BILL ANALYSIS �
AB 780
Page A
ASSEMBLY THIRD READING
AB 780 (Charles Calderon)
As Amended May 10, 2011
Majority vote
REVENUE & TAXATION 8-0 APPROPRIATIONS 17-0
-----------------------------------------------------------------
|Ayes:|Perea, Donnelly, Beall, |Ayes:|Fuentes, Harkey, |
| |Charles Calderon, | |Blumenfield, Bradford, |
| |Cedillo, Alejo, Harkey, | |Charles Calderon, Campos, |
| |Nestande | |Davis, Donnelly, Gatto, |
| | | |Hall, Hill, Lara, |
| | | |Mitchell, Nielsen, Norby, |
| | | |Solorio, Wagner |
-----------------------------------------------------------------
SUMMARY : Provides that, in the case of a "fixed price" contract
between a "government entity" and a contractor, the contractor
shall be entitled to an increase in payment for a change in the
contract price attributable to an increase in taxes imposed by
the Sales and Use Tax (SUT) Law, and the "government entity"
shall be entitled to a reduction in payment for a change in the
contract price attributable to a decrease in the SUT rate.
Specifically, this bill :
1)Provides that this increase or decrease shall be made in
accordance with the provisions of the contract governing
payment for changes in the work or, if no provisions are set
forth, payment shall be as agreed to by the parties.
2)Defines "fixed price" to mean that the amount of all costs or
prices is fixed by the contract or lease, the contract or
lease does not reserve to the contractor or lessor the right
to increase that amount, and the contract or lease does not
address the obligations of the parties in the event of any
change in taxes or tax rates, including SUT rates.
3)Defines a "government entity" as 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.
4)Applies only to contracts entered into on and after this
AB 780
Page B
bill's effective date, and only to an increase or decrease in
the SUT rate that occurs on or after this bill's effective
date.
5)Amends the fixed price contract provisions of the Transactions
and Use Tax (TUT) Law to provide that the sale or lease of
tangible personal property (TPP) to a government entity shall
be deemed obligated pursuant to a contract or lease for any
period of time for which the contractor or lessor does not
have the unconditional right to terminate that contract or
lease.
6)Provides that, notwithstanding existing law, the state shall
not reimburse any local agency for any SUT revenues lost as a
result of this bill.
7)Provides that, if the Commission on State Mandates determines
that this bill contains costs mandated by the state,
reimbursement to local agencies and school districts shall be
made according to existing law.
EXISTING LAW imposes a:
1)Sales tax on retailers for the privilege of selling TPP,
absent a specific exemption. The tax is based upon the
retailer's gross receipts from TPP sales in this state.
2)Complementary use tax on the storage, use, or other
consumption in this state of TPP purchased from any retailer.
The use tax is imposed on the purchaser, and unless the
purchaser pays the use tax to a retailer registered to collect
the California use tax, the purchaser remains liable for the
tax, unless the use is exempted. The use tax is set at the
same rate as the state's sales tax and must be remitted to the
State Board of Equalization (BOE).
FISCAL EFFECT : According to the Assembly Appropriations
Committee:
1)There will be state reimbursements for mandated costs to local
government. The specific mandate is for any costs that a
local government may incur to change contracts or
AB 780
Page C
administrative systems to make them consistent with the new
law. Because the public contract code applies to a county,
city, city and county, district, public authority, public
agency, municipal corporation or any other political
subdivision or public corporation in the state, the number of
possible mandate claims could be large as there are almost 500
cities, 58 counties, 90 community college districts, 1,000
school district and 4,000 special districts, together over
5,000 affected local governments.
2)The BOE estimates this bill would have no impact on existing
local government tax revenues, since the provisions would only
apply to future local government tax rate changes.
COMMENTS : The author has provided the following statement in
support of this bill:
AB 780 would add a provision in the Public Contract Code
that requires fixed price contracts between a contractor
and a government entity to authorize payment for a change
in the contract price that is a result of a future increase
or decrease in the state sales and use tax rate.
Assembly Revenue and Taxation Committee Staff Comments:
1)Background : On February 20, 2009, Governor Schwarzenegger
signed into law AB 3 X3 (Evans), Chapter 18, Statutes of 2009,
Third Extraordinary Session. Among other things, AB 3 X3
temporarily increased the General Fund SUT rate by 1%
effective April 1, 2009. Unlike prior bills increasing the
SUT rate, AB 3 X3 did not provide an exemption for sales of
TPP obligated pursuant to fixed price contracts entered into
before the rate increase.<1>
Instead of providing an exemption for sales of TPP obligated
under a fixed price contract, this bill would allow
contractors with fixed price public contracts to obtain a
--------------------------
<1> 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 to cover the increase.
In addition, BOE notes that a general fixed price contract
exemption is also contained in the TUT Law.
AB 780
Page D
change order compensating them for an unanticipated increase
in the state SUT rate. This bill would also entitle
government entities to a reduction of the fixed contract price
in cases where the state SUT rate is reduced.
2)Is this bill's approach preferable to the standard exemption
provisions passed with prior SUT rate increases ? Past SUT
rate increases have been accompanied by legislative provisions
exempting fixed price contracts from the rate increase. Such
provisions were designed to protect the expectations expressed
by both contracting parties. Specifically, under standard
exemption provisions, the contractor would continue to bear
the same SUT burden (and, all things being equal, maintain the
same profit margin) and the government entity would experience
no change in its bargained-for contract price. Of course,
such exemption provisions necessarily entailed the loss of
certain SUT revenues. This bill attempts to address the same
fundamental problem without causing a similar reduction in SUT
moneys. Specifically, this bill would do nothing to change
the underlying SUT rate applied to fixed price contracts, but
would entitle public works contractors to an additive change
order in cases where the state SUT rate unexpectedly
increases. Thus, while this bill serves to preserve the
expectations of the public works contractor, it necessarily
also serves to disrupt the expectations of the government
entity by shifting the risk of a SUT rate increase to that
government entity. Thus, the Legislature is essentially
presented with the question of whether it is preferable to
preserve the expectations of both parties though an exemption
that results in SUT revenue losses, or whether it is
preferable to shift the risk to government entities, which
would potentially result in those entities paying more for
public works contracts.
Analysis Prepared by : M. David Ruff / REV. & TAX. / (916)
319-2098
FN: 0000937
AB 780
Page E