Did one fixed-price construction contract grandfather fixtures, materials, and supplies from three historical California tax-rate increases?

Plain-English summary

California staff said three historical tax increases could not be analyzed under one general grandfather rule. Each statute stood alone and treated fixed-price construction contracts differently.

The quarter-percent earthquake-tax clause covered fixtures, materials, and supplies obligated under a fixed-price construction contract entered before November 7, 1989. The OCTA, LATC, and other district-tax clauses covered fixed-price contracts and fixtures, but materials and supplies generally required the contractor to have its own fixed-price contract with the supplier before the district increase's effective date.

The 1-1/4-percent state increase clause covered materials and fixtures obligated under a fixed-price construction contract before July 15, 1991. Supplies required a qualifying fixed-price supplier contract before that increase. Thus, a pre-April 1991 customer construction contract alone did not shelter later supply purchases from OCTA or LATC tax.

Common questions

Did all three increases use the same grandfather clause?

No.

Did a customer construction contract always protect supplies?

No. Some clauses required a separate fixed-price supplier contract.

Were fixtures treated the same as materials and supplies?

No. Their treatment varied by the particular tax increase.

Citations and references

• California Revenue and Taxation Code section 6376.1 — enclosed historical grandfather provision
• California Code of Regulations, title 18, section 1823 — district-tax fixed-price contract rule enclosed
• Requester's July 30, 1992 letter to Bob Nunes — OCTA, LATC, and state-increase questions presented; not reproduced in the official PDF
• Two letters enclosed with the request, including one from a Supervising Tax Auditor — prior exemption-certificate and rate-transition advice summarized; separate letters not reproduced in the official PDF
• Earlier exemption-certificate request and Board response, followed by a transaction-specific explanatory letter — correspondence chain described without reproduced copies or complete identities
• Orange County District Compliance permit search — source records that no permit could be located for the taxpayer; separate search record not reproduced in the official PDF
• Copies of California Revenue and Taxation Code section 6376.1 and Regulation 1823 — identified as enclosures to the 1992 letter; enclosure copies not reproduced in the official PDF
• May 20, 1996 Legal Division memorandum on Non-Attorney Opinions — reviewed and agreed with the September 11, 1992 conclusion

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/190-6300.pdf

Original ruling text

190.6300

STATE OF CALIFORNIA

WILLIAM M. BENNETT
First District, Kentfield

STATE BOARD OF EQUALIZATION
1020 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 920-7576

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

September 11, 1992

Burton W. Oliver
Executive Director

Dear ---:
Your letter dated July 30, 1992 to Mr. Bob Nunes has been referred to me for response. With your letter, you enclosed copies of letters from --- and --- ---, Supervising Tax Auditor with the Board of Equalization. You asked several questions regarding exemptions from tax increases.
--- letter was in response to an earlier request by --- regarding the acceptance of certain exemption certificates to exempt --- contracts from the Orange County Local Transportation Authority (OCTA) Tax. --- provided information regarding the exemption for certain contracts entered into prior to the state tax increase of 1-1/4% on July 15, 1991, and certain contracts entered into prior to the ½% tax increase for Los Angeles County (LATC) and (OCTA) on April 1, 1991. In conclusion, --- explained that all sales of supplies after April 1, 1991 to --- in which there is no fixed price contract between --- and ---, are subject to the OCTA Tax. After receiving a copy of the Board’s response, --- sent you a letter that explained the application of tax to your transaction as well as a copy of ---′s letter In your July 30, 1992 letter, you explained that the specific exemption you are claiming relates to the OCTA and LATC taxes and to fixed price construction contracts entered into before April 1, 1991. As a preliminary matter, the three tax increases that you identified in your letter, namely: 1) the 1/4 % state tax increase (earthquake tax), 2) the ½% OCTA and LATC tax increases, and 3) the 1-1/4% state tax increase, are each covered by a specific and separate “grandfather clause” which exempts certain transactions entered into prior to the operative dates from the tax increase. Each of

