Is a contract to add square footage to an existing building taxed as new construction, or as taxable repair/remodeling like a roof repair or HVAC replacement?

Plain-English summary

A taxpayer asked the Comptroller how to tax three types of contracts: building additions, roof repairs, and HVAC system replacement.

Building additions (and new structures) are new construction, not repair. A contract to build an addition to an existing nonresidential structure, or to build an entirely new structure, is an improvement to realty taxed as "new construction" under Rule 3.291 - Contractors. The person doing the work is a contractor, and how tax is charged depends on the contract type:

• Under a lump-sum contract, the contractor is the consumer of all materials, consumable items, and equipment used or incorporated into the customer's property. The contractor pays tax to its suppliers when it buys the materials (and must accrue and remit Texas use tax if materials are bought from an out-of-state seller who didn't collect Texas tax). The contractor does not collect any tax from the customer on the lump-sum charge.
• Under a separated contract, the contractor is treated as a retailer of the materials physically incorporated into the realty, and must collect tax from the customer based on the agreed contract price of those incorporated materials. So on a separated contract to build a plant addition, tax is charged only on the incorporated materials.

Roof repairs, HVAC replacement, and repainting are taxable repair/remodeling services, not new construction. These services on nonresidential real property are taxed under Rule 3.357 - Labor Relating to Nonresidential Real Property Repair, Remodeling, Restoration, Maintenance, New Construction, and Residential Property. The person doing this work is treated as a service provider, not a contractor, and — unlike new construction — the lump-sum vs. separated distinction does not matter here. The service provider must collect tax on the total sales price charged to the customer (less any separately stated charges for unrelated services), or accept a valid resale, exemption, or direct payment exemption certificate in lieu of tax. So a charge to repair a roof or replace an HVAC system in a nonresidential building is taxable in full.

What this means for you

Contractors building additions or new structures

Structure your contract carefully: a lump-sum contract makes you the consumer of materials (you pay tax on your purchases, don't collect from the customer), while a separated contract makes you a retailer who must collect tax on the incorporated materials' contract price. Either way, the addition/new-structure work itself is new construction under Rule 3.291, not repair/remodeling.

Businesses hiring roof repair, HVAC replacement, or repainting services

Expect to be charged tax on the full price of these services (minus any separately stated unrelated-service charges), regardless of whether the underlying contract would otherwise be described as lump-sum or separated — that distinction doesn't apply to repair/remodeling of nonresidential real property.

Accountants and tax professionals

This letter is a clean illustration of the boundary between Rule 3.291 (new construction, where lump-sum/separated contract structure controls how tax is collected) and Rule 3.357 (repair/remodeling of nonresidential real property, where the service provider always collects tax on the total price). Use it to classify mixed contracts (e.g., a project combining an addition with a roof repair) into the correct bucket for each component.

Common questions

Q: Is building an addition to an existing commercial building taxed as new construction or as a repair?
A: New construction, under Rule 3.291 - Contractors, whether it's an addition to an existing nonresidential structure or an entirely new structure.

Q: If I have a lump-sum contract to build an addition, do I charge my customer sales tax?
A: No. As a contractor on a lump-sum contract, you're the consumer of the materials — you pay tax to your suppliers (or accrue use tax on out-of-state purchases) and don't collect tax from the customer on the lump-sum charge.

Q: If I have a separated contract to build an addition, how much tax do I collect from the customer?
A: Only on the agreed contract price of the materials incorporated into the realty — not on labor or the full contract price.

Q: Is replacing an HVAC system or repairing a roof on a commercial building taxable?
A: Yes. These are repair/remodeling services under Rule 3.357, taxed in total on the sales price charged to the customer, less any separately stated charges for unrelated services.

Q: Does the lump-sum vs. separated contract distinction matter for roof repairs or HVAC replacement?
A: No. That distinction applied historically but is no longer valid for contracts to repair, remodel, or restore real property — the service provider collects tax on the total sales price either way (subject to valid resale/exemption/direct payment certificates).

Q: Can I rely on this letter for my own contracts?
A: No. This opinion is based on the facts presented to the Comptroller, and other facts, though similar, may produce a different result.

Citations and references

• Rule 3.291 (Contractors)
• Rule 3.357 (Labor Relating to Nonresidential Real Property Repair, Remodeling, Restoration, Maintenance, New Construction, and Residential Property)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9606L1424A01

Original ruling text

June 19, 1996

Dear **:

This is in response to your request for a ruling on the taxability of contracts
for building additions, roof repairs and replacement of HVAC systems.

A contract to build an addition to an existing nonresidential structure or to
build a new structure is considered an improvement to realty and taxed as "new
construction" under Rule 3.291 - Contractors. The person making the
improvements is considered a contractor.

Under subsection (b) of Rule 3.291, (c)ontractors performing lump-sum contracts
are consumers of all materials, consumable items, and equipment used or
incorporated into a customer's property. As a consumer, a contractor must pay
tax to suppliers at the time the materials are purchased. If the materials are
purchased from an out-of-state seller, a contractor must accrue and remit use
tax on the materials unless Texas use tax was collected by the out-of-state
seller. A contractor shall not collect tax from a customer on a lump-sum
charge or on any portion of the charge.

Contractors performing separated contracts are considered retailers of all
materials physically incorporated into the realty being improved. As a
retailer, a contractor must collect tax from the customer based upon the agreed
contract price of the incorporated materials.

Therefore, under a separated contract to build an addition to your plant, tax
should only be charged on the materials incorporated into the realty.

Roof repairs, replacement of HVAC systems, or repainting of nonresidential
real property are considered repair or remodeling services and are taxed under
Section 3.357 - Labor Relating to Nonresidential Real Property Repair,
Remodeling, Restoration, Maintenance, New Construction, and Residential
Property. A person repairing or remodeling nonresidential real property is
treated as a service provider, rather than a contractor.

Under subsection (b)(2) of Section 3.357, (a)ll persons who repair, restore, or
remodel nonresidential real property must collect tax on the total sales price
to their customers less separately stated charges for unrelated services or
accept valid resale, exemption or direct payment exemption certificates in lieu
of tax. Previously, lump-sum and separated contracts were treated differently
for tax purposes. This distinction is no longer valid when the contract is for
the repair, remodeling, or restoration of real property.

Therefore, a charge by a service provider to repair the roof or replace the
HVAC system in a nonresidential building is taxable in total.

This opinion is based on the facts presented. Other facts though similar may
provide a different result.

You may call me toll-free at 1-800-531-5441, extension 3-4502. The direct line
is 512/463-4502. You may also write to Tax Policy Division, Comptroller of
Public Accounts. My Internet address is: [email protected].

Sincerely,

Gilbert Zamora
Tax Policy Division