A contractor's job was bid and included in the original new-construction contract, but the work wasn't actually performed until after the building was already occupied. Is that job taxable repair/remodeling labor, or nontaxable new-construction labor?

Plain-English summary

A contractor asked the Comptroller how to tax a construction job that was part of an original new-construction project, but wasn't actually performed until after the building was already occupied.

The letter draws the line this way: remodeling contracts performed after initial occupancy of a building are normally taxable repair and remodeling services under 34 Tex. Admin. Code Rule 3.357. But this particular job could still count as new construction because several facts lined up together: the work was already part of the original new-construction contract, it wasn't a later modification (the work was simply left incomplete, not redone in a different way), it was bid before occupancy, it was performed for the general contractor responsible for the original new-construction job, and it was completed within a reasonable time after the new construction.

Why the distinction matters: labor on new construction is not taxable, while labor on repair and remodeling is taxable. So classifying a job correctly changes what the contractor owes tax on:

• If treated as new construction: labor is not taxable. If the contract with the customer is a lump-sum amount covering both materials and labor, the contractor owes tax on the materials (and may build that tax into the lump-sum price). If the contract separates the material charge from the labor charge, the contractor must collect sales tax from the customer on the materials charge.
• If treated as taxable repair/remodeling instead, the calculus under Rule 3.357 would be different (that scenario isn't the one addressed in this particular letter, since the Comptroller concluded this job qualified as new construction).

What this means for you

Contractors bidding jobs that straddle occupancy

If part of your original new-construction scope doesn't get finished until after the customer has moved in, don't assume it's automatically reclassified as taxable remodeling. The Comptroller looked at whether the work was already in the original contract, bid before occupancy, performed for the same general contractor, not a later design change, and completed within a reasonable time of the original construction — all of those facts supported treating it as new construction.

Timing and documentation matter

Because this ruling turned heavily on specific facts (what was in the original bid, when the work was bid, who it was performed for, how much time passed), contractors relying on similar treatment should keep records showing the work was part of the original scope and bid before the building was occupied — not treated as a fresh, separately-bid modification.

Lump-sum vs. separated billing

Even when labor qualifies as nontaxable new-construction labor, materials are still taxable. How you bill your customer determines who pays: a lump-sum contract means the contractor owes tax on materials; itemizing materials separately from labor means the contractor must collect sales tax from the customer on the materials charge.

Common questions

Q: Is remodeling work performed after a building is occupied automatically taxable?
A: Generally yes — remodeling contracts performed after initial occupancy are taxable repair and remodeling services under Rule 3.357. This letter describes an exception where facts support treating the job as new construction instead.

Q: What made this specific job count as new construction instead of taxable remodeling?
A: The work was part of the original new-construction contract, it was incomplete rather than modified, it was bid before occupancy, it was performed for the general contractor on the original job, and it was completed within a reasonable time of the new construction.

Q: Is labor taxable on a job classified as new construction?
A: No, labor is not taxable on new construction.

Q: If labor isn't taxed on new construction, what about materials?
A: Materials are taxable either way. On a lump-sum contract (materials and labor combined), the contractor owes tax on the materials. If materials are billed separately from labor, the contractor must collect sales tax from the customer on the materials charge.

Q: Can another contractor rely on this letter for a similar-looking job?
A: No. This opinion is based on the facts presented, and if the facts are different, the opinion may change. It can be relied on only by the taxpayer to whom it was issued.

Citations and references

• 34 Tex. Admin. Code Rule 3.357 (referenced in the letter as "enclosed Rule 3.357," governing taxable repair and remodeling services)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9206L1179G01

Original ruling text

June 22, 1992

Dear **:

Thank you for your letter of May 18, 1992, concerning the taxability of
construction performed as part of new construction, however after initial
occupancy of the building.

Remodeling contracts performed after initial occupancy are taxable repair
and remodeling services under enclosed Rule 3.357. In the case at hand, it
appears that the initial contract for new construction included the work
in question, the work was not completed in a different manner requiring
modification (it simply was incomplete), the work was bid prior to
occupancy, and the work was performed for the general contractor
responsible for the new construction. This job may be considered as new
construction presuming that the job was performed within a reasonable
amount of time from the new construction.

As new construction, the labor will not be taxable. If your contract with
your customer is for a lump-sum amount (including both materials and
labor), you will owe tax on the materials. The tax you pay on the materials
may be included in the lump-sum charge. If the contract with your customer
separates the charge for incorporated materials from the charge for labor,
you must collect sales tax from the customer on the charge for materials.

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

You may call me toll free at 1-800-252-5555, ext. 5-0613. The direct line
is 512/475-0613. You may also write to Tax Administration Division,
Comptroller of Public Accounts.

Sincerely,

Kevin Koller