BILL ANALYSIS
SENATE REVENUE & TAXATION COMMITTEE
Senator Lois Wolk, Chair
AB 2060 - C. Calderon
Amended: May 18, 2010
Hearing: July 1, 2010 Tax Levy Fiscal: Yes
SUMMARY: Exempts Certain Sales Related to Fixed-Price
Contracts with Government Entities and Qualified
Contractors From Future Sales and Use Tax (SUT)
Rate Increases.
EXISTING LAW imposes a sales or use tax on the sale or
purchase of tangible personal property in this state,
unless specifically exempted. As of April 1, 2009, the
statewide SUT rate of 8.25% is imposed on taxable sales and
purchases of tangible personal property, and is made up of
state and local components.
THIS BILL exempts from future SUT rate increases:
1) Fixed-price contracts signed before the operative
date of the rate increase involving the sale or lease
of tangible property. ('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.)
2) All fixed-price contracts involving sales to
governmental agencies, or to contracts between private
entities when the seller is a small business, defined
as a business with gross receipts of less than $1
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million and net income of less than $250,000.
FISCAL EFFECT:
The Board of Equalization (BOE) states that it
cannot determine with any degree of certainty the total
revenue associated with this bill's proposed fixed-price
contract exemption that would be foregone with future sales
and use tax increases. However, based on Caltrans
contracts alone, BOE estimates that a fixed price contract
exemption could result in foregone revenues of at least
$1.91 million ($191 million x 1%) for a one percent sales
and use tax increase.
A. Purpose of the Bill
According to the author's office, this bill's purpose
is to protect contractors with fixed-price contracts from
bearing the cost of a sales and use tax rate increase that
cannot be passed onto their customers. The author provides
the following statement:
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.
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.
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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.
B. Background
ABX3 3 (Chapter 8, Statutes of 2009, Third
Extraordinary Session), a special session measure to deal
with the state's fiscal crisis, was signed into law on
February 20, 2009. Among other things, that measure
increased the State's General Fund sales and use tax rate
by 1 percent. However, that measure does not, nor does
existing law; provide an exemption for sales of tangible
personal property obligated pursuant to fixed price
contracts entered into prior to the rate increase.
In the past, however, legislation enacting sales
and use tax increases has contained provisions that
exempted sales of tangible personal property obligated
pursuant to fixed- price contracts and fixed-price leases
from the rate increase. For example, California's last
state sales and use tax increase occurred in July 1991 with
the enactment of AB 2181 (Chapter 85, Statutes of 1991) and
SB 179 (Chapter 88, Statutes of 1991). The rate was
increased by 1.25 percent in response to the budget
shortfall and the exemption for sales of property obligated
pursuant to fixed-price contracts entered into prior to the
operative date of the increase was part of that enactment.
Prior to that increase, for a 13-month period
beginning December 1, 1989, and ending December 31, 1990, a
0.25 percent state sales and use tax increase was enacted
in response to the October 17, 1989 Loma Prieta earthquake
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in the San Francisco Bay Area (SBX1 33, Chapter 14,
Statutes of 1990, First Extraordinary Session). That
measure also contained an exemption for sales of property
obligated pursuant to fixed-price contracts entered into
prior to the date of the rate increase.
A general fixed price contract exemption is also
contained in the Transactions and Use Tax Law (and has been
since 1979) for purposes of exempting 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.
C. Is exempting one group of taxpayers from future SUT
increases justified?
As mentioned above, in 2009, ABX3 3 increased the
state's General Fund SUT by 1 percent as a special session
measure to deal with the state's fiscal crisis. (This
increase expires on June 30, 2011.) This measure did not,
nor does existing law; provide an exemption for sales of
tangible personal property. Thus, AB 2060 invites the
question of why a certain group of taxpayers should be
exempted from a future SUT increase other another?
This question is important to consider especially
given the regressive nature of the SUT The SUT is
considered a regressive, consumption tax in that it imposes
a disproportionate burden on lower-income families, who
must consume (rather than save or invest) a larger share of
their income than higher-income families. A recent study by
the Center on Budget and Policy Priorities indicates that
state tax hikes, like the SUT increase, during a recession
can hit lower-income families hard, forcing poor families
to bear most of the burden. Thus, AB 2060's protection of
one group of SUT payers, i.e. certain parties to
fixed-price contracts, from future SUT increases can be
viewed as inequitable tax policy as it leads to the
following central question: Why is this group of taxpayers
more deserving of this exemption over others, such as lower
income tax payers-who, when considering the regressivity of
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the SUT, might be harder hit by a future SUT increase?
D. Relief for Only Some Parties to Fixed Price Contracts
As stated above, the author's intention with AB 2060
is to protect contractors with fixed-price contracts from
bearing the cost of a sales and use tax rate increases.
Yet this bill is limited to contracts entered into with
government entities or small businesses, as defined.
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. Absent an
exemption for fixed-price contracts, when the sales and use
tax rate increased on April 1, 2009, for existing contracts
entered into prior to that date, the contractors are 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 AB 2060 would fix this inequity that these
fixed-price contractors are subject to in the face of a SUT
rate increase. However, this inequity would only be
addressed for the government and small business parties
involved in these contracts. The committee may wish to
consider whether all sales and use taxpaying parties
involved in fixed-price contracts should be considered for
the exemption offered by this bill.
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E. Clarification needed on the Scope of the Exemption
BOE recommends that this bill apply to fixed-price
contracts entered into after the April 1, 2009, 1 percent
SUT rate increase that contemplated the expiration of the
increase effective July 1, 2011. Otherwise, the strict
wording of the language of the bill could be interpreted to
mean that any extension of the rate on July 1, 2011 is not
an "increase in the sales and use tax rate" and that
contractors and lessors would be liable for the tax, yet
not be able to reimburse themselves for the additional tax
during the period of the extension.
Support and Opposition
Support: 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,
Cal-Tax; California Taxpayers' Association
Oppose: None on file.
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Consultant: Meg Svoboda