Did a 30-day proposal remain fixed-price when quoted prices were guaranteed only for materials delivered by a stated deadline?

Plain-English summary

A pre-July 15, 1991 proposal accepted during its original 30-day irrevocable period could qualify as fixed-price. An extension also worked only if it was granted before the cutoff; acceptance during an extension granted afterward did not qualify.

Protection covered only goods delivered before the proposal's price-guarantee deadline, which could not exceed 120 days after acceptance. The supplier reserved the right to pass through cost increases on later-delivered goods, so those sales were not fixed-price and were subject to the increased tax rates.

The opinion assumed the delivery schedule was set when the contract was made. An open-ended schedule that allowed delivery dates to shift for tax consequences could defeat fixed-price status. It also said qualifying construction, material, and equipment subcontracts inherited protection when awarded under a qualifying fixed-price general construction contract.

Common questions

Did acceptance within 30 days establish a fixed obligation?

Yes, if the timing satisfied the pre-cutoff irrevocability rules.

Were goods delivered after the guarantee date protected?

No.

Could an open-ended delivery schedule qualify?

The opinion warned that it could defeat fixed-price treatment.

Citations and references

• California Revenue and Taxation Code section 6376.1 — historical fixed-price transition rule applied
• Requester's November 21, 1991 letter to Out-of-State Auditing — 30-day and 120-day proposal language and clarification request presented; not reproduced in the official PDF
• Requester's July 12, 1991 letter — original product-proposal and purchase-agreement question answered by the attached July 17 opinion; separate request not reproduced in the official PDF
• Assistant Chief Counsel Gary J. Jugum letter of July 17, 1991 — prior conclusion that the sample California agreements were tax-included fixed-price agreements; reproduced in full as an attachment
• Sample product proposal and purchase agreement — printed tax language, quoted F.O.B. jobsite tax-included price, 30-day irrevocability, 120-day delivery cap, and later cost escalation described; separate form not reproduced in the official PDF
• Delivery schedule and any authorizing general construction contract — assumed or identified as potentially controlling, but underlying documents are 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/190-6500.pdf

Original ruling text

190.6500

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
1020 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 324-3828

January 29, 1992
Begin deleted text REDACTED TEXT End deleted text
Boise, Idaho 83707
End deleted text

RE: Begin deleted text REDACTED TEXT

Dear Begin deleted text REDACTED TEXT End deleted text
Mr. E. W. Hopkins of Out-of-State Auditing has forwarded to the Legal Division your letter of November 21, 1991, to Mr. Douglas Heinz of that office. I have been assigned the responsibility of answering. You have requested an opinion regarding qualifying certain of your company’s (“Trus Joint”) contacts as being for a fixed price within the terms of the fixed-price construction contract exemption from the recent tax increases. (Rev. & Tax. Code § 6376.1.) Further statutory citations are, unless otherwise stated, to the Revenue and Taxation Code.) You are requesting clarification of an opinion issued to you on this same topic by Assistant Chief Counsel Gary J. Jugum on July 17, 1991, a copy of which you attached to your letter. You have asked how the wording set forth below affects the status of Begin deleted text REDACTED TEXT End deleted textcontracts as being for a fixed price: “This proposal is effective for 30 days after the date shown above. If this proposal is accepted within that period, the prices show below are guaranteed by Begin deleted text REDACTED TEXT End deleted text for all materials delivered before [A], but in no case more than 120 days from the date of acceptance [“the termination date”]. Thereafter, prices are subject to change on undelivered materials to reflect any increases in Begin deleted text REDACTED TEXT End deleted text costs.” OPINION In determining whether a contract is a “fixed-price” contract we have consistently required that it satisfy the following criteria: (1) it be binding prior to July 15, 1991, (2) neither party has an unconditional right to terminate the contract; (3) the contract must fix all costs at the onset; and (4) the agreement must include a provision which fixes the tax obligation on a taxincluded basis or sets forth either the amount or the rate of tax and does not provide for an increase in the amount of tax. In construction contracts, we consider a contract awarded pursuant to an irrevocable bid made prior to July 15, 1991, which is accepted prior to becoming revocable as being for a fixed price even if the contract is actually awarded after July 15. Please

Begin deleted text REDACTED TEXT End deleted text -2-

January 29, 1992
190.6500

note that, to be considered as being for a fixed price, the bid must be accepted within the original period of irrevocability or any extension of the period granted prior July 15, 1991. If the bid is accepted during an extension of the period if revocability which was granted after July 15, 1991, it does not qualify as being for a fixe price. In his letter, Mr. Jugum concluded that you quote your price to California customers on a tax-included basis and that neither party reserves the right to unconditionally terminate the contract. The remaining question, then, is whether or not the obligation is fixed – i.e., if either party reserves the right to pass on tax increases. The contract guarantees the bid price for thirty days only. Thus, assuming the bid date is prior to July 15, 1991, and the contract is accepted prior to that period running out, the obligation is fixed prior to July 15. It is, however, fixed only for goods which are delivered prior to the termination date. Since Begin deleted text REDACTED TEXT End deleted text specifically reserves the right to pass on to the purchaser any cost increases to which goods delivered after termination date are subject, the contract is not for a fixed price regarding those goods. Therefore, even if a given contract was executed prior to July 15, 1991, or was executed pursuant to an irrevocable bid which was accepted during the original period of revocability or any extension of that period granted prior to July 15, 1991, sales of goods delivered after termination date (assuming it is after July 15, 1991) are subject to the increased tax rates. Two caveats. I have written this assuming that at the time of contracting a delivery schedule is set forth so that the customer knows when the materials are delivered. If, however, the time of delivery is open-ended, that creates the potential for varying the delivery dates so as to alter the tax consequences. If such be the case, the contract would not be for a fixed price. Also, the entire discussion may be moot if your contracts are executed under the authority of a general construction contract. If the general contract qualifies as being for a fixed price, so do construction, materials, and equipment sub-contracts awarded pursuant to it. 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
4245I
bc:
Out-of-State District Administrator

Jugum Letter
Attachment to TP letter
190.6500

-3-

(916) 445-3723

July 17, 1991
Begin deleted text REDACTED TEXT End deleted text
Boise, Idaho 83707
Begin deleted text REDACTED TEXT End deleted text
Dear Begin deleted text REDACTED TEXT End deleted text
This is in response to your letter of July 12, 1991. You have inquired as to whether your company’s product proposal and purchase agreement is a fixed price contract for California sales and use tax purposes, with reference to the tax rate increase which became effective here on July 15, 1991. We have reviewed the sample copy which you have furnished us. The printed form recites “Sales and Use Taxes Not Included Unless Listed Above.” However, with respect to your California customers, it has been your practice to include sales tax. In the space for description of materials and prices, the price is typically quoted as follows: “Begin deleted text REDACTED TEXT End deleted text PRICE (F.O.B. Truckbed Jobsite, sales tax incl.) [price].” We are of the opinion that these agreements are fixed price agreements. There is no recital in the “terms and conditions” to the effect that tax increases will be passed on to the purchaser. As to invoices issued to customers after July 15, 1991, with respect to product proposal and purchase agreements entered into prior to that date, tax should be invoiced at the old rate, with a notation “fixed price contract entered into prior to July 15, 1991.” Very truly yours,

Gary J. Jugum
Assistant Chief Counsel
GJJ:wk
3234C
bc:

Out-of-State Distrist Administrator