Is demolishing part of a building's interior and removing its roof, trusses, and elevator taxable remodeling, and does it matter whether the demolition contractor is the same firm doing the reconstruction or a separate third party?

Plain-English summary

This letter is a follow-up ruling that responds to an earlier letter (dated November 2, 1994, reproduced at the end of this document) about the tax treatment of work on a building referred to as the "***" building. The project involved partially demolishing a one-story building and reconstructing it with a new second story, including removing the existing roof, trusses, and elevator.

The Comptroller distinguished the taxpayer's facts from a cited administrative hearing (Hearing 27,967), agreeing that demolishing an entire structure is not, by itself, a taxable service — but that the same demolition becomes taxable when lumped together with substantial waste-removal charges. More importantly, the letter concludes that demolishing the interior of a building, as described by the taxpayer, is taxable remodeling whether it's done by the same firm that will reconstruct the building or by a separate third-party contractor.

The letter cites Tax Code Section 151.0047, which defines real property repair and remodeling as "the repair, restoration, remodeling, or modification of an improvement to real property," and states there is no question the building had been modified. Accordingly, the Comptroller concluded that charges for demolishing the interior of the building, as well as removing the roof, trusses, and elevator, are taxable remodeling regardless of which contractor performs that work.

The earlier November 2, 1994 letter (also reproduced below) goes into more detail about the underlying project: work on the existing slab (a new laboratory complex and offices), new foundations to support a new second floor and roof loads, a new roof truss system, a new mechanical room, new administrative offices, a new dock system, and a new personnel walking bridge with elevator services, plus new HVAC, ventilation, electrical, and plumbing systems. That letter classified the new second floor (including its roof, truss system, and supporting foundation pillars), the new mechanical room, the dock system (additional square footage), and the new administrative offices as new construction. By contrast, it classified the demolition of the interior along with removal of the roof, trusses, and elevator — as well as rebuilding the first-floor interior and adding the HVAC system — as remodeling. That letter also referenced Rule 3.357, subsection (b)(7), for the tax consequences of combining charges for new construction and remodeling on the same job.

What this means for you

Contractors and owners planning demolition-and-rebuild projects

If your project involves demolishing part of an existing building's interior — including removing structural elements like the roof, trusses, or an elevator — as part of a larger renovation, that demolition work is taxable remodeling. This is true even if a different contractor performs the demolition than the one who does the reconstruction. Splitting the work between two separate contractors does not change the taxability of the demolition charges.

Distinguishing new construction from remodeling on the same job

The related November 1994 letter shows how a single project can contain both new construction (e.g., an entirely new second floor, new mechanical room, new administrative offices, and new dock area representing added square footage) and remodeling (demolition of existing interior space, removal of the old roof/trusses/elevator, and rebuilding the existing first floor). Contractors billing for combined new-construction and remodeling work on one project should consult Rule 3.357(b)(7) for how to handle the mixed charges.

Demolition of an entire structure versus demolition with waste removal

The letter notes that demolishing an entire structure by itself is not automatically a taxable service — but if that whole-structure demolition is billed together with substantial waste-removal charges, the combined charge becomes taxable. This is a narrower fact pattern than the interior-demolition-as-remodeling situation addressed in this letter.

Common questions

Q: Does it matter whether the same contractor does both the demolition and the reconstruction?
A: No. The letter states the interior demolition, along with removal of the roof, trusses, and elevator, is taxable remodeling "whether performed by the same contractor who performed the reconstruction work or by a third party."

Q: Is demolishing an entire building always taxable?
A: Not by itself. The letter states demolition of an entire structure is not in and of itself a taxable service, but the same demolition becomes taxable when lumped together with substantial charges for waste removal.

Q: What Tax Code provision does the letter rely on?
A: Tax Code Section 151.0047, which defines real property repair and remodeling as "the repair, restoration, remodeling, or modification of an improvement to real property."

