BILL ANALYSIS Ó
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: AB 780 HEARING: 6/29/11
AUTHOR: Calderon FISCAL: Yes
VERSION: 5/10/11 TAX LEVY: No
CONSULTANT: Grinnell
FIXED PRICE CONTRACTS
Alters contractor payments when the sales and use tax rate
changes.
Background and Existing Law
State law imposes the sales tax on every retailer "engaged
in business in this state" that sells tangible personal
property to collect the appropriate tax from the purchaser
and remit the amount to the Board of Equalization (BOE).
The Legislature increased the statewide sales and use tax
rate from 5% to 6% between April 1, 2009 and July 1, 2011
(ABx3 3, Committee on Budget, 2009), but did not include an
exemption for property obligated pursuant to a fixed-price
contract between a contractor and a government entity, who
agrees to pay the contractor a specific price for materials
procured in the course of constructing a project. Previous
to ABx3 3, the Legislature exempted sales of tangible
personal property obligated pursuant to fixed- price
contracts and fixed-price leases from the rate increase,
both for the general sales tax increase in 1991, and for
the sales tax increase after the Loma Prieta earthquake in
1989.
Cities and counties may impose their own sales taxes, known
as transactions and use taxes, for general or specific
purposes. The taxes range from 1/10% to 2.5%. Since 2009,
voters in about 30 different local jurisdictions have
approved new district taxes within their local areas.
Altogether, voters have approved over 100 district taxes
that are levied in various cities and counties throughout
California. The Transactions and Use Tax Law exempts all
sales of property obligated pursuant to fixed price
contracts from the various city and county tax rate
increases when those contracts are entered into prior to
the operative date of those rate increases. Tangible
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personal property is not deemed obligated pursuant to fixed
price contracts (and the sale or purchase is not exempted
from the district rate increase) if either party to the
contract has the unconditional right to terminate the
contract.
AB 780 - 5/10/11 -- Page 3
Proposed Law
Assembly Bill 780 provides that the contractor in a fixed
price contract is entitled to an increase in payment for a
change in the contract price attributable to an increase in
the state sales and use tax rate. The bill also provides
that the government entity is entitled to a reduction in
payment when the sales and use tax rate is reduced.
Increases or decreases shall be made in accordance with the
contract, or by agreement if the contract does not so
provide.
The bill applies only when the contract is entered into
prior to the rate increase, and does not apply to property,
materials, or fixtures obligated pursuant to a contract
during the period of time contractor has the right to
terminate the contract unconditionally or upon notice,
whether or not the right is exercised. The measure
similarly applies to leases that are continuing sales and
purchases of property. The bill applies only to contracts
entered into on or after its effective date. The measure
also defines some of its terms.
AB 780 changes the exemption in the Transactions and Use
Tax law to state that property is deemed obligated whenever
the contractor does not have the unconditional right to
terminate the contract, instead of when both the public
agency and the contractor lack that right.
State Revenue Impact
BOE estimates no revenue effect.
Comments
1. Purpose of the bill . According to the Author, "AB 780
will provide fairness to contractors and public agencies
who entered into fixed price construction contracts prior
to any change in the state sales tax rate. AB 780 provides
that, in the event of a future increase or decrease in the
state sales tax, public works fixed price contracts that
were entered into prior to the tax change must provide for
an adjustment in a contract to compensate the contractor
AB 780 - 5/10/11 -- Page 4
for the increase if it was not factored into the contract.
If the tax is decreased, the contractor will compensate the
public agency. Because this provision was not included in
the current sales tax increase, contractors have been
forced to absorb the additional tax. A similar statute was
enacted in 1989 and 1991 when the sales tax was temporarily
increased. This bill will only apply to any future
adjustment to the sales tax and has no current or future
revenue loss to the state."
2. Surprise ! Contractors in fixed price contracts bid on
projects based on its estimated costs of time and materials
necessary to complete the job. When the state increases
the sales tax rate on property necessary to complete the
project, the contractor unexpectedly has to eat the
difference due to the now higher costs that can't be passed
on because the parties fixed the price of the job in the
contract. Conversely, the contractor may receive a
windfall if the state decreases the rate after signing the
contract but before he or she procures the materials. AB
780 resolves this difference by providing for an increase
or decrease in payment whenever the rate changes after the
contractor buys the property.
3. Two to tango . AB 780 changes transactions and use tax
law that allows the current exemption from local tax
increases. Currently, the exemption applies only when both
the contractor and the government lack the right to
terminate the contract. Sponsors state that governments no
longer enter contracts that lack the right to terminate, so
the exemption will never apply. AB 780 revises this
requirement to state that the exemption applies only when
the contractor lacks the right to cancel the contract.
4. Have we met before ? Last year, the Committee approved
AB 2060 (Calderon), which exempted fixed price contracts
with government agencies from sales and use tax increases.
At the time, the Committee was concerned that the measure
exempted only one class of taxpayers, contractors with
fixed price contracts, when many other classes of taxpayers
that had reasonably relied on a lower sales and use tax
rate when signing contracts or making investments were not
afforded a similar exemption. The Senate Appropriations
Committee then amended AB 2060 into a measure similar to AB
780. However, Governor Arnold Schwarzenegger vetoed AB
2060, stating:
AB 780 - 5/10/11 -- Page 5
"First, I can understand the impact of new taxes on
businesses and the frustration that contractors may
have when they are not exempted from sales tax
increases. This is one of the reasons I have continued
to oppose raising additional taxes because it slows
our state's economic recovery efforts and dampens job
creation. However, this bill seeks an overly broad and
permanent exemption which effectively shifts the
burden of paying both state and local sales tax
increases from the contractor to the government entity
and ultimately, on California's taxpayers. In
addition, I believe this bill is unnecessary because
current law allows an exemption to fixed-price
contracts for city and county tax increases, and such
exemptions have been allowed on past statewide sales
and use tax increases. I believe this process is
appropriate and does not affect district tax revenues,
as this bill would propose to do. For these reasons, I
am unable to sign this bill."
5. Amendment needed . To ensure that public agencies can
access information to verify contractors' cost changes
resulting from sales and use tax rate changes, the
Committee should amend AB 780 on page 3, line 19, after
"parties.", to add:
"The government entity may require the contractor to submit
invoices for those tools, materials, or supplies
specifically purchased for actual incorporation into the
public works contracts, including, but not limited to,
tools, materials, or supplies consumed solely for use in
the contract entered into by the government agency and
contractor."
Assembly Actions
Assembly Revenue and Taxation 8-0
Assembly Appropriations 17-0
Assembly Floor 78-0
Support and Opposition (6/22/11)
Support : Associated Builders and Contractors of
California; Associated General Contractors; California
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Landscape Contractors Association; California Nevada Cement
Association; California Precast Concrete Association;
California Taxpayers Association; Concrete Contractors
Association; Engineering and Utility Contractors
Association.
Opposition : Unknown.