Texas Letter Ruling 9210L1197E07: Walls — New Exterior Wall Built Around Remodeled Building — No Usable Space Created — Is Remodeling

Subject

Walls — New Exterior Wall Built Around Remodeled Building — No Usable Space Created — Is Remodeling

Plain-English summary

This letter is a follow-up to an earlier February 28, 1992 letter the Comptroller sent the same taxpayer, answering four questions about sales tax on commercial real property jobs. Between that letter and this one, an administrative law judge (ALJ) issued a hearings decision that changed the analysis for at least one of the examples, so the Comptroller wrote back to update its answer.

The key example: the taxpayer pours a new concrete footer and adds a new brick wall outside an existing wall, without removing the existing wall. In the original February letter, the Comptroller said this was new construction — meaning the labor would not be taxable, and tax would apply only to materials (either through a lump-sum contract or a separated-charge contract).

The ALJ's decision changed that. The Comptroller now says that if the new wall does not create usable space, the job is remodeling, not new construction. When a job is remodeling, the total charge to the customer is taxable, including the labor, and it does not matter whether the contract is lump-sum or has separated charges for materials and labor. If usable space is created, the taxpayer can still rely on the original February 28th answer (new construction treatment).

The same logic carries over to a related example: installing new metal-frame windows in a new brick wall. If the new wall itself doesn't create usable space, then adding windows to it is also remodeling, taxed the same way.

The letter notes that the answers to two other examples from the February letter — parking/driveway construction, and adding footage to an existing building while recovering existing walls and floors to match — were not changed by the ALJ decision and remain governed by the original February 28th response.

What this means for you

Contractors doing exterior wall or building-envelope work

Whether a new exterior wall built around (but not replacing) an existing wall counts as new construction or remodeling turns on one fact: does the new wall create usable space? If yes, treat it as new construction (labor not taxable, tax due on materials). If no usable space is created, treat the whole job — labor and materials — as taxable remodeling, and the type of contract (lump-sum vs. separated) doesn't change that outcome.

Contractors installing windows in new walls

If you're installing windows into a newly built wall, check first whether that wall itself created usable space. If it did not, the window installation is remodeling, taxed the same way as the wall work itself.

Businesses relying on the earlier February 28, 1992 letter

If your commercial property job matches Example #1 or #2 from that earlier letter, don't assume the February answers still apply. This October letter says those specific answers may need to be replaced with the updated remodeling analysis, depending on whether usable space was created. The answers to Examples #3 (parking/driveway) and #4 (additional footage with matching remodel work) were unaffected and remain as originally stated.

Common questions

Q: Is adding a new brick wall outside an existing wall always new construction?
A: Not according to this letter. It depends on whether the new wall creates usable space. If it does, it's new construction. If it doesn't, the Comptroller now treats it as remodeling, following an ALJ hearings decision.

Q: Why did the Comptroller change its answer?
A: An administrative law judge issued a hearings decision in a similar situation, ruling that work creating no usable space is remodeling rather than new construction. The Comptroller updated its guidance to this taxpayer to reflect that decision.

Q: If the job is remodeling instead of new construction, what's taxable?
A: The total charge to the customer is taxable, including the remodeling labor — regardless of whether the contract is lump-sum or separates the charge for materials from the charge for labor.

Q: Does this change apply to all four examples from the original February 28, 1992 letter?
A: No. Only the answers to Examples #1 (new wall outside existing wall) and #2 (windows installed in a new wall) were addressed and potentially changed by this letter. The answers to Examples #3 and #4 remain unchanged.

Citations and references

Rules:

• 34 Tex. Admin. Code Rule 3.357, Subsection (b)(7) — referenced in the original February 28, 1992 letter (reproduced here) as "the enclosed Rule 3.357," regarding contracts combining new construction and remodeling.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9210L1197E07

Original ruling text

October 22, 1992

Dear ****:

On February 28, 1992, I responded in a letter to four of your tax questions. An
administrative law judge (ALJ) recently issued a hearings decision that may
change some of the answers I gave. I have enclosed a copy of the decision for
your review.

In Example #1, you gave the situation of pouring new concrete footers and
adding new brick walls outside an existing wall. The existing wall was not
removed. I responded that the work would be new construction work. The ALJ
ruled in a similar situation that if there is no usable space created, the work
would be remodeling rather than new construction. Therefore, I will restate the
examples you gave in your earlier letter and respond based on the recent
hearings decision. If, in your situation, usable space is in fact created, then
you may continue to use my February 28th response. If no usable space is
created by the addition of the walls, then my earlier responses should be
disregarded and the following answers used.

Example #1: Pouring new concrete footer and adding new brick wall outside
existing wall. Existing wall not removed.

Response: If usable space is not created by the addition of the new brick wall,
this job will be regarded as remodeling. The total charge to your customers
will be taxable including the remodeling labor. When the work is remodeling,
the type of contract between you and your customers is not relevant.

Example #2. New metal frame windows installed in a new brick wall.

Response: If no usable space was created by the addition of the new wall, the
addition of the windows will be remodeling. See response to Example 1.

The February 28th responses to Examples #3 and #4 remain unchanged.

I hope this additional information and the copy of the administrative hearing
will be helpful in determining your tax responsibilities.

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

If you have any questions or need more information, you may call me toll free
at 1-800-252-5555, extension 3-4633. The regular number is 512/463-4633. You
may also write to the Tax Administration Division.

Sincerely,

Wanda Hutcheson
Tax Administration Division

February 28, 1992

Dear ****:

Thank you for your recent letter asking about your sales tax responsibilities
when performing work on commercial real property. The jobs you outlined are
restated below with our responses.

Example #1: Pouring new concrete footer and adding new brick wall outside
existing wall.

Existing wall not removed.

Response: This job is new construction. The labor will not be taxable. If your
contract with your customer is lump sum, you will owe tax on the materials. 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.

Example #2: New metal frame windows installed in a new brick wall.

Response: If, in the course of new construction of the wall, the blueprints
called for the wall to have windows, and you as a subcontractor get the job of
installing them in the opening in the wall prepared for them, this is new
construction. See the response to Example #1.

If the wall was built without windows and is now being remodeled to add
windows, this is remodeling. The total charge for remodeling, including labor
as well as materials, is taxable to your customer. The type of contract
(lump-sum or separated) is irrelevant.

Example #3: Pouring new concrete for parking and driveway where none existed
before.

Response: You are constructing a parking area and driveway. This is new
construction. See the response to Example #1.

Example #4: Additional footage to existing building and recovering existing
walls and floors to match new construction.

Response: Here, you have a combination of new construction and remodeling. The
additional square footage is new construction. Recovering existing walls and
floors to match the additional footage is remodeling. If the portion relating
to the remodeling is 5% or less of the total charge, the contract may be
regarded as new construction. See response to Example #1.

If the portion relating to remodeling is more than 5% of the total, the total
charge to the customer will be taxable unless the charge for the nontaxable new
construction labor is separately identified to the customer from the charge for
remodeling labor. If the charges are separated, tax will be due from the
customer on all materials and on the remodeling labor. See Subsection (b)(7) of
the enclosed Rule 3.357.

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

If you have any additional questions or need more information, you may call me
toll free at 1-800-252-5555, extension 3-4633. The regular number is
512/463-4633. You may also write to the Tax Administration Division.

Sincerely,

Wanda Hutcheson
Tax Administration Division