Is Texas sales tax due on labor to demolish, repair, and rebuild a shopping center that was partially destroyed by fire?

Plain-English summary

A taxpayer asked the Comptroller's office about the taxability of labor to level and rebuild a shopping center that had been partially destroyed by fire. In the facts presented, 60% of the structure was completely destroyed and would be leveled down to the slab, while the remaining 40% sustained only fire and smoke damage. After demolition, testing would determine whether the existing slab could be reused; if so, the taxpayer's client planned to rebuild and attach the new construction to the surviving 40% of the structure.

The Comptroller explained that the total charge — including demolition — to rebuild, repair, or remodel an existing structure is taxable, regardless of whether the charges are separately stated or billed lump-sum. That holds true even if the existing slab turns out to be unsuitable and must be replaced. Likewise, if the customer decides not to rebuild the destroyed 60% at all, the charge to level the site and haul off debris is still taxable, because the existing structure is being modified from its original condition.

The one carve-out: if the existing slab must be destroyed and a new slab is built to support a new structure, and neither the new slab nor the new structure attaches to the existing slab or structure, then the work qualifies as new construction. Labor for new construction is not taxable.

What this means for you

Property owners and developers rebuilding after fire damage

If you're repairing, remodeling, or rebuilding a structure that was only partially destroyed — and any part of the new work attaches to or reuses the existing slab or structure — expect the entire charge, including demolition and haul-off, to be taxable. Billing the demolition and rebuilding separately from each other does not change this result.

Contractors bidding fire-restoration or rebuild jobs

Whether your labor is taxable turns on connection to the existing structure, not on how the work is billed. A truly independent new building — on a new slab, with no attachment to what remains of the old structure or slab — is treated as new construction and its labor is not taxable. But if any part of the job ties back into the surviving structure or slab, the whole job is treated as taxable repair/remodel labor.

Accountants and tax professionals advising on casualty-loss rebuilds

This letter is a useful example of the Comptroller's "attachment" test for distinguishing taxable repair/remodel labor from non-taxable new construction: the key question is whether the new work attaches to or reuses any part of the existing structure or slab, not the extent of the damage or how the invoice is itemized.

Common questions

Q: Is labor to demolish and rebuild a fire-damaged shopping center taxable?
A: Yes. The total charge to rebuild, repair, or remodel an existing structure — including demolition — is taxable, whether billed separately or lump-sum.

Q: Does it matter if the existing slab can't be reused and has to be replaced?
A: No. The charge is still taxable even if the existing slab is unsuitable for rebuilding and must be replaced, as long as the new work is otherwise connected to the existing structure.

Q: If the owner decides not to rebuild the destroyed portion, is the demolition and cleanup charge still taxable?
A: Yes. Leveling the damaged portion and hauling off the debris is taxable because it modifies the existing structure from its original condition.

Q: When is rebuilding after a fire treated as non-taxable new construction?
A: Only when the existing slab is destroyed and replaced with a new slab, and neither the new slab nor the new structure attaches to the existing slab or structure. In that case the labor is new construction and not taxable.

Citations and references

No specific statutes or administrative rules are cited in the text of this letter.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9412L1337G10

Original ruling text

December 19, 1994

Dear **:

Thank you for your letter of December 5, 1994. You asked us to address the
taxability of labor to level and rebuild a shopping center damaged by a fire.

As I understand it, a structure was partially destroyed by fire. Your client
will level 60% of the structure down to the slab. This portion of the
structure was completely destroyed by the fire. The remaining 40% of the
structure sustained only fire and smoke damage. Once the demolition work is
completed, test will be done to determine if the slab is reused. If the tests
indicate the slab may be reused, your client will rebuild the structure and
attach it to the remaining 40% of the existing structure.

The total charge, including demolition, to rebuild, repair, or remodel an
existing structure is taxable. This is true whether the charges are separately
stated or billed lump-sum. This is also true if the existing slab is
unsuitable for rebuilding purposes and must be replaced.

If the customer chooses not to rebuild the 60% destroyed by fire, the charge to
level and haul off the debris is taxable. This is true because the existing
structure is being modified from its original condition.

If the present slab must be destroyed and a new slab is constructed to support
a structure and neither the new or structure attach to the existing slab or
structure, the work will be new construction. The labor for new construction
is not taxable.

This opinion is based on the facts presented. If there are any additional or
different facts, the opinion may change. You may call me toll free at
1-800-5315441, ext. 5-0037. The direct line is 512/475-0037. You also may
write to tax Administration Division, Comptroller of Public Accounts.

Sincerely,

Lindey Osborne
Tax Administration Division

NOTE: Previous Accession Number 9412971L