We had to completely rebuild an ice skating rink that never worked because of construction defects, before it ever opened to the public -- does the rebuild count as new construction or taxable repair?

Subject

Skating Rink — Rebuilt Because Original Ice Rink Never Used Due To Defects In Construction — New Construction

Plain-English summary

A contractor built an ice skating rink for a client near "City A." The contractor's company built the building itself, while a different company (working directly for the owner) installed the ice rink equipment. The ice rink never worked properly and had to be completely rebuilt right before the rink's public opening. The original contractor was hired to do that rebuild and asked the Comptroller whether the rebuild should still be treated as new construction, arguing that the rink had never actually performed its intended function and that the overall project was still in its completion stage when the rework happened.

The Comptroller agreed: the rebuild qualifies as new construction, because the original rink was never used for its intended purpose due to defects in its construction. The ruling notes this conclusion is based on the specific facts presented, and that other facts, even if similar, could lead to a different result.

This distinction matters for sales tax purposes because Texas treats new construction and repairs to existing real property differently -- and the letter confirms that a rebuild necessitated by a rink that never functioned, and was fixed before it ever opened, is treated as part of the original new-construction project rather than as a later repair.

What this means for you

Contractors who have to redo defective work before a project opens

If a structure or installation never actually worked as intended because of construction defects, and you rebuild it before it's ever placed into public use, the rebuild can be treated as new construction rather than a repair -- even if the rework happens after the main construction project reaches its completion stage.

Owners and general contractors coordinating with separate installation contractors

This ruling involved a building built by one company and rink equipment installed by a separate company hired directly by the owner. The "never used due to defects" reasoning applied to the rebuild of the failed component (the rink), regardless of which contractor originally installed it.

Anyone relying on this letter for a similar situation

The Comptroller expressly limited this ruling to the facts presented. If your rework happens after the item has actually been used or placed in service, or for a different reason than construction defects, this letter's reasoning may not apply, and you should not assume the same result without your own ruling request.

Common questions

Q: Is rebuilding a rink that never worked treated as new construction or a taxable repair?
A: New construction, according to this letter, because the original rink was never used for its intended purpose due to defects in construction.

Q: Does it matter that the rebuild happened after the main construction project was in its completion stage?
A: No -- the ruling treated the rebuild as new construction even though the main construction was already in the completion stage when the rework was done, because the rink had never actually been used.

Q: Does it matter that a different company installed the original rink than the one doing the rebuild?
A: The letter doesn't suggest that mattered to the outcome -- the building was built by the requesting company while the rink itself was installed by a different company working for the owner, and the requesting company was then hired to rebuild it.

Q: Can I rely on this letter if my situation is similar but not identical?
A: The letter itself cautions that its opinion is based on the facts presented, and that other facts, though similar, may provide a different result.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9611782L

Original ruling text

November 19, 1996

Dear ***:

This is in response to your request for a ruling on whether reworking an
ice skating rink qualifies as new construction.

You built an ice skating rink for a client in the CITY A area. The building
was built by your company and the ice rink was installed by a different company
that worked directly for the owner. The ice skating rink never worked properly
and had to be completely rebuilt immediately prior to the public opening of
the rink. Your company was hired to rebuild the rink. You feel that this
project should still be treated as new construction, due to the fact that the
rink has never performed the function that it was intended and the main
construction was still in progress (completion stage) when the rework was done.

Response: The rebuilding of the rink will qualify as new construction because
the original rink was never used for its intended purpose due to defects in
construction.

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