BILL ANALYSIS
AB 2060
Page 1
ASSEMBLY THIRD READING
AB 2060 (Charles Calderon)
As Amended May 18, 2010
Majority vote. Tax levy
REVENUE & TAXATION 9-0 APPROPRIATIONS 17-0
-----------------------------------------------------------------
|Ayes:|Portantino, DeVore, |Ayes:|Fuentes, Conway, Ammiano, |
| |Beall, | |Bradford, Charles |
| |Charles Calderon, Coto, | |Calderon, Coto, Davis, |
| |Fuentes, Harkey, | |Monning, Ruskin, Harkey, |
| |Nestande, Ma | |Miller, Nielsen, Norby, |
| | | |Skinner, Solorio, |
| | | |Torlakson, Torrico |
| | | | |
-----------------------------------------------------------------
SUMMARY : Provides parties to specified "fixed price" contracts
relief from future 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 a "government entity" with the
property or the "government entity" 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. This
exclusion is limited, however, to construction contracts
to which a "government entity" is a party or situations
where a "qualified contractor" is obligated to sell or
furnish the materials and fixtures. For purposes of this
AB 2060
Page 2
exclusion, the following definitions apply:
(1) "Fixed price" means the price specified in the
construction 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; and,
(2) "Qualified contractor" means a construction
contractor with no more than $1 million in gross
receipts from business operations and no more than
$250,000 in taxable income in the prior taxable year.
b) A lease of TPP to a "government entity" 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
SUT rate increase; and,
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. This exclusion shall only apply to leases
of TPP to a "government entity."
2)Defines a "government entity" as the United States, the State
of California, or any city, county, or city and county,
community college district, school district, county
superintendent of schools, or special district in this state.
3)Specifies that the exemption shall only apply to future
increases in the SUT rate.
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 TPP sales in this state.
AB 2060
Page 3
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 : According to the Assembly Appropriations
Committee:
1)No direct or immediate effect since this bill would apply only
to future sales tax increases.
2)If the state were to raise the sales tax in a future year and
the enacting legislation did not have a general exemption for
fixed price contracts, this bill could result in revenue
reductions potentially exceeding $2 million.
COMMENTS :
1)The author notes, "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 . . . the additional tax."
2) BOE has provided the following comments in its staff analysis
of this bill:
a) This bill is intended to address an issue of equity -
but only for some. "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
AB 2060
Page 4
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
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 types of contracts would qualify as 'fixed
price' than have in the past (although overall, [fewer]
contracts would qualify since the bill would limit the
exemption in other ways);"
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).
Also, Revenue and Taxation Code Sections 7261(g) and
7262(f) under Part 1.6 [require] ordinances proposing new
local district taxes [to] contain fixed price contract
provisions . . . . Accordingly, since this bill would
change the definition of a 'fixed price' [contract] to
include additional types of contracts (i.e., guaranteed
maximum price contracts) under Part 1 for purposes of
materials and fixtures obligated pursuant to a guaranteed
maximum price construction contract, it appears 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 future state sales and use taxes, [but] it could
also affect future district tax revenues with respect to
materials and fixtures obligated pursuant to guaranteed
maximum price construction contracts . . . ."; and,
AB 2060
Page 5
d) Finally, BOE notes that this bill should clarify whether
an extension of the current 1% SUT rate would be regarded
as a tax increase for purposes of this exemption. BOE has
proposed suggested amendment language to address this
issue.
Committee Staff Comments:
1)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 increases the General
Fund 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 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. In addition, BOE notes that a
general fixed price contract exemption is also contained in
the TUT Law.
2)A prospective exemption?: This bill is designed to provide a
prospective exemption to provide specified 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.
Analysis Prepared by : M. David Ruff / REV. & TAX. / (916)
319-2098
FN: 0004556