BILL ANALYSIS �
Senate Appropriations Committee Fiscal Summary
Senator Christine Kehoe, Chair
AB 780 (Calderon)
Hearing Date: 08/15/2011 Amended: 07/12/2011
Consultant: Mark McKenzie Policy Vote: G&F 9-0
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BILL SUMMARY: AB 780 would exempt fixed price contracts with
government entities from any future increase or decrease in
sales and use tax (SUT) rates.
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Fiscal Impact (in thousands)
Major Provisions 2011-12 2012-13 2013-14 Fund
State contracting costsunknown potential increase in
stateGeneral/
contracting costs in a future fiscal year
Special
--------(see staff comments)--------
Contract practices mandate unknown, potentially
reimbursable costs General
for local and school entities to make
changes
to contracting practices
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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 7.25 percent. ABx3 3 (Evans), Chapter 3 of 2009,
temporarily increased the state General Fund portion of the SUT
rate by one percent from April 1, 2009 until it recently expired
on July 1, 2011. This measure did not provide an exemption for
fixed price contracts entered into prior to the increase. In
the past, however, legislation enacting increases to the sales
and use tax has provided exemptions for all fixed price
contracts (not just contracts with government entities).
Existing law provides a general exemption from any local
district tax increases for fixed price contracts, under
AB 780 (Calderon)
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specified criteria.
AB 780 would provide a general exemption from any future
increase or decrease in the SUT rate for fixed price contracts
between a government entity and a contractor. The bill would
entitle a contractor to an increase in payment in the event of a
SUT rate increase, and entitle a government entity to a reduced
payment if the SUT rate is decreased. This exemption would
apply to sales of property, materials, and fixtures pursuant to
a fixed price contract, as well as leases that provide for
continuing sales and purchases of property. The exemption would
only apply to contracts and leases that do not include a
provision that allows either party to increase the fixed price
and does not provide for increases or decreases to the SUT rate.
The bill would only apply to contracts entered into on or after
its effective date that are operative prior to any future
increase or decrease in the SUT rate. Staff notes that the
current statutory exemption for local district tax increases
applies to all fixed price contracts, while this bill is limited
to contracts with a government entity, defined as the State of
California, cities, counties, special districts, and specified
local education entities.
AB 780 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 state contracts to which this exemption would apply, and
the size of any proposed sales and use tax increases. For every
$100 million in fixed price contracts that would be subject to
the exemption provided in this bill, for example, the state
revenue impact would be $1 million in increased contract costs
for a one percent SUT rate increase. The Department of
Transportation (Caltrans) currently has $3.3 billion in
construction contract expenditures, approximately one-third of
which is attributable to materials that would be subject to the
sales and use tax. The Department of General Services and the
University of California also regularly utilize fixed price
contracts. To the extent that a state agency enters into future
fixed price contracts to which this exemption would apply, and
the Legislature enacts a SUT increase that does not provide for
a general exemption for fixed price contracts, this bill could
result in multi-million dollar increases in contract costs in a
future fiscal year. In the unlikely event of a future decrease
in the SUT rate, state contracting costs could decrease.
AB 780 (Calderon)
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Staff notes that nothing in existing law prevents a fixed price
contract from addressing the obligations of either party in the
event of a change in tax rates; a contract could provide for
payment increases or decreases if the Legislature enacted a
change in the SUT rate. It is unclear whether this is a common
provision of state contracts.
Staff notes that, notwithstanding the equities this bill seeks
to address, 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]. A future Legislature could
affirmatively exempt a future SUT increase from the requirements
in this bill.
AB 780 would place new duties on local officials with respect to
contracting practices, thereby imposing a potentially
reimbursable state-mandated local program. It is possible that
local entities could file mandate claims related to any costs
incurred to change contracts or administrative systems for
consistency with the bill. Staff is not aware of any current or
previous mandate claims that are similar to a claim that may
arise as a result of this bill.
Staff notes that this bill is substantially similar to AB 1523
(Calderon), which was held under submission in the Assembly
Appropriations Committee in 2009, and AB 2060 (Calderon), which
was vetoed by Governor Arnold Schwarzenegger last year with the
following message:
"First, I can understand the impact of new taxes on
businesses and the frustration that contractors may have
when they are not exempted from sales tax increases. This
is one of the reasons I have continued to oppose raising
additional taxes because it slows our state's economic
recovery efforts and dampens job creation. However, this
bill seeks an overly broad and permanent exemption which
effectively shifts the burden of paying both state and
local sales tax increases from the contractor to the
government entity and ultimately, on California's
taxpayers. In addition, I believe this bill is unnecessary
because current law allows an exemption to fixed-price
contracts for city and county tax increases, and such
exemptions have been allowed on past statewide sales and
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use tax increases. I believe this process is appropriate
and does not affect district tax revenues, as this bill
would propose to do. For these reasons, I am unable to sign
this bill."