A client plans to build a two-story office area inside an existing warehouse without raising the roof — installing a new second floor where none existed before, alongside remodeling the existing first floor. Does it matter whether the first and second floors are built under one contract or two, or at different times, for purposes of Texas's new-construction sales tax exemption?

Plain-English summary

A client planned to build a two-story office area inside an existing warehouse without raising the roof — remodeling the existing first floor and installing a brand-new second floor where none previously existed. The taxpayer asked the Comptroller two structural questions: would it change the tax result if the first and second floors were built under separate contracts rather than one, and would it matter if the first floor was built now with the second floor added later? The taxpayer also asked whether an older letter ruling (fiche #976G02) addressing a similar situation still reflected current policy.

The Comptroller confirmed fiche #976G02 remains current policy, and then answered the specific new-construction question: because the second floor is being installed where one did not previously exist, it qualifies as exempt new construction — while the first-floor work remains taxable remodeling. Neither of the two structural questions changes that result. If both floors are built under a SINGLE contract, the new-construction charge for the second floor must be separately stated from the taxable first-floor remodeling charge, per Rule 3.357(b)(7) and (9). If built under two SEPARATE contracts, the second floor's new-construction exemption is unaffected either way. And building the second floor at a LATER time than the first-floor remodeling doesn't change the second floor's exempt status either.

What this means for you

Building owners/contractors adding a new floor or room inside an existing structure

Installing a genuinely new floor or room where none existed before can qualify as exempt new construction, distinct from remodeling of the existing space — even without raising the roof. The key fact is whether the specific portion of work creates something that didn't previously exist, not the overall project's scope or timing.

Contractors bidding combined remodel + new-construction jobs under one contract

If your job mixes taxable remodeling with exempt new construction, make sure your invoice or contract SEPARATELY STATES the new-construction charge from the remodeling charge (per Rule 3.357(b)(7) and (9)) — otherwise you risk the whole charge being treated as taxable.

Accountants and tax professionals confirming reliance on older letter rulings

This letter is itself a useful example of how to properly confirm an older ruling (here, decades-old fiche #976G02) still represents current policy before relying on it — always ask the Comptroller to reconfirm currency rather than assuming an older letter still applies.

Common questions

Q: Does installing a new second floor inside an existing building qualify as exempt new construction?
A: Yes — if a floor/room is being installed where none existed before, that portion of the work is new construction, exempt from tax, even without raising the roof.

Q: Does it matter if the new floor is built under a separate contract from the remodeling work?
A: No — the new-construction exemption for the second floor applies either way, whether under one contract (with charges separately stated) or two separate contracts.

Q: Does it matter if the new floor is built at a different time than the remodeling?
A: No — building the remodeling now and the new floor later doesn't change the new floor's exempt status.

Q: What do I need to do if both projects are under one contract?
A: Separately state the new-construction charge from the taxable remodeling charge, per Rule 3.357(b)(7) and (9).

Q: Can I rely on this letter for my own construction project?
A: No. It's based on the facts presented, and the letter notes other facts, though similar, may provide a different result.

Citations and references

• 34 Tex. Admin. Code Rule 3.357(b)(7), (b)(9) (separately stating new construction charges from taxable remodeling charges under a single contract)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9803402L

Original ruling text

March 24, 1998

Dear Mr. ****:

This is in response to your request for information as to whether fiche #976G02
still represents current tax policy. I have restated your fact situation and
questions below, followed by my response:

Your client is planning on constructing a two-story office area in an existing
warehouse without raising the roof. While this situation is different from
that in fiche # 976G02 there are some similarities. If fiche # 976G02 still
represents current sale tax policy, then it would seem that the construction of
the first floor would be classified as real property remodeling and the
construction of the second floor would be new construction.

Would it make a difference if the first floor was constructed under one
contract and the second floor under a different contact?

Would it make a difference if the first floor was constructed now and the
second floor later?

Response: The letter ruling in fiche #976G02 is still current policy.
My understanding is that your client will have a new second floor installed
within the existing warehouse. The installation of the second floor, where one
did not previously exist, will qualify as new construction. If performed under
a single contract in conjunction with the remodeling of the first floor, the
charge for the new construction should be separately stated from the taxable
remodeling. See Rule 3.357(b)(7) and (9). If performed under a contract
separate from the remodeling contract, the new construction of the second floor
will still be exempt. Remodeling of the first floor now and the constructing
the second floor later will not change the taxability of the second floor
construction.

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