BILL ANALYSIS
AB 1523
Page 1
Date of Hearing: May 18, 2009
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Charles M. Calderon, Chair
AB 1523 (Charles Calderon) - As Amended: May 5, 2009
Majority vote. Tax levy. Fiscal committee.
SUBJECT : Sales and use taxes: exemption: fixed price
contracts
SUMMARY : Relieves parties who entered into a fixed price
contract or a fixed price lease before the recently enacted 1%
sales and use tax (SUT) increase. Specifically, this bill :
1)Provides that, from the operative date of the act adding
Revenue and Taxation Code (R&TC) Sections 6051.7 and 6201.7,
to the date on which the taxes imposed by those sections cease
to apply, there is exempted from the taxes imposed by the SUT
Law, an amount equal to an amount that is attributable to a 1%
rate of tax with respect to the following:
a) The gross receipts from the sale of, and the storage,
use, or other consumption in this state of, tangible
personal property (TPP), if the seller is obligated to
furnish or the purchaser is obligated to purchase the
property for a fixed price under a contract entered into
before the operative date of the act adding R&TC Sections
6051.7 and 6201.7;
b) The gross receipts from the sale of, and the storage,
use, or other consumption in this state of, materials and
fixtures obligated under an engineering construction
contract or a building construction contract entered into
for a fixed price before the operative date of the act
adding R&TC Sections 6051.7 and 6201.7;
c) A lease of TPP that is a continuing sale of the property
for any period of time for which the lessor is obligated to
lease the property for an amount fixed by the lease before
the operative date of the act adding R&TC Sections 6051.7
and 6201.7; and,
d) The possession of, or the exercise of, any right or
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power over TPP under a lease that is a continuing purchase
of the property for any period of time for which the lessee
is obligated to lease the property for an amount fixed by a
lease entered into before the operative date of the act
adding R&TC Sections 6051.7 and 6201.7.
2)Provides that, on and after January 1, 2010, the exemption
outlined above shall apply with respect to any future SUT rate
increase.
3)Contains legislative findings and declarations noting that it
fulfills a statewide public purpose, and provides necessary
relief to the retailers or contractors who entered into a
fixed price contract or a fixed price lease agreement before
the operative date of the 1% SUT increase.
4)Takes immediate effect as a tax levy.
EXISTING LAW imposes:
1)A sales tax on retailers for the privilege of selling TPP,
absent a specific exemption. The tax is based upon the gross
receipts from sales of TPP in this state.
2)A use tax on the storage, use, or other consumption in this
state of TPP purchased from any retailer for storage, use, or
other consumption in this state, absent a specific exemption.
3)As of April 1, 2009, an additional SUT at the rate of 1%.
This additional SUT is codified in R&TC Sections 6051.7 and
6201.7.
FISCAL EFFECT : The Board of Equalization (BOE) notes that many
contracts are drafted in such a way that they would not qualify
as fixed price contracts eligible for this exemption.
Specifically, contracts often contain protective clauses
providing that any tax increase will be borne by the customer.
BOE does not know the percentage of contracts containing such
clauses. As such, it is not possible to provide a precise
revenue estimate for this bill.
COMMENTS :
1)The author notes:
AB 1523 would exempt from the recently enacted 1% sales and
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use tax increase fixed price contracts entered into prior
to the rate increase. This bill is designed to protect
parties with fixed price contracts from bearing the cost of
the increase, in cases where that cost cannot be passed on
to customers. This bill is modeled on prior legislation
providing an identical exemption, and promotes equity and
settled business expectations. Without AB 1523,
contractors holding existing fixed price contracts would be
forced unfairly to absorb the tax increase.
2)Proponents note, "Construction contracts are normally entered
into on a fixed price basis, with the contractor assuming the
risk and responsibility for costs under the control of the
contractor. The fixed price contract exemption protects the
contractor who entered into a fixed price contract based on
the sales tax impact at the time on the contract. If the
contractor had knowledge of the change in tax rate at the time
of bid or contract, the contractor would have factored the tax
increase into the contract price."
3)BOE notes the following by way of background:
a) "In the past, legislation enacting [SUT] increases has
historically contained provisions that exempt fixed price
contracts from the rate increase - provisions that are
substantially the same as the language in this bill. For
example, California's last state [SUT] increase occurred in
July 1991 with the enactment of AB 2181 (Ch. 85, Stats.
1991) and SB 179 (Ch. 88, Stats. 1991). The rate was
increased by 1.25 percent in response to the budget
shortfall and the exemption for fixed price contracts
entered into prior to the operative date of the increase
was part of that enactment."
b) "Prior to that increase, for a 13-month period beginning
December 1, 1989 and ending December 31, 1990, a 0.25
percent state [SUT] increase was enacted in response to the
October 17, 1989 earthquake (commonly referred to as the
Loma Prieta earthquake) in the San Francisco Bay Area (SB
33x, Ch. 14, Stats. 1990, First Extraordinary Session).
That measure also contained an exemption for fixed price
contracts entered into prior to the date of the rate
increase."
c) "A general fixed price contract exemption is also
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contained in the Transactions and Use Tax Law (and has been
since 1979) for purposes of exempting all 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 (see [R&TC]
Sections 7261(g) and 7262(f)).
