Does building a completely new parking lot or street, or enlarging an existing one, count as tax-favorable new construction rather than taxable repair?

Plain-English summary

A company that had patented a new process for constructing streets and parking lots asked the Comptroller whether that process automatically qualified as "new construction" for sales tax purposes. The Comptroller said no — having a patented process for paving or resurfacing does not, by itself, determine whether the work is new construction, repair, or remodeling. What matters is what is physically done to the pavement.

The letter describes the taxpayer's process as involving hauling off as much material as necessary to establish a new cross section, which the Comptroller characterized as an upgrade to an existing parking lot or street. Any time an existing street or parking lot is improved or a segment/portion of it is replaced, that work is repair, remodeling, or restoration — and the total charge for nonresidential repair, remodeling, or restoration is taxable.

By contrast, the letter explains that new construction occurs when the taxpayer builds a completely new street or parking lot, adds additional length or width to enlarge an existing one, or removes the entire existing street/parking lot and replaces it with new pavement. The labor charge for new construction is not taxed. The letter specifically notes that merely making an existing parking lot thicker (from 1.5 inches to 4 inches) is not new construction.

Regardless of whether the job is new construction or repair, the materials incorporated into the street or parking lot are taxable to the end consumer. Under lump-sum new construction contracts or lump-sum residential repair/remodeling contracts, the contractor is the end consumer of those materials. Under separated new construction contracts and nonresidential repair or remodeling contracts, the customer is the end consumer.

What this means for you

Paving and construction contractors

The tax classification of your paving job turns on the physical scope of the work, not on any patented technique or process you use to perform it. If you build a brand-new street or parking lot, enlarge an existing one by adding length or width, or completely remove and replace an existing street/parking lot, the labor charge is new construction labor and is not taxed. If instead you are improving, upgrading, resurfacing, or replacing part of an existing street/parking lot — even using an innovative or patented process — that is repair, remodeling, or restoration, and the total charge is taxable if the job is nonresidential.

Business owners with parking lots or private streets

If you hire a contractor to simply thicken your existing parking lot (for example, adding 1.5 to 4 inches of new pavement over what's there), the letter states this is not new construction — it will be treated as repair/remodeling, and the nonresidential charge will be taxable. If you instead have the whole lot torn out and replaced, or enlarged, that is new construction.

Accountants and tax professionals

Watch how contracts are structured (lump-sum vs. separated) because that determines who is the end consumer of materials, and thus who bears the sales tax on materials. Under lump-sum new construction or lump-sum residential repair/remodeling contracts, the contractor is the end consumer of materials. Under separated new construction contracts and nonresidential repair/remodeling contracts, the customer is the end consumer of materials. Note that this letter does not cite a statute, so it's best used as guidance on the Comptroller's classification approach rather than as a citable legal authority.

Common questions

Q: If a contractor uses a patented process to pave or resurface, does that make the job "new construction" for tax purposes?
A: No. The letter states directly that a patented process to pave or resurface does not determine whether the work is new construction, repair, or remodeling — the classification depends on what is actually done to the street or parking lot.

Q: Is hauling off old material and re-grading to a "new cross section" considered new construction?
A: Based on this letter, that description was treated as an upgrade to an existing parking lot or street, which is repair, remodeling, or restoration, not new construction.

Q: Is simply making an existing parking lot thicker new construction?
A: No. The letter specifically states that making an existing parking lot thicker (1.5 inches to 4 inches) is not new construction.

Q: What does count as new construction under this letter?
A: Building a completely new street/parking lot, adding additional length or width to enlarge an existing street/parking lot, or removing the entire existing street/parking lot and replacing it with new pavement.

Q: Who pays tax on the materials used in the job?
A: The materials incorporated into the street/parking lot are taxable to the end consumer. The contractor is the end consumer under lump-sum new construction contracts or lump-sum residential repair/remodeling contracts. The customer is the end consumer under separated new construction contracts and nonresidential repair/remodeling contracts.

Q: Does this letter cite a specific statute?
A: No. The letter states its conclusions directly without citing a Tax Code section or administrative rule by number.

Citations and references

The original letter does not cite any specific statute or rule by number.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9404L1299F07

Original ruling text

April 21, 1994

Dear *****:

Thank you for your letter dated April 20, 1994. You requested that we review
your newly patented process for constructing streets and parking lots and
determine whether the process qualifies as new construction.

A patented process to pave or resurface does not determine whether the work is
new construction, repair, or remodeling.

In the process described, you mentioned hauling off as much material as
necessary to establish a new cross section. You appear to describe an upgrade
to an existing parking lot or street. Anytime you improve or replace a segment
or portion of an exiting street/parking lot, the work is classified as repair,
remodeling, or restoration. The total charge for nonresidential repair,
remodeling, or restoration is taxed.

However, if you build a completely new street/parking lot, add additional
length or width to (enlarge) an existing street/parking lot, or remove the
entire existing street/parking lot and replace the old street/parking lot with
your new pavement, then you have performed new construction. The charge for new
construction labor is not taxed. Making an existing parking lot thicker (1.5"
to 4") is not new construction.

The materials incorporated into the street/parking lot are taxable to the end
consumer. Your company is the end consumer under lump-sum new construction
contracts or lump-sum residential repair or remodeling contracts. Your customer
is the end consumer under separated new construction contracts and
nonresidential repair or remodeling contracts.

This opinion is based upon the facts presented. If there are additional or
different facts, this opinion may change. You may also write to Tax
Administration Division, Comptroller of Public Accounts, Post Office Box
13528, Austin, Texas 78711-3528.

Sincerely,

Tax Administration Division

NOTE: Previous Accession Number 9404322L