Did a pre-July 15, 1991 county radio-system contract qualify for fixed-price rate protection, and were its removable communications components fixtures?

Plain-English summary

The county's main radio-system construction contract qualified for the historical fixed-price protection from the July 15, 1991 sales-and-use-tax rate increase. It was binding before the cutoff, fixed the main price, and included taxes. The county's convenience-termination right did not defeat protection because the county still had to pay an equitable amount for work already performed; termination was not effective solely upon notice.

Change orders were separate contracts and had to qualify independently. Change orders executed after the cutoff were subject to the new rates.

The rack-mounted radio and microwave components were machinery and equipment, not fixtures. They retained their identity, were readily removable without damaging the shelters, and served the communications service rather than the shelters themselves. The contractor was their retailer; under the lump-sum contract, gross receipts were based on comparable delivered retail prices or, if none existed, the contractor's records.

Common questions

Did convenience termination defeat fixed-price protection?

No, because payment for completed work remained due.

Did the protection cover later change orders?

No; each change order was a separate contract.

Were the removable communications systems fixtures?

No. They were machinery and equipment.

Citations and references

• California Revenue and Taxation Code section 6376.1 — historical fixed-price transition protection applied
• California Revenue and Taxation Code sections 6051, 6051.2, 6051.5, 6201, 6201.2, and 6201.5 — 1991 rate legislation discussed
• Assembly Bill 2181, Statutes of 1991, chapter 85, and Senate Bill 180, Statutes of 1991, chapter 236 — rate increase, section 6376.1 enactment, and later amendment discussed
• California Code of Regulations, title 18, sections 1521(a)(4), (a)(5), (a)(6), and (a)(8) — materials, fixtures, machinery and equipment, and lump-sum contract definitions applied
• California Code of Regulations, title 18, section 1521(b)(2)(C) — machinery-and-equipment retailer status and lump-sum gross-receipts measure applied
• Requester's July 10, 1992 letter — fixed-price and property-classification questions and equipment description supplied; not reproduced in the official PDF
• May 28, 1991 Los Angeles County CWIRS contract — $21,500,677 tax-included price, $1,067,812 maintenance option, change orders, and convenience termination described; complete contract not reproduced in the official PDF
• Contract paragraphs 4, 5A, and 36 and termination notice/claim/invoice procedure — selected terms quoted or summarized; underlying notices, claims, invoices, and change orders are not reproduced in the official PDF
• Contract Item 8.0 price-summary sheet — radio and microwave components and contract pricing identified; separate sheet not reproduced in the official PDF
• Copy of California Sales and Use Tax Regulation 1521 — identified as enclosed; enclosure copy not reproduced in the official PDF

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/190-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/190-2843.pdf

Original ruling text

190.2843

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

WILLIAM K. BENNETT
First District, Kentfield

1020 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 445-6450

BRAD SHERMAN
Second District, Los Angeles
ERNEST J. DRONENBURG, JR.
Third District, San Diego
MATTHEW K. FONG
Fourth District, Los Angeles

September 16, 1992

GRAY DAVIS
Controller, Sacramento

BURTON W. OLIVER
Executive Director

Mr. [M]
Director, State and Local Taxes
[H]
--- ---, -- XXXXX
Re: S- -- XX-XXXXXX
Fixed-Price Construction Contract
Machinery & Equipment
Dear Mr. [M]:
I am writing this to answer your letter of July 10, 1992, to the Legal Division. You requested two rulings concerning the application ‘of the fixed-price contract exemption from the recent increases in the sales and use tax rates to this transaction and also whether or not certain of the items listed in [H]’s contract are considered fixtures or machinery and equipment. We note that the Board staff cannot issue tax rulings; only the Board itself may do that. However, we can give you our opinion regarding the correct application of tax to a given set of facts. The contract at issue is one that [H] executed with the county of Los Angeles on May 28, 1991, for the engineering, design, construction, and installation of a county-wide integrated radio communications system (CWIRS) for general government use. Paragraph 5A. provides that the contract is “for a fixed price of $21,500,677.00,” including, among other things, “all taxes.” At the County’s option, the Contractor will maintain the CWIRS for an additional $1,067,812.00. Paragraph 4 provides for change orders. Paragraph 36 provides that the county may terminate the work for its convenience. Upon receipt of a Notice of Termination, [H] must, among other things, submit a claim and invoice to the County which will negotiate an “equitable amount to be paid Contractor by reason of the total of [or?] partial termination of work......”

Mr. [M]

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September 16, 1992
190.2843

OPINION
A.

Fixed-Price Contracts.
1.

Generally.

