Is replacing a race track's surface taxable real property repair/remodeling (labor and materials both taxable to the customer), or is it new construction (only materials taxed, to the contractor, under a lump-sum contract)?

Plain-English summary

A contractor bid a lump sum to build a new race track — described as a full replacement, not a repair — and the requester asked whether the resulting sales tax liability falls on the contractor or the customer.

The Comptroller explained that the answer turns on whether the job is new construction or repair/remodeling, citing Rule 3.357(a)(8)'s definition of remodeling as "to make over, rebuild, replace, or upgrade existing real property." Two scenarios, two different results:

• Resurfacing the existing track (or a portion of it): this is real property repair or remodeling. The ENTIRE job — labor and materials — is taxable to the customer, and the repairman/remodeler must collect and report the tax.
• Removing/stripping the ENTIRE existing track (pavement and base material) and applying new base material and pavement surface: this qualifies as new construction (an improvement to realty). Under a lump-sum contract to improve realty, the contractor is the consumer of the materials incorporated into the realty and must pay tax to suppliers on those materials — but the LABOR is not taxable. The contractor isn't prohibited from passing the material tax cost on to the owner as an overhead expense (as opposed to charging it as a separate line-item tax).

The Comptroller noted the answer could be refined further if the requester submitted the actual contract for review, and enclosed Rules 3.357 (remodeling/new construction) and 3.291 (contractors) for reference.

What this means for you

Racetrack owners and paving/track contractors

The scope of work determines everything: resurfacing an existing track (even a full resurfacing) is taxable repair/remodeling with the ENTIRE charge taxed to the customer. Fully removing the old track down to base material and building a new one is new construction, where only the contractor's material costs get taxed (passed to suppliers) and labor is untaxed.

Accountants and tax professionals advising track owners or contractors

Watch the contract language carefully — "replace" language alone isn't decisive; what matters is whether the OLD track (including base material) is actually removed, versus just resurfaced on top of the existing base. This is the same new-construction-vs-remodeling distinction that recurs across many other Texas real-property contractor rulings (e.g., "demolish to slab" for buildings).

Common questions

Q: Is resurfacing an existing race track taxable?
A: Yes — the entire charge (labor and materials) is taxable to the customer as real property repair/remodeling.

Q: Is building a brand-new track (removing the old pavement and base material first) taxable the same way?
A: No — that's new construction. Only the contractor's materials are taxed (via supplier purchases under a lump-sum contract); labor is not taxable.

Q: Who's responsible for collecting the tax in each scenario?
A: For repair/remodeling, the repairman/remodeler collects and reports tax from the customer. For new construction under a lump-sum contract, the contractor pays tax to its OWN suppliers on materials (and may pass that cost to the owner as overhead, not as a separately stated tax).

Q: Can I get a more definitive answer for my specific contract?
A: The Comptroller invited the requester to submit the actual contract for a more informed determination — the letter's answer depends heavily on the precise scope of work described in the contract.

Citations and references

• 34 Tex. Admin. Code Rule 3.357(a)(8) (Labor Relating to Nonresidential Real Property Repair, Remodeling, Restoration, Maintenance, New Construction, and Residential Property — defines remodeling/modification)
• 34 Tex. Admin. Code Rule 3.291 (contractors — lump-sum contract treatment of new construction materials)

Subject

Racetracks — Resurfacing Existing Track Or Portion Vs. Removal Of Entire Track And Replaced By New Base Material Pavement Surface

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9711073L

Original ruling text

November 14, 1997

Dear ***:

This is in response to your request for a ruling to clarify as to whether sales
tax would be payable by the contractor or customer in the following situation:

1. Contractor bid a lump sum for the job of building a new race track. He did
   not repair it. He replaced it with a new race track.

You are asking if the sales tax should be payable by the contractor? Do you
have any printed publication available explaining this?

Response: The liability for the tax will depend on whether the job qualifies as
new construction or repair or remodeling. Subsection (a)(8) of Rule 3.357 -
Labor Relating to Nonresidential Real Property Repair, Remodeling, Restoration,
Maintenance, New Construction, and Residential Property, defines remodeling or
modification in part as "To make over, rebuild, replace, or upgrade existing
real property ..."

If the contractor in your situation merely resurfaced the existing track or a
portion of the track, the job would be considered real property repair or
remodeling and would be taxable in total to the customer. The
repairman/remodeler would be required to collect and report the tax.

If the contract calls for the contractor to remove or strip off the entire
existing track, including the pavement and base material and then apply a new
base material pavement surface, the job would be considered an improvement to
realty qualifying as new construction. Under a lump-sum contract to improve
realty, the contractor is the consumer of, and must pay tax to suppliers on,
all materials incorporated into the realty being improved. The labor would not
be taxable. The contractor is not prohibited from passing on the tax paid on
materials to the owner as an overhead expense.

You may wish to submit a copy of the contract for our review so that we can
make a more informed decision on the taxability. I am enclosing copies of Rule
3.357 and Rule 3.291, concerning contractors for your benefit.

This opinion is based on the facts presented. Other facts though similar may
provide a different result.

I hope this information answers your questions. If you need additional
information, please
call me toll-free at 1-800-531-5441, extension 3-4502. The direct line is
512/463-4502. You may also write to Tax Policy Division, Comptroller of Public
Accounts. You may also e-mail our tax help section at:

Sincerely,

Gilbert Zamora
Tax Policy Division