When one lump-sum contract adds new square footage onto two existing, partially-demolished buildings while also redoing their remaining structures, how should the new-addition work be split from the remodeling work for sales tax purposes?

Plain-English summary

A contractor is performing one lump-sum contract that adds roughly 23,000 square feet of new construction onto two adjoining existing structures -- which had been roughly two-thirds demolished down to their slabs, with facades removed on three sides -- while also rebuilding the remaining one-third of each structure (new siding, fronts, complete new plumbing, electrical, HVAC, fire line/sprinkler, doors, windows, flooring, insulation, ceilings, and finish-out work). The contractor asked how to tax this mixed job.

The Comptroller split the work into two categories with DIFFERENT tax treatment:

• Remodeling: work done on the existing slabs -- new siding, new fronts, and the plumbing/electrical/HVAC/etc. serving that existing structure -- is taxable real property remodeling, and the TOTAL charge for labor and materials on the remodeled area is subject to sales tax collected from the customer. The joint area where new square footage connects to the existing buildings is also treated as remodeling.
• New construction: the additional new square footage itself is new construction. New plumbing/electrical/sewer lines running to and solely supporting the new addition are new construction; replacement lines are apportioned -- remodeling to the extent they support the existing square footage, new construction to the extent they support the addition.

The contract should clearly separate these charges. For the new-construction portion specifically, because this is a lump-sum contract, the CONTRACTOR (not the customer) owes sales tax on its own purchases of materials incorporated into the newly constructed area -- unlike the remodeling portion, where the full labor-and-materials charge is taxed to the customer.

What this means for you

General contractors on mixed addition + remodel projects

Track new-construction square footage separately from remodeling work on the existing structure, including apportioning utility lines (plumbing, electrical, sewer) between the two based on what they actually support. The tax collection point differs: remodeling gets taxed on the full customer charge, while new construction (under a lump-sum contract) shifts the tax burden to your own material purchases instead.

Commercial property owners undertaking a building addition combined with a partial rebuild

Expect your contractor's invoice to separate remodeling charges (taxable to you as the customer) from new-construction charges (where the contractor absorbs the tax on materials, with no tax billed to you for that portion).

Accountants and tax professionals

This letter is a good illustration of apportioning a single mixed-scope project between the "new construction" and "remodeling" tax categories at a granular level -- down to individual utility runs -- rather than treating the whole job under one classification.

Common questions

Q: Is the additional new square footage on this project taxed the same way as the remodeling of the existing structure?
A: No, per this letter -- the new square footage is new construction (contractor pays tax on materials, no tax collected from customer under this lump-sum contract), while the remodeled existing structure's full labor-and-materials charge is taxed to the customer.

Q: How are utility lines (plumbing, electrical, sewer) that serve both the old and new parts of the building taxed?
A: Per this letter, they're apportioned -- remodeling to the extent supporting the existing square footage, new construction to the extent supporting the new addition.

Q: Does the contract need to separate these charges?
A: Yes, per this letter -- the contract should clearly separate the remodeling and new-construction charges.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9706469L

Original ruling text

June 11, 1997

Dear ***:

Thank you for your facsimile transmission of June 3, 1997 regarding the tax
treatment of a mixed new construction and remodeling contract. This letter
will also include information from our telephone conversation of June 4, 1997.

Your letter states in part:

The lump-sum contract will create additional footage to two adjoining existing
structures. Specifically, the work includes approximately 23,000 square feet
of new concrete slab, new structural steel beams and bar joists will be
installed and the entire building will receive new lightweight fill and
built-up roofing. There will be new exterior walls on both sides of the
building and along the entire front of the building. Complete new plumbing
(underground, sewer, water, and fixtures), electrical (both voltage, L&P
connections, service panels and fixtures), HVAC (new units, and distribution
systems), and new fire line with riser and sprinkler. The construction will
include new automatic doors, windows, exterior steel doors, overhead doors,
flooring, insulation, ceilings, and miscellaneous finishing out work to the
interior and exterior. In addition, the building requires new structural steel
to support the new space and a new roof.

In our telephone conversation of June 4, 1997, you said that the two buildings
had been roughly two-thirds demolished to their respective slabs with the
remaining one third remaining. You also said the facades of the two buildings
had been removed on three sides of each building.

Response: The work done on each of the slabs, including the new siding and
fronts added will be taxable real property remodeling. This includes plumbing,
electrical, HVAC etc. The additional square footage is new construction. The
area where the new square footage joins the existing buildings will be
considered remodeling. The contract should clearly separate the charges for
remodeling and new construction with the total amount for labor and materials
for the remodeled area subject to sales tax. The new plumbing, electrical, and
sewer lines running to and solely supporting the newly constructed building
will be considered new construction. Replacement plumbing, electrical, and
sewer lines will be considered remodeling to the extent it is to support the
existing square footage and new construction to the extent it is used to
support the additional square footage. The contractor owes sales tax on its
purchases of materials incorporated into the newly constructed area since it is
performing a lump-sum contract.

This opinion is rendered based on 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, ext. 3-4680. The direct line is
512/463-4680. You may also write to Tax Policy, Comptroller of Public
Accounts. My Internet address is .

Sincerely,

Al Van Allen
Tax Policy Division