--- ---

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September 11, 1992
190.6300

these laws stands alone, and each is slightly different as it relates to fixed price construction contracts. At this point, I believe it would be helpful to clarify the “grandfather clause” for each of the three tax increases as they relate to fixed price construction contracts. 1/4% Earthquake Tax The “grandfather clause” covering the tax rate increase for the ¼% (earthquake tax) exempts from that increase fixtures, materials, and supplies obligated pursuant to a fixed price construction contract entered into prior to November 7, 1989. Transactions Taxes in General (OCTA, LATC, etc.) The “grandfather clause” covering the tax rate increase for OCTA, LATC as well as all other district taxes exempts from that increase fixed price contracts. This includes fixtures obligated pursuant to a fixed price construction contract entered into prior to the effective date of the increase because construction contractors are retailers of fixtures. The “grandfather clause” relating to this tax increase does not provide an exemption from the increase for materials and supplies purchased pursuant to a fixed price construction contract entered into prior to the effective date of the increase, unless the contractor has entered a fixed price contract directly with their supplier for these materials and supplies prior to the effective date of the tax increase. 1 ¼% State Tax Increase The “grandfather clause” covering the tax rate increase for the 1-1/4% state tax increase exempts from that increase materials, and fixtures obligated pursuant to a fixed price construction contract entered into prior to July 15, 1991. The “grandfather clause” relating to this tax increase does not provide an exemption from the increase for supplies purchased pursuant to a fixed price construction contract entered into prior to the effective date of the increase, unless the contractor has entered a fixed price contract directly with their supplier for these supplies prior to the effective date of the tax increase. Accordingly, even though you may have entered into a fixed price construction contract with your customers prior to the operative date of the ½% district tax increase for OCTA and LATC, your purchase of supplies for the job will be subject to tax unless you have a fixed price contract directly with your supplier for these supplies prior to the effective date of the tax increase.

--- ---

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September 11, 1992
190.6300

I hope this information is helpful.
Sincerely,

Glenn A. Bystrom
Principal Tax Auditor
GAB:sls
B-A959
Enclosures:
bc:

Section 6376.1 and Regulation 1823

Mr. Robert Nunes (with copy of incoming)
Mr. Richard Rinetti (with copy of incoming)
Orange County District Compliance – Unable to locate a permit for this taxpayer. Mr. Gary Jugum Ms. Shirley Johnson District Administrators

State of California

Board of Equalization
Legal Division (MIC:82)

Memorandum
190.6300
To:

Mr. Glenn Bystrom

From:

Gary Jugum

Subject:

Non-Attorney Opinions

Date:

May 20, 1996

I have reviewed your memorandum of September 11, 1992 to --- ---. We are in agreement with his conclusion, as follows: Tax Rate Changes. Several questions were asked regarding the grandfather exemption from tax increases related to three different tax increases. The three tax increases identified are: (1) the ¼% tax increase (earthquake tax), (2) the ½% OCTA and LATC increases, and (3) the 1 ¼% state tax increase effective July 15, 1991. Each of these tax increases are covered by a specific and separate “grandfather clause” which exempts certain transactions entered into prior to the operative dates from the tax increase. Each of these laws stand alone, and each is slightly different as it relates to fixed price construction contract. A clarification of the “grandfather clause” for each of three tax increases as they relate to fixed price construction contract follows: ¼% Earthquake Tax The “grandfather clause” covering the tax rate increase for the ¼% (earthquake tax) exempts from that increase fixtures, materials and supplies obligated pursuant to a fixed price construction contract entered into prior to November 7, 1989. Transactions Taxes in General (1/2% OCTA, LATC, etc.) The “grandfather clause” covering the tax rate increase for OCTA, LATC, as well as other district taxes, exempt from that increase fixed prices contracts. This includes fixtures obligated pursuant to a fixed price construction contract entered into prior to the effective dates of the increase because construction contractors are retailers of fixtures. The “grandfather clause” relating to the tax increase does not provide an exemption from the increase for materials and supplies purchased pursuant to a fixed price construction contract entered into prior to the effective date of the increase, unless the contractor has entered inot a fixed price contract directly with its supplier for these materials and supplies prior to the effective date of the tax increase. 1 ¼% State Tax Increase The “grandfather clause” covering the tax rate increase for the 1 ¼% state tax increase exempt from that increase materials and fixtures obligated pursuant to a fixed price construction contract entered into prior to July 15, 1991. The grandfather clause” relating to this tax increase does not

Mr. Glenn Bystrom

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January 12, 1990
190.6300

provide an exemption from the increase for supplies purchased pursuant to a fixe price construction contract entered into prior to the effective date of the increase, unless the contractor has entered a fixed price contract directly with its supplier for these supplies prior to the effective date of the ½% district tax increase for OCTA and LATC, purchase of supplies for the job will be subject to tax unelss a fixed price contract directly with suppliers has been entered into prior to the effective date of the tax increase. 9/11/92