When rebuilding fire-damaged spaces in a strip center — where two spaces will have all walls and the roof replaced, leaving only the foundation — is the work taxable nonresidential repair, or untaxed new construction?

Plain-English summary

A 50-year-old strip center caught fire, damaging four spaces (130, 134, 138, 146) owned by different entities within what looks like a single complex. Two of the spaces (134 and 138) will be rebuilt down to the foundation — all walls and the roof replaced. The contractor asked whether to pay sales tax on materials or use a resale certificate instead.

The Comptroller's answer turned entirely on one physical fact the contractor hadn't yet confirmed: do the damaged spaces share a common foundation, wall, or roof with the rest of the center?

• If yes — even though spaces 134 and 138 are being rebuilt down to the foundation, the work still counts as nonresidential real property repair and remodeling, because the structure as a whole isn't new. The entire charge (materials and labor, whether separately stated or not) is taxable to the property owner, but the contractor may issue a resale certificate when buying the materials that get incorporated into the repair.
• If no — if the spaces sit on their own separate foundations sharing nothing with neighboring units, rebuilding them down to the foundation is treated as new construction instead. There, taxability depends on how the contract is billed: a separated (itemized) contract makes the contractor a seller of materials (resale certificate available, labor untaxed); a lump-sum contract makes the contractor the consumer of the materials (contractor owes tax on materials, and the charge to the owner is not taxable and can't be billed as including sales tax).

What this means for you

Contractors rebuilding fire- or storm-damaged commercial space

Don't assume that "rebuilt down to the foundation" automatically means new construction for tax purposes. In a shared-structure building (mall, strip center, attached units), even a full walls-and-roof replacement is still repair/remodeling if the surviving structure — the shared foundation, wall, or roof — ties it to the rest of the building. Confirm the structural-sharing fact first; it decides which entire tax framework applies.

Property owners negotiating rebuild contracts after a casualty loss

If your space is being treated as new construction (independent foundation), ask your contractor to itemize materials and labor separately in the contract — that lets the contractor buy materials tax-free and keeps your labor charge untaxed, versus a lump-sum contract where the contractor's material cost (with embedded tax) gets baked into your price.

Accountants and tax professionals

This letter is a clean illustration of the structural-sharing test that decides repair/remodeling (Rule 3.357) vs. new construction (Rule 3.291) status for casualty rebuilds — and a reminder that even total destruction of the above-foundation structure doesn't create new construction if the foundation, wall, or roof is shared with an intact part of the building.

Common questions

Q: We're rebuilding a fire-damaged unit down to the foundation — is that new construction or repair?
A: If the unit shares a common foundation, wall, or roof with the rest of the building, it's still nonresidential repair and remodeling, even with a full walls-and-roof replacement. Only a unit on a fully separate foundation, sharing nothing structurally, counts as new construction.

Q: If it's repair/remodeling, is the whole charge taxable?
A: Yes — materials and labor together are taxable to the property owner, though the contractor can buy the incorporated materials tax-free with a resale certificate.

Q: If it's new construction instead, how is tax handled?
A: It depends on the contract: an itemized (separated) contract lets the contractor buy materials tax-free and keeps labor untaxed; a lump-sum contract makes the contractor the taxable consumer of the materials, and the owner's charge is not itself taxable.

Q: Can I rely on this letter for my own rebuild project?
A: No. This opinion is based on the facts presented, and additional or different facts may change the result; it binds the Comptroller only as to the taxpayer it was issued to.

Citations and references

• 34 Tex. Admin. Code Rule 3.291 (contractors — new construction vs. repair/remodeling; lump-sum vs. separated contracts)
• 34 Tex. Admin. Code Rule 3.357 (nonresidential real property repair and remodeling)

Subject

Mall Shopping Center/Strip Center — Partially Destroyed/Damaged By Fire — Spaces Sharing/Not Sharing Common Foundation/Roof/Wall

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9712359L

Original ruling text

December 9, 1997

Dear Mr. **:

Thank you for your fax transmission of December 8, 1997, concerning your sales
tax responsibilities for work performed on a 50-year old strip center damaged
by fire.

Facts: The center appear to be one complex; however, the spaces are owned by
different entities. Spaces 130, 134, 138, and 146 are the four spaces which
have exterior damage. Spaces 134 and 138 will have all walls and the roofs
replaced, leaving only the foundation.

You need a ruling, in writing, stating whether to pay tax on material or to use
a resale certificate.

Response: Presuming the damaged spaces at this complex share a single common
foundation, wall or roof, the work performed on the spaces, including spaces
134 and 138, constitutes nonresidential real property repair and remodeling
services. The total charge (separately stated charges for materials and labor)
for the services rendered is taxable. You may issue a resale certificate
instead of paying sales tax when buying materials that will be incorporated
into the real property being repaired or remodeled.

However, if the all of the spaces are on individual foundations and do not
share a common foundation, roof or wall, the work performed on spaces 134 and
138 will constitute new construction. Your sales tax responsibilities when
performing new (residential or nonresidential) construction or residential
repair or remodeling are determined by the terms of the contract or the method
of billing. If the contract or billing is separated, you are a seller of the
incorporated materials and you may issue a resale certificate when you buy
these materials. The separate charge for new construction labor is not
taxable.

If the terms of the contract or method of billing for new construction or
residential repair or remodeling services is a lump-sum, you are the consumer
of the incorporated materials. You owe sales tax on the incorporated materials
and you may not issue a resale certificate when buying the materials. The
charge you make to the property owner is not taxable and the contract or
invoice may not state the price includes sales tax.

You may call me toll free 1-800-531-5441, extension 3-4683. The direct line is
512/463-4683. You may also write to Tax Policy Division, Comptroller of Public
Accounts.

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

Sincerely,

Eddie C. Washington
Tax Policy Division