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Ruling 96-2, Sales and Use Taxes / Services to Industrial, Commercial, or Income-Producing / Real Property Renovation

FACTS:

An organization will cause significant changes to be made to a building to convert it to a new use. All interior wall covering, exterior wall covering, flooring, roofing, plumbing, electrical systems and mechanical systems will be removed from the existing building. Only the interior and exterior wall studs and the floor and ceiling joists will be left in place.

ISSUE:

Whether the services rendered in the conversion of a building to a new use, where the interior and exterior wall studs and floor and ceiling joists are left in place, are considered to be rendered in the construction of new real property under Conn. Agencies Regs. §12-407(2)(i)(I)-1(c)(1), and therefore are not subject to sales and use taxes as services to industrial, commercial or income-producing real property under Conn. Gen. Stat. §12-407(2)(i)(I).

DISCUSSION:

Conn. Gen. Stat. §12-407(2)(i)(I) defines "sale" and "selling" to include "services to industrial, commercial or income-producing real property. . . ." However, Conn. Agencies Regs. §12-407(2)(I)(I)-1(c)(1) provides that

[s]ervices are within the purview of section 12-407(2)(i)(I) of the general statutes if and only if the services are rendered to existing industrial, commercial or income-producing real property. Services to real property that are rendered in the construction of new industrial, commercial or income-producing real property are not within the purview of said section 12-407(2)(i)(I). Services to real property will be considered to be rendered in the construction of new real property only to the extent that they are directly connected with the construction of a new building (or a new addition that expands the cubic footage of an existing building)...

The regulation also provides an exception to the general rule that only the creation of new cubic footage constitutes new construction:

Where only the external walls and roof of an existing building are left in place, services will nonetheless be considered to be rendered in the construction of new real property, as long as new floors, new internal walls, new support columns and new electrical and mechanical systems are constructed . . . .

Although the Department has consistently construed this exception narrowly, questions have been raised about whether Ruling No. 93-10 expanded the application of the rule. In Ruling No. 93-10 an existing building, consisting solely of a roof, four concrete block walls, some steel supports and a concrete slab, was to be renovated. The renovation within the building included removal and replacement of the existing roof, substantial demolition of the existing concrete slab, installation of new plumbing under the new concrete slab, the creation of a second floor and the excavation of an elevator pit. It was also noted in the recitation of the facts that "additional support columns" would be required. The ruling held that since the regulatory exclusion permitted the four walls and the roof to remain intact, it followed logically that if the roof were also removed, the project would qualify as new construction, as well.

It is clear, both from the language of the regulation and from the Department's historic interpretation of that language, that the new construction exception in Conn. Gen. Stat. §12-407(2)(i)(I)-1(c)(1) applies only in situations where everything in the interior of a building is entirely removed, including all interior framing and structures, between the lowest floor of the building (that is, the floor that touches the ground) and the rafters of the roof. There must, literally, be nothing left inside the building. Thus the term "new interior walls" does not mean only new wallboards or other wall covering installed over existing wall studs, and the term "new floors" does not mean new subflooring or other floor covering installed over existing floor joists. Moreover, "new support columns and new electrical and mechanical systems" do not mean supplemental ones in addition to the existing ones, but new ones instead of the old ones. (The use of the term "additional support columns" in Ruling No. 93-10 might have suggested that the old support columns were left in place, but it was understood from the facts presented in that ruling request that they were not.)

A question remains whether a concrete slab that touches the ground must also be torn up. In Ruling No. 93-10, the slab was "substantially demolished," apparently so that the new plumbing could be installed, and so that the elevator shaft could be excavated. However, the Department has not held that it is necessary for a concrete slab that sits directly on the ground on the bottom floor of a building to be removed, except to the extent required to remove existing electrical or mechanical systems.

The Department recognizes that in many renovation projects it is not feasible or desirable to effect so drastic a demolition of the interior of a building, and that in some cases a building that consists only of four walls and a roof will not be self-supporting. However, the general rule, stated in the regulation, is that new construction must involve the creation of new cubic footage. To that rule an extremely limited exception was made, which was intended to apply only in rare instances.

RULING:

The services rendered in the conversion of a building, where the interior wall studs and floor and ceiling joists are left in place, are not considered to be rendered in the construction of new real property under Conn. Agencies Regs. §12-407(2)(i)(I)-1(c)(1), and therefore are subject to sales and use taxes as services to industrial, commercial or income-producing real property under Conn. Gen. Stat. §12-407(2)(i)(I). For a project to be "new construction," everything in the interior of a building, between the floor that touches the ground and the rafters of the roof, must be removed. To the extent necessary to remove existing electrical or mechanical systems, a concrete slab on the ground floor must also be removed.

Ruling No. 93-10 is clarified by this ruling.

LEGAL DIVISION

February 21, 1996