Does a city owe sales tax when it demolishes a structure and removes debris from a landowner's property under its police powers?

Plain-English summary

This 1993 Texas Comptroller letter answers a question about a city's charges for demolishing structures and removing debris. The Comptroller drew a clear line between the two activities:

• Demolishing a structure entirely down to the slab is not a taxable service.
• Removing the debris afterward is a taxable service.

If the city bills a single combined charge for both demolition and debris removal, the whole charge escapes tax only if the debris-removal portion is 5% or less of the overall charge. If debris removal makes up more than 5% of the total, tax is due on the entire combined charge — not just the debris-removal share. Alternatively, the city can separately state the charge for debris removal, in which case tax applies only to that separately stated (taxable) portion.

The letter then describes an important exception: if the city is exercising nonconsensual police powers — for example, demolishing an unsafe or abandoned structure and removing the resulting debris without the landowner's consent — no tax is due on the amount charged to the landowner at all, because no "sale" of services has occurred. The letter points to an enclosed, edited copy of Administrative Hearing 27,367 as further guidance on a Texas city exercising this kind of non-consensual police power.

What this means for you

Cities and municipalities that demolish structures and bill property owners

If your city bills landowners for demolition and cleanup, keep the demolition and debris-removal charges separate wherever possible — that keeps tax due only on the debris-removal portion. If you combine them into one charge, watch the 5% threshold: once debris removal exceeds 5% of the total bundled charge, the whole charge becomes taxable. And if the work is done under the city's nonconsensual police powers (razing unsafe or abandoned structures without the owner's consent), the Comptroller treated that as not a taxable sale at all, so no tax applies to what's charged the landowner.

Accountants and tax professionals advising local governments

This letter illustrates the Comptroller's bundling rule for mixed taxable/nontaxable charges (the 5% de minimis threshold) and a fact-specific carve-out for services performed under government police power rather than by consensual sale. Because the letter is fact-based ("This opinion is based on the facts presented. If there are additional or different facts, the opinion may change."), confirm with current STAR guidance or 34 Tex. Admin. Code before relying on it for a present-day situation.

Common questions

Q: Is a city's charge to demolish a building taxable?
A: No. According to this letter, a charge to entirely demolish a structure down to the slab is not taxable.

Q: Is removing the debris from a demolition taxable?
A: Yes, the letter treats debris removal as a taxable service on its own.

Q: What happens if the city charges one lump sum for both demolition and debris removal?
A: The combined charge is not taxable if the debris-removal portion is 5% or less of the total. If it's more than 5%, tax is due on the entire combined charge. The city can avoid this by separately stating the debris-removal charge, so that only that portion is taxed.

Q: Does a city ever owe no tax at all on this kind of work?
A: Yes, per this letter — if the city is exercising nonconsensual police powers, such as demolishing an unsafe or abandoned structure and removing debris without the landowner's consent, no tax is due on the amount charged the landowner because no sale of services occurs.

Citations and references

No statutes or rules are cited in this letter. It references an enclosed, edited copy of Administrative Hearing 27,367 (regarding a Texas city exercising non-consensual police powers) as supporting authority, but that hearing decision itself is not reproduced in the letter and no Tax Code section or Comptroller rule is quoted.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9302L1226G13

Original ruling text

February 22, 1993

Dear **:

Thank you for your letter concerning the demolition of structures and the
removal of debris by the City of **.

A charge to entirely demolish a structure down to the slab is not
taxable. A charge to remove the debris is taxable.

If there is a single charge for both demolition and removal, the total
charge is not taxable if the portion relating to the removal of the
debris is 5% or less of the overall charge. If the portion relating to
the removal of the debris is greater than 5% of the overall charge, tax
is due on the total charge.

The charge for debris removal may be separately stated from the charge
for demolition. In that case, tax is only due on the separately stated
charge for the taxable service.

However, if the City of ***** is exercising non-consensual police
powers by demolishing unsafe or abandoned structures and removing the
debris, no tax is due on the amount charged the land owner because no
sale of services occurs. Please review the enclosed edited copy of
Administrative Hearing 27,367 regarding a Texas city exercising
non-consensual police powers.

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 1-800-531-5441, ext. 5-0030. The direct line
is 512/475-0030. You may also write to Tax Administration, Comptroller of
Public Accounts.

Sincerely,

David Somerville
Tax Administration Division