Is labor to repair storm/water damage to a parking lot taxed as new construction or as taxable repair, and is contract labor for real property repair taxable?

Subject

Contract Labor/Worker Performing Taxable Services Vs. Employee Performing Services For Employer

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9403L1288B14

Plain-English Summary

This is an internal Comptroller memo addressing two separate situations for one taxpayer who built a truck stop.

Situation 1 — storm/water damage to the parking lot. After the truck stop opened, rainwater seeped or washed under the concrete paving, washing out the dirt underneath. This caused numerous places in the concrete to fail over time, requiring repeated repair and/or replacement — an ongoing problem, since the damaged sub-base could only be identified once the concrete surface failed. The taxpayer was in discussions with its insurance carrier about coverage and in litigation with the contractor to recover damages. The taxpayer asked whether this repair work qualified as nontaxable "new construction" under Rule 3.357 section (c)(5), given that the damage appeared to stem from natural causes and might be covered by insurance, and whether that treatment would extend to future repairs of the same damage.

The Comptroller's answer: repairs made to the parking lot before October 1, 1993 did qualify as "new construction" for purposes of the labor used to make them. But the exemption that allowed labor to repair casualty-claim-eligible property to be treated this way was replaced by Tax Code Section 151.350. That new section contains no "prior contract" exemption, so labor to repair damage to real or tangible property performed on or after October 1, 1993 is taxable — unless the work independently qualifies for the exemption in Section 151.350 or some other exemption applies.

Situation 2 — contract labor for real property repair/remodeling. The taxpayer also had an employee who, separate from his regular job duties, performed real property repair/remodeling work and billed the taxpayer for it as "contract labor." The taxpayer asked whether categorizing the labor as contract labor made those charges taxable. The Comptroller's answer was simply: Yes.

What This Means For You

If you're repairing storm- or water-damaged concrete/paving (or similar realty) tied to a casualty event: The timing of the work matters a great deal. Repairs performed before October 1, 1993 could qualify as nontaxable "new construction" labor under the rule discussed here, but that treatment does not automatically continue for repairs performed on or after October 1, 1993 — those are taxable unless a current exemption (such as one found in Tax Code Section 151.350) applies.

If you have an ongoing casualty-damage repair situation with insurance or litigation pending: Don't assume the tax treatment of your first round of repairs will carry over to later repairs of the same underlying damage. Each phase of repair work needs to be evaluated against the law in effect when that specific labor is performed.

If you pay a worker "contract labor" for real property repair or remodeling work done outside their normal employment duties: Labeling the payment as contract labor does not avoid tax. Per this ruling, such charges are taxable to the taxpayer who pays them.

Q&A

Q: Did repairs to the taxpayer's parking lot, damaged by rainwater erosion under the concrete, qualify as new construction under Rule 3.357 section (c)(5)?
A: For repairs made before October 1, 1993, yes — those repairs qualified as "new construction" with respect to the labor used to make them.

Q: Does that same treatment apply to future repairs of the same damage performed on or after October 1, 1993?
A: No, not automatically. The casualty-repair exemption was replaced by Tax Code Section 151.350, which has no prior-contract exemption. Labor to repair damage to real or tangible property performed on or after October 1, 1993 is taxable unless it qualifies for the exemption in Section 151.350 or some other exemption applies.

Q: The taxpayer's employee also does real property repair/remodeling work outside his regular job and bills it as "contract labor." Does labeling it contract labor make those charges taxable to the taxpayer?
A: Yes.

Citations

• 34 Tex. Admin. Code Rule 3.357 section (c)(5) (new construction vs. repair/remodeling of realty)
• Tex. Tax Code Section 151.350 (exemption for labor to repair damage to real or tangible property, effective October 1, 1993, replacing the prior casualty-claim exemption)

Original ruling text

DATE: March 16, 1994

TO: Tom M. Grimes, ***

FROM: Gilbert Zamora Tax Administration Division

SUBJECT: Repair, Remodeling of Realty vs. New Construction

SITUATION: Taxpayer constructed a truck stop which covers several acres
of land After the truck stop opened, rainwater seeped or washed under the
concrete paving that covers the area, washing the dirt from under the
concrete. Subsequently, numerous places in the concrete have required
repair and/or replacement. This is an ongoing situation, as the damaged
sub-base can only be located and identified when the surface structure
(concrete) fails. The company is currently in discussion with their
insurance carrier to determine if the damage is covered by their policy.
They are in litigation with the contractor to recover damages.

QUESTION (1): Since the damage was or appears to have been caused by
natural causes and could possibly be covered by insurance does the repair
qualify as new construction per Rule 3.357 section (c)(5)? The damage and
repair occurred prior to October 1, 1993. Will any future repair related
to this damage qualify as new construction?

RESPONSE: The repairs to the parking lot prior to October 1, 1993,
qualify as "new construction" with respect to labor used to make the
repairs. The exemption for labor to repair property damaged in such a way
that a casualty claim could be filed was replaced by Tax Code Section
151.350. Since there is no prior contract exemption in that section, labor
to repair damage to real or tangible property performed on or after October
1, 1993, is taxable unless it qualifies for the exemption in Tax Code
Section 151.350 or some other exemption applies.

SITUATION (2): The taxpayer has an employee that also performs real
property repair/remodeling separate from his regular employment. This
person bills the taxpayer for the work and the labor is categorized as
contract labor.

QUESTION: Since the labor for the real property repair remodeling is
categorized as contract labor, does this make the labor charges taxable
to the taxpayer?

RESPONSE: Yes.

NOTE: Previous Accession Number 9403090L