Is the labor to build a new mezzanine floor inside an existing building taxable real property repair/remodeling, or non-taxable new construction, under Texas law?

Plain-English summary

A taxpayer asked whether building a new floor -- called a "mezzanine" -- inside an existing building qualifies as non-taxable new construction. The addition created new usable floor space in an area that had previously been non-usable empty space.

The Comptroller answered yes. Rule 3.357(a)(5) defines "new construction" to include all new improvements to real property, including the initial finish-out of an interior or exterior, giving the example of a multi-story building where only the first floor had been finished: finishing out each additional floor before its initial occupancy counts as new construction. The rule's definition also expressly includes "the addition of new footage to an existing structure." Because the mezzanine deck added new floor space that hadn't existed before, the labor to build it is new construction and is not taxable. The Comptroller advised that the construction contract should separately state the new-construction charges from any taxable real property repair and remodeling charges on the same job.

What this means for you

Building owners and construction contractors

Adding a mezzanine or other new floor level that creates usable space where there was previously only empty, non-usable space is treated as non-taxable new construction, not taxable remodeling labor -- as long as the project genuinely adds new square footage rather than repairing or restoring existing finished space.

Contractors billing mixed new-construction/remodeling jobs

Keep new-construction charges separately stated from taxable real property repair/remodeling charges in the contract. Commingling them risks having the whole job treated as taxable.

Common questions

Q: Is the labor to build a new mezzanine floor inside an existing building taxable?
A: No, per this letter -- it qualifies as new construction under Rule 3.357(a)(5) because it adds new floor space where none existed before, and new construction labor is not taxable.

Q: Does it matter that the mezzanine is inside an existing building rather than an entirely new structure?
A: No. Per this letter, Rule 3.357(a)(5) defines new construction to include the addition of new footage to an existing structure, and gives the example of finishing out additional floors in a multi-story building.

Q: How should the contract be billed if the project has both new-construction and remodeling work?
A: Per this letter, the new-construction charges should be separately stated from the taxable real property repair and remodeling charges.

Citations and references

Rules:

• 34 Tex. Admin. Code Rule 3.357(a)(5) (definition of new construction)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9702191L

Original ruling text

February 7, 1997

Dear ***:

This is in response to your request for a ruling on whether the construction of
a new floor called a "mezzanine" inside an existing building qualify as new
construction. The addition added new floor space where non-usable empty space
existed before.

Response: Subsection (a)(5) of Rule 3.357- Labor Relating to Nonresidential
Real Property Repair, Remodeling, Restoration, Maintenance, New Construction,
and Residential Property defines new construction as follows:

All new improvements to real property including initial finish out work to the
interior or exterior of the improvement. An example would be a multiple story
building which has only had its first floor finished and occupied. The initial
finishing out of each additional floor prior to initial occupancy will be
considered new construction. New construction also includes the addition of
new footage to an existing structure.

Emphasis added.

The addition of the concrete mezzanine deck within an existing building
qualifies as new construction. The labor to add this mezzanine is not taxable.
The contract for this improvement should separate the charges for new
construction from the taxable real property repair and remodeling.

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