BILL ANALYSIS
AB 2060
Page 1
Date of Hearing: May 10, 2010
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Anthony J. Portantino, Chair
AB 2060 (Charles Calderon) - As Introduced: February 18, 2010
VOTE ONLY
Majority vote. Tax levy. Fiscal committee.
SUBJECT : Sales and use taxes: exemption: fixed price
contracts
SUMMARY : Provides parties to "fixed price" contracts relief
from sales and use tax (SUT) rate increases, as specified.
Specifically, this bill :
1)Provides that on and after the operative date of any increase
in the SUT rate, to the date on which that increase ceases to
be operative, there is exempted from the taxes imposed by the
SUT Law an amount equal to an amount attributable to the
increased rate of tax imposed with respect to the following:
a) Gross receipts from the sale of, and the storage, use,
or other consumption in this state of, the following:
i) 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 SUT rate
increase; or,
ii) Materials and fixtures obligated under a
construction contract entered into for a "fixed price"
before the operative date of the SUT rate increase.
('Fixed price' means the price specified in the contract
is a lump sum price or a stated unit price or a
guaranteed maximum price, and the construction contract
does not authorize an increase in price due to an
increase in the SUT rate.)
b) A lease of TPP that is a continuing sale of the property
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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 SUT rate increase.
c) The possession of, or the exercise of, any right or
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 SUT
rate increase.
2)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 TPP sales in this state.
2)A complementary 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 Revenue and Taxation Code
Sections 6051.7 and 6201.7.
FISCAL EFFECT : The State Board of Equalization (BOE) is unable
to determine with any degree of certainty the total amount of
revenues that would be lost as a result of this bill. However,
based on California Department of Transportation contracts
alone, BOE estimates that this bill could result in General Fund
(GF) revenue losses of $637,000.
COMMENTS :
1)The author has provided the following statement in support of
this bill:
AB 2060 provides that, in the event the state sales tax is
increased in the future, materials and supplies purchased
or obligated by a fixed price contract entered into prior
to the sales tax increase, will be exempt from paying the
additional tax.
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With the exception of the current sales tax increase, when
the Legislature has increased the sales tax previously,
this provision was included as a section of the statute
enacting the sales tax increase. Legislation I carried
last year to provide this exemption for the sales tax
enacted last April 1 was held on the Appropriations
suspense file. This bill does not compensate contractors
for the tax increase they are now absorbing.
The state sales tax increase in 1991 contained similar
language proposed by AB 2060. A similar sales tax increase
in 1989 in response to the Loma Prieta earthquake also
contained this same exemption language.
Local sales tax enactments already have fixed price
contract exemptions in the Revenue and Taxation Code that
are permanent provisions and are administered by the Board
of Equalization.
2)Proponents state, "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 [of] the contract."
3)BOE has provided the following comments in its staff analysis
of this bill:
a) This bill is intended to 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
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."
b) This bill's definition of "fixed price" is broader than
BOE's current rulings . BOE currently administers an
exemption for fixed price contracts under the Transactions
and Use Tax (TUT) Law and has administered fixed price
contract exemptions on past statewide SUT rate increases.
As a result, BOE has a substantial body of annotations that
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clarify what constitutes a "fixed price" contract for
purposes of an exemption. Among other things, a "fixed
price contract" must fix the amount of all costs at the
outset. Under this bill, however, a contract would not
have to satisfy this condition to qualify. BOE notes,
"Instead the bill would simply require that the contract
contain a 'guaranteed maximum price,' which, by definition,
would enable a contractor to be paid for his or her 'actual
costs.' By enabling a contractor to be reimbursed for his
or her actual costs, which could include the sales tax at
the higher rate, such a contract would not qualify as
'fixed price' under current legal rulings. Therefore, it
appears more contracts would qualify as 'fixed price' than
have in the past."
c) This bill could also affect construction contracts
entered into before district tax increases . "Local
ordinances to adopt additional local district taxes or to
increase existing local district taxes (Parts 1.6 and 1.7
of the Revenue and Taxation Code) are required to contain
provisions identical to those contained in Part 1 of the
Revenue and Taxation Code (the Sales and Use Tax Law).
Accordingly, since this bill would change the definition of
a 'fixed price' contract under Part 1 for purposes of
materials and fixtures obligated pursuant to a construction
contract, that change would apply to construction contracts
entered into prior to the date new district taxes are
imposed under Part 1.6 and Part 1.7. Accordingly, this
bill would not only have an impact on state sales and use
taxes, it could also affect district tax revenues with
respect to materials and fixtures obligated pursuant to
construction contracts entered into prior to any new local
district taxes and acquired after the rate increase and
after enactment of this bill. Since 2009, voters in about
16 different local jurisdictions have approved district tax
increases."
4)Committee Staff Comments:
a) Background : On February 20, 2009, Governor
Schwarzenegger signed into law AB X3 3 (Evans), Chapter 18,
Statutes of 2009. Among other things, AB X3 3 temporarily
increased the GF SUT rate by 1% effective April 1, 2009.
In the past, SUT rate increases have been accompanied by
legislative provisions exempting fixed price contracts from
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the rate increase. For example, in July 1991, California
increased its state SUT rate in response to budget
shortfalls, and enacted fixed price contract exemption
provisions substantially similar to those contained in this
bill. In addition, BOE notes that a general fixed price
contract exemption is also contained in the TUT Law.
b) What is the Intended Scope of this Exemption? : The
author states that this bill is designed to provide
contractors relief from future SUT rate increases. In
addition, the author states, "This bill does not compensate
contractors for the tax increase they are now absorbing."
BOE's fiscal estimate, however, appears to be predicated on
the assumption that this exemption would apply to open
fixed price contracts entered into before the most recent
SUT rate increase on April 1, 2009. To address any
ambiguity on this issue, Committee staff suggests
amendments clarifying that this exemption will only apply
to SUT rate increases enacted after this bill's effective
date.
c) A Prospective Exemption ?: This bill is designed to
provide a prospective exemption to provide contractors
relief from future SUT rate increases. While not
detracting from the equities involved, it is unclear to
what extent this prospective exemption would actually be
binding. [See 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.] While this exemption would
effectively become the state's "default position" for
future SUT rate increases, nothing would prevent a future
Legislature from enacting a rate increase with language
"notwithstanding" the exemption provisions.
d) Related Legislation : AB 1523 (Calderon), of the current
Legislative Session, would have relieved parties who
entered into a fixed price contract or a fixed price lease
before the recently enacted 1% SUT increase. AB 1523 was
held in the Assembly Appropriations Committee.
REGISTERED SUPPORT / OPPOSITION :
Support
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Associated General Contractors (co-sponsor)
California Landscape Contractors Association (co-sponsor)
Engineering & Utility Contractors Association (co-sponsor)
Golden State Builders Exchange (co-sponsor)
American Fence Association (California chapter)
Associated Builders and Contractors of California
California Concrete Contractors Association, Inc.
California Fence Contractors' Association
California Legislative Conference of the Plumbing, Heating and
Piping Industry
California Nevada Cement Association
California Taxpayers' Association
Engineering Contractors' Association
Flasher/Barricade Association
Marin Builders' Association
National Electrical Contractors Association (California
chapters)
Pacific Rim Drywall Association
State Building and Construction Trades Council of California,
AFL-CIO
Western Home Furnishings Association
Opposition
None on file
Analysis Prepared by : M. David Ruff / REV. & TAX. / (916)
319-2098