As you are aware, on June 30, 1991, the Legislature enacted Assembly Bill 2181, Statutes 1991, Chapter 85. This bill amended Revenue and Taxation Code Sections 6051 and 6201, and added sections 6051.2, 6051.5, 6201.2, and 6201.5, which raised the state-wide sales and use tax rate to seven and one-quarter percent. (Unless otherwise cited, all subsequent statutory references are to the Revenue and Taxation Code.) This bill also added Section 6376.1 which provides that certain contracts executed prior to July 15, 1991, in which the seller is obligated to sell or the buyer is obligated to purchase tangible personal property for a fixed price are not subject to the new rates. Subsequently, the legislature enacted Senate Bill 180, Statutes 1991, Chapter 236, which amended Section 6376.1 to provide that construction contracts entered into prior to July 15, 1991, qualify for the exemption and that the exemption does not apply to contracts for any period of time in which one party to the agreement has the right to terminate the agreement upon notice, whether or not the right is exercised. In determining whether a contract is a “fixed-price” construction contract we have consistently required that it satisfy the following criteria: (1) it be binding prior to July 15,1991;.(2) neither party has a right to terminate the contract conditioned solely upon notice; (3) the agreement must fix the amount of all costs at the outset; and (4) the agreement must include a provision which fixes the tax obligation on a tax-included basis or sets forth either the amount or the rate of tax and does not provide for an increase in the amount of tax. We regard change orders to be separate contracts. They must qualify as being for a fixed price on their own separate and apart from the main contract which they modify. Fixed-price sales contracts are exempted from the recent rate increases under section 6376.1(a)(1)(A). The criteria for evaluating such contracts are the same as those for construction contracts except that only the buyer or the seller need be bound to perform for a fixed price, not both as in construction contracts. 2.

Tax Consequences to [H].

This contract was executed prior to July 15, 1991, and the total price (exclusive of change orders) is fixed. The contract price specifically includes taxes. Therefore, elements (1), (3) & (4) of the above standard are met. Paragraph 36 provides that the County may terminate the contract for its convenience but must reimburse [H] for work done prior to the termination. As noted above, Section 6376.1(a)(1)(C) boots construction contracts out of the fixed-price contract exemption if either party retains the right to terminate the contract solely upon notice. We have, however, consistently considered that when the obligor has the right to terminate contract for his convenience but must pay the contractor for work previously done, that is not a termination

Mr. [M]

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September 16, 1992
190.2843

solely upon notice. Rather, the obligor is under the continuing condition to pay the contractor for work already done. Thus, the contract cannot be terminated merely upon notice. Consequently, whether or not the items supplied are considered materials, fixtures, or machinery and equipment, the contract qualifies for the fixed-price exemption with any change orders executed after July 15, 1991, being subject to the new rates. B.

Fixtures v. Materials v. Machinery and Equipment.
1.

Generally.

Regulation 1521(a) defines the above items as follows:
“(4) MATERIALS. ‘Materials’ means and includes construction materials and components, and other tangible personal property incorporated into, attached to, or affixed to, real property by contractors in the performance of a construction contract and which, when combined with other tangible personal property, loses its identity to become an integral and inseparable part of the real property....” “(5) FIXTURES. ‘Fixtures’ means and includes items which are accessory to a building or other structure and do not lose their identity as accessories when installed...” “(6) MACHINERY AND EQUIPMENT. ‘Machinery and equipment’ means and includes property intended to be used in the production, manufacturing or processing of tangible personal property, the performance of services or for other purposes (e.g., research, testing, experimentation) not essential to the fixed works, building, or structure itself, by which property incidentally may, on account of its nature, be attached to the realty without losing its identity as a particular piece of machinery or equipment and, if attached, is readily removable without damage to the unit or to the realty. ‘Machinery and equipment’ does not include junction boxes, switches, conduit and wiring, or valves, pipes and tubing incorporated into fixed works, buildings, or other structures, whether or not such items are used solely or partially in connection with the operation of machinery and equipment, nor does it include items of tangible personal property such as power shovels, cranes, trucks, and hand or power tools used to perform the construction contract....”
*

*

*

“(8) LUMP SUM CONTRACT. Lump sum contract means a contract under which the contractor for a stated lump sum agrees to furnish and install materials or fixtures, or both….” 2.

Tax Consequences to [H]

Mr. [M]

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September 16, 1992
190.2843

You asked if any of the property shown as Item 8.0 on the price summary sheet is considered fixtures or machinery and equipment. You describe the items as follows: “The equipment is bolted to racks which in turn are bolted to the floor and walls of the integrated shelters described as ‘site development’ in the contract. The equipment may be removed from the shelter by unbolting without material damage to the shelter. The shelters are pre-fabricated and are permanently fixed to concrete pads.” We assume that [H] is not the manufacturer of this property. The property listed in Item 8.0 is such things as basin systems, county-wide systems, simulcast test and common equipment, site controllers, conventional repeaters, multi-site coordinators, antenna circuits, and microwave equipment. You indicate that these items do not lose their identity to become a separate and integral part of the realty but rather are bolted onto other property that is itself affixed to the realty, retain their own identity, and are readily removable without damage to the realty. They do not appear to be accessories to the buildings essential to the function of the buildings themselves but constitute property intended to be used in the delivery of the services for which the buildings were built. Indeed, such items are likely commonly removed for repair and replacement. As a result, we conclude that such items are properly considered ‘machinery and equipment’ under the above definition rather than fixtures.
[H] is the retailer of the machinery and equipment. Since the contract is for furnishing and installing the property, it is a lump-sum contract under the above definition. Thus, the gross receipts from the sale of the machinery and equipment is the price at which similar quantities ready for installation are sold at retail delivered in the market area where the property is installed. If there is no such retail price, then the gross receipts are determined from records. (Reg. 1521(b)(2)(C).) The contract, in Item 8.0, sets out the items in question along with the contract price, providing a source for determining gross receipts. For your information, I have included a copy of Regulation 1521. I hope the above discussion has answered your question. If you need anything further, please do not hesitate to write again. Sincerely,

John L. Waid
Tax Counsel
JLW:es