Is renovating a specialty hospital taxed as work on nonresidential (commercial) real property, or as work on residential real property?

Subject

Hospital — Considered Nonresidential/Commercial Real Property

Plain-English summary

A company planned to renovate an existing building into a specialty hospital licensed by the Texas Department of Health. The facility would serve patients with multicomplex health problems whose average stay would exceed 30 days -- long enough that the company asked whether the building should be treated as residential property (which could change how the renovation work is taxed) rather than nonresidential/commercial property.

The Comptroller answered plainly: hospitals are considered nonresidential property. Because of that classification, the total charge to renovate the property into the specialty hospital is taxable. The long average patient stay did not change the outcome -- the nature of the facility as a hospital controlled the classification, not how long individual patients would live there.

The letter notes this opinion is based on the facts presented, and could change if the facts were different.

What this means for you

Contractors and renovation companies working on hospital buildings

If you're renovating a building that will operate as a hospital -- including a specialty hospital for long-stay patients -- expect the job to be taxed as work on nonresidential (commercial) real property. Under this ruling, the total charge for the renovation is taxable; you cannot treat the job as tax-favored residential remodeling just because patients stay for extended periods.

Hospital operators and healthcare facility developers

Don't assume that a long average length of stay (here, over 30 days) turns a healthcare facility into "residential" property for sales tax purposes. The Comptroller looked at what the building is -- a hospital -- not how long individual occupants remain there.

Accountants and tax professionals advising healthcare clients

When evaluating renovation contracts for hospital facilities, classify the underlying real property as nonresidential/commercial. This ruling indicates length-of-stay arguments for residential treatment were rejected in the specialty-hospital context described.

Common questions

Q: Is a hospital residential or nonresidential property for Texas sales tax purposes?
A: Nonresidential (commercial) property, according to this ruling.

Q: Does it matter that patients at a specialty hospital may stay more than 30 days?
A: No. Even with an average stay exceeding 30 days, the Comptroller still classified the hospital as nonresidential property.

Q: Is the full renovation charge taxable, or just part of it?
A: The letter states the total charge to renovate the property is taxable.

Q: Could this outcome change under different facts?
A: Yes -- the letter explicitly says the opinion is based on the facts presented, and could change if there are additional or different facts.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9611769L

Original ruling text

November 22, 1996

Dear ***:

Thank you for your letter asking if a specialty hospital would be treated
as residential or nonresidential property for sales tax purposes. The
specialty hospital is licensed by the Texas Department of Health. The
facility will be designed for persons with multicomplex health problems
where the average stay will exceed 30 days. Your company is going to
renovate an existing building into the specialty hospital.

Hospitals are considered nonresidential property. The total charge to
renovate the property will be taxable.

This opinion is based upon the facts presented. If there are additional
or different facts, the opinion may change.

You may call me toll free at 1-800-531-5441 extension 50892. The direct
line is 512/475-0892. You may also write to Tax Policy Division,
Comptroller of Public Accounts.

Sincerely,

John J. Fitzgibbons, CPA
Tax Policy Division