Q: How should charges be handled when a project includes both new construction and remodeling?
A: The related November 2, 1994 letter directs taxpayers to Rule 3.357, subsection (b)(7), for the tax consequences of combining charges for new construction and remodeling.

Citations and references

• Tax Code Section 151.0047 (defining real property repair and remodeling as "the repair, restoration, remodeling, or modification of an improvement to real property")
• Rule 3.357, subsection (b)(7) (referenced in the November 2, 1994 letter regarding combined charges for new construction and remodeling)
• Hearing 27,967 (distinguished as involving different facts)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9501L1337A14

Original ruling text

January 31, 1995

Dear ****:

Thank you for your follow-up letter regarding the tax treatment of
charges related to interior demolition of a portion of the "***"
building as well as removal of the roof, trusses and elevator.

The facts in Hearing 27,967 are quite different from those you presented
in your letter of October 17, 1994. I agree that demolition of an entire
structure is not in and of itself a taxable service. But, the same demolition
lumped together with substantial charges for waste removal is taxable.
Further, demolition of the interior of a building as you describe in your
letter of October 17, 1994 constitutes taxable remodeling whether done by
the firm that will reconstruct the building or by a third party.

Tax Code Section 151-0047 defines real property repair and remodeling as
"the repair, restoration, remodeling, or modification of an improvement to
real property. And, there is no question that the building mentioned in
your letter of October 17,1994 has been modified.

Accordingly, the charges for demolition of the interior of the building
as well as the removal of the roof, trusses, and elevator are considered
taxable remodeling whether performed by the same contractor who performed
the reconstruction work or by a third party.

This opinion is rendered based on the facts you submitted. Other facts,
though similar, may yield different results.

You may call me toll free at 1-800-531-5441, ext. 3-4680. The direct line
is 512/463-4680.

You may also write to Tax Administration, Comptroller of Public Accounts.

Sincerely,

Al Van Allen
Tax Administration Division

November 2, 1994

Dear ***:

Thank you for your recent letter regarding the tax treatment of labor
to partially demolish and reconstruct a building. This would involve
removal of a roof and interior walls from a one story building. The
building would then be rebuilt with a second story.

Your letter is restated in part with taxability responses below.

Work performed on the existing slab of the old *** building primarily
consists of constructing a new laboratory complex including offices for
laboratory personnel. Work performed on new foundations include:

1. Installation of new drilled foundations to support the new second
   floor and the new roof loads.
2. Construction of a new second floor
3. Installation of a new roof truss system and roof.

Work performed on new square footage created by the second floor or work
performed outside the area of the old *** building includes:

1. Construction of a new mechanical room located at roof level.
2. Construction of new administrative offices on the second floor.
3. Installation of a new dock system for the laboratory.
4. Installation of a new personnel walking bridge to access the
   laboratory and administrative offices complete with elevator services.

Additionally, as part of the planned construction, the company will
install new HVAC, ventilation systems, electrical systems, utility services
and plumbing in the new *** Building.

Response: The second floor, including the roof, truss system, and foundation
pillars supporting it, constitute new construction. Also considered new
construction are the new mechanical room, dock system which you said in our
telephone conversation was additional square footage, and administrative
offices.

Charges related to demolition of the interior of the building as well as
the removal of the roof, trusses, and elevator constitute remodeling.
Rebuilding the interior of the first floor and the addition of the HVAC system
also constitutes remodeling.

Under separate cover I am sending a copy of Rule 3.357. Please refer to
subsection (b)(7) for the tax consequences of combining charges for new
construction and remodeling.

This opinion is rendered based on the facts you submitted. Other facts,
though similar, may yield different results.

You may call me toll free at 1-800-531-5441, ext. 3-4680. The direct
line is 512/463-4680. You may also write to Tax Administration, Comptroller
of Public Accounts.

Sincerely,

Al Van Allen
Tax Administration Division

NOTE: Previous Accession Number 9501960L