BILL ANALYSIS
Senate Appropriations Committee Fiscal Summary
Senator Christine Kehoe, Chair
2060 (Calderon)
Hearing Date: 08/02/2010 Amended: 07/15/2010
Consultant: Mark McKenzie Policy Vote: Rev&Tax 4-1
_________________________________________________________________
____
BILL SUMMARY: AB 2060 would exempt fixed price contracts with
government entities from any future increases of state sales and
use taxes, including any extension of the 1% increase enacted
last year that is currently set to expire on July 1, 2011.
_________________________________________________________________
____
Fiscal Impact (in thousands)
Major Provisions 2010-11 2011-12 2012-13 Fund
Foregone revenues unknown, potentially several million in a
General
future fiscal year (see staff comments)
_________________________________________________________________
____
STAFF COMMENTS: This bill meets the criteria for referral to the
Suspense File.
Existing law generally imposes a sales and use tax on the sale
or purchase of tangible personal property at a combined base
rate of 8.25 percent (6.25 percent state and 2 percent local).
During last year's third extraordinary session, ABx3 3 (Evans),
Chapter 3 of 2009, was signed into law, providing for a one
percent increase in the state General Fund portion of the sales
and use tax until July 1, 2011. This measure did not provide
for an exemption for fixed price contracts entered into prior to
the increase. In the past, however, legislation providing for
increases to the sales and use tax has provided exemptions for
all fixed price contracts (not just contracts with government
entities). Existing law also includes a general exemption from
any local district tax increases for fixed price contracts,
under specified criteria.
AB 2060 would provide a general exemption from any future sales
and use tax increases for fixed price contracts entered into
with government entities if that contract was entered into prior
to the operative date of that tax increase. This exemption
would specifically apply to: (1) fixed price contracts to
furnish a government entity with tangible personal property; (2)
fixed price construction contracts to provide materials and
fixtures to a government entity; and (3) specified leases of
tangible personal property. This exemption would not apply to
contracts that include a provision if either party has a right
to terminate the contract. For purposes of this exemption,
"fixed price" also means a contract for a "guaranteed maximum
price," which is a contract for a price specified in a contract
for actual costs plus a fixed fee, but subject to a maximum
price. This bill would apply to all future increases enacted
after the effective date of the bill and for any extension of
the one percent increase that is scheduled to expire on July 1,
2011.
AB 2060 would not have an impact on current state revenues,
since its provisions only apply prospectively. Future revenue
impacts, however, would depend upon the dollar amount of fixed
price contracts with the state, and the size of any proposed
sales and use tax increases. For every $100 million in fixed
price contracts, for example, the state revenue impact would be
$1 million in foregone revenue for a one percent increase.
Page 2
AB 2060 (Calderon)
The Board of Equalization notes that based upon the value of
fixed price contracts with the Department of Transportation in
2008 alone, the impact would be approximately $1.91 million.
Staff notes that the exemption provided in this bill would use
different criteria than the current exemption provided for
district sales and use tax increases in existing law. For
example, the existing exemption applies to contracts in which
the agreement fixes the amount of all costs at the outset, but
this bill provides an exemption for contracts that contain a
"guaranteed maximum price," which by definition allows a
contractor to be paid for all "actual costs." Guaranteed
maximum price contracts provide for payment of actual costs plus
a fixed fee, subject to a maximum price. In addition, the
current exemption applies to all fixed price contracts, while
this bill is limited to contracts with a government entity.
While this bill takes an approach that limits the state revenue
impact, it raises an issue of equity with those who contract
with other entities.
Staff notes that there is nothing in existing law that prevents
a contractor from entering into a fixed price contract that
includes a provision that allows for a change order that would
allow a contract price to be adjusted if there is a subsequent
increase in sales and use tax rates.