4)BOE has provided the following comments in its staff analysis
of this bill:
a) This bill would address an issue of equity . "A fixed
price contract exemption is designed to protect the
business expectations of the parties when they entered into
the contract and protect them from an unplanned increase in
[the] tax rate. Under a fixed price contract, the
contractor assumes all of the cost variation risk and
reward. If the cost exceeds the contract price, the
difference comes out of the contractor's pocket. Absent an
exemption for fixed price contracts, when the sales and use
tax rate increases, for existing contracts entered into
prior to April 1, 2009, the contractor will be liable for
the increase in the sales and use tax rate on any purchases
and sales made pursuant to the contract on or after April
1, 2009. However, due to the nature of a fixed price
contract, the contractor may not pass that increase on to
the customer or recoup his or her costs in any other
manner. Consequently, the contractor alone must bear the
out-of-pocket cost of the rate increase. Enactment of this
bill would assure that a contractor's liability for sales
or use tax in connection with fixed price contracts and
fixed price lease agreements entered into prior to April 1,
2009, would be limited to the sales and use tax rate in
effect at the time the contractor and his or her customer
entered into the contract. This change would also
eliminate any issues between a contractor and his or her
customer in cases where a contractor inappropriately
attempts to collect the additional tax from the customer on
a fixed price contract."
b) When is a contract deemed "fixed price?" "[BOE]
currently administers a similar exemption for fixed price
contracts under the Transactions and Use Tax Law, and has
administered fixed price contract exemptions on past
statewide sales and use tax increases. Therefore, we would
apply the same principles to contracts and leases affected
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by this measure. To qualify as 'fixed-price', neither
party may have the right to adjust the price for an
increase in costs or an increase in taxes, and the amount
of the tax or the rate of the tax must be specifically
stated in the contract or lease agreement. For example, a
contract that says 'plus applicable taxes' would not be
regarded as a fixed-price contract. In addition, a
contract would not be considered a 'fixed-price' contract
if either party has the [unconditional] right to terminate
the contract or lease. If the contract or lease qualifies
as fixed-price, the contractor or lessor would only be
required to report and remit the rate in effect at the time
the contractor and customer entered into the contract."
5)Committee Staff Notes:
a) Sooner rather than later : To ease administration, this
bill should be enacted before July 1, 2009. Specifically,
BOE notes, "The out-of-pocket expense of the 1% increase
for which the majority of retailers, contractors and
lessors would be liable is due to [BOE] on or before July
31, 2009 for those taxable sales or continuing leases made
during the months of April, May and June." Thus, if this
bill is enacted before July 1, 2009, a credit for the 1%
increase could be claimed on the quarterly return. If this
bill is enacted later, BOE notes that it could result in
administrative complications and increased costs associated
with processing refund claims.
b) Full support from BOE : The members of BOE voted
unanimously to support this bill. BOE notes that the
exemption proposed by this bill addresses the inequity of
holding contractors and lessors liable for the SUT increase
when they are limited by the terms of a fixed price
contract and, therefore, unable to pass the tax increase on
to their customers. Specifically, BOE notes, "The Board
supports restoring equity in the Sales and Use Tax Law by
creating this exemption from the rate increase."
c) A prospective exemption : This bill provides that, on
and after January 1, 2010, the exemption provided by this
bill and prior legislation shall apply with respect to any
future SUT rate increase. While not detracting from the
equities involved, it is unclear to what extent this
prospective exemption would actually be binding. [See
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e.g., United Milk Producers of California v. Cecil (1941)
47 Cal.App.2d 758, 764-65, noting that the Legislature
cannot declare in advance the intent of a future
Legislature.]
6)Proposed amendments :
a) This bill provides that the SUT exemption shall run from
"the operative date of the act" adding R&TC Sections 6051.7
and 6201.7. The act in question was ABx3 3 (Evans),
Chapter 18, Statutes of 2009 which, among other things,
increased the state's General Fund SUT rate by 1%.
Governor Schwarzenegger signed ABx3 3 into law on February
20, 2009. As an urgency measure, it went into immediate
effect. While the SUT provisions may have become
"operative" on April 1, 2009, it may not make sense to
refer to the "operative date" of the overall act. Thus,
Committee staff recommends amending this bill to specify
that the exemption shall run from April 1, 2009.
b) Committee staff recommends the following technical
amendments:
i) Replace the word "ceases" with "cease" on page
3, line 29;
ii) Replace the word "are" with "is" on page 3,
line 30; and,
iii) Delete the reference to "July 1, 1993" on
page 3, lines 37-38, and replace with "the rate
increase" or similar verbiage.
REGISTERED SUPPORT / OPPOSITION :
Support
Associated General Contractors
Associated General Contractors of California
Board of Equalization
Builders Exchange of Alameda County
California Association of Sheet Metal and Air Conditioning
Contractors' National Association
California Chapter of the American Fence Contractors'
Association
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California Chapters of the National Electrical Contractors
Association
California Fence Contractors' Association
California Landscape Contractors Association
California Legislative Conference of the Plumbing, Heating and
Piping Industry
California Nevada Cement Association
California-Nevada Conference of Operating Engineers
California Taxpayers' Association
Concrete Contractors Association, Inc.
Construction Employers' Association
Construction Industry Legislative Council
Engineering and Utility Contractors Association
Engineering Contractors' Association
Flasher/Barricade Association
Golden State Builders Exchanges
Humboldt Builders' Exchange, Inc.
Marin Builders' Association
Pacific Rim Drywall Association
Salinas Valley Builders Exchange
Shasta Builders' Exchange
Southern California Contractors Association
Valley Builders' Exchange
Valley Contractors Exchange, Inc.
Western Electrical Contractors Association
Opposition
None on file
Analysis Prepared by : M. David Ruff / REV. & TAX. / (916)
319-2098