Who did the upgrades? If the answer is that the seller did the upgrades, then the buyer has purchased an upgraded house and the upgrades are part of the purchase price. If the buyer did the upgrades and paid for them, that cost would not be part of the purchase price. It would be very unusual if the buyer did upgrades on a house before close and transfer of ownership.

“How would anyone really know what improvements you do after you close escrow on your own home?” If the person doing the upgrades had to pull a permit, the assessor probably knows that work is being done on the house.

“Should the assessor be allowed to tax?” That is a matter of law and not subject to our opinion.

We often see upgrades added and paid for by the buyer with cash on custom homes. When it closes, it may not show how much the buyer truly paid for the house which can hurt comparables going forward. Taxes are assessed every 4 years here. Until recently, it was every 8 years. The tax assessor will eventually catch up with people on the home values. I think the bigger issue is the comparables and resale. During the recession I ran into situations where the seller told me how much they paid and it didn't reflect that in the tax records. Buyers were looking at how much a person paid and what the house was assessed for during the recession. It probably hurt some home sellers. In this market, people could care less if they're paying $100k - $150k over the assessed value. We're all going to get a hit when tax values are reassessed next. 

Do it outside of escrow.

If the seller/builder is doing the upgrades, it's often best handled as part of the sales price.  We're having that discussion with a potential buyer of one of our listings now.

That is the way it is done here in IL. It's in the buyers best interests to be sure that all the builder specs are correct.  I've had it both ways - they forgot some upgrades & underreported others on NC.

The assessor won't know after the closing what was done at least here.

If upgrades were done before closing and became part of the purchase price then the total sales price is the basis for tax. 

If the upgrades were done after the close, depending on the nature of the upgrades, they may or may not be taxed. 

I'm feeling like I am missing something in the question and more details or information may be necessary.

Interesting, just when you think you have seen everything.  

upgrades have nothing to do with taxes in my state.  No one knows if I get new countertops or flooring.  It's not their business.  No permit required.

It does make sense to wait to do the upgrades, unfortunately few buyers are wise enough to go that way.

Good question. I have actually seen this situation (of sorts). The purchase price was set on a new home; the buyers chose certain upgrades, for which the developer charged them separately and that amount was not included in the purchase price. If it was not "official" sale price, then the buyer agent doesn't get paid on that amount?