Did liquidated damages deducted for late completion reduce the taxable sales price of a fabricated and installed transformer?

Plain-English summary

A Canadian firm agreed for a lump sum to fabricate and install an electrical transformer. The contract allowed liquidated damages to be deducted from the contract price when completion was late.

Tax counsel said qualifying installation was excluded from gross receipts even if it was not separately stated, as long as a reasonable allocation could be made. For this purpose, installation meant emplacement only, not assembly or fabrication performed at the site.

The liquidated-damages deduction did not reduce the taxable sales price. Tax counsel treated it as a formula for civil damages payable for breach of contract, not as a revision to the price agreed upon in the initial sale.

Key distinction

• A reasonable portion of a lump-sum price could be allocated to qualifying installation.
• Assembly or fabrication in place was not installation under the letter's definition.
• A seller's payment or credit for late performance was damages and did not reduce the original taxable price.

Citations and references

• California Revenue and Taxation Code sections 6011, 6012, and 6012(c)(3) (as cited)
• Southern California Edison Co. and San Diego Gas & Electric Co. v. State Board of Equalization (1972) 7 Cal.3d 652, 661, 663 (as cited)
• City internal auditor's Apr. 8, 1993 request for an opinion on use tax and a contract-price reduction for liquidated damages — question and conclusion quoted; letter and supporting materials not reproduced in the official PDF
• Canadian firm's lump-sum electrical-transformer fabrication-and-installation contract with no separate installation charge and a late-completion liquidated-damages deduction — facts supplied; exact contract, specifications, allocation, invoices, completion schedule, delay and damage records, payments, credits, and tax computations not reproduced in the official PDF
• $100-per-day late-completion deduction — general example supplied by tax counsel, not stated as a term of the requester's unavailable contract
• Official Annotation 295.0367's transformer fabrication and installation, lump-sum contract, late-completion deduction, no-gross-sales-price-reduction conclusion, civil-damages characterization, sections 6011 and 6012, and June 23, 1993 date — annotation omits the Canadian-firm fact, Apr. 8 request provenance, unavailable exact contract, installation-allocation analysis, section 6012(c)(3), case authority and quoted language, general-example status, printed wording forms, missing records, and later outcome and supplies no additional contract or transaction record
• Possible completed project, installation allocation, delay, damages calculation, payment or credit, return filing, audit, assessment, refund claim, appeal, or other later agency action — not supplied 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/295-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/295-0367.pdf

Original ruling text

295.0367

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

MEMBER
First District

LEGAL DIVISION – MIC: 82
450 N STREET, SACRAMENTO, CALIFORNIA
PO BOX 942879, SACRAMENTO, CALIFORNIA 94279-0082
TELEPHONE (916) 445 – 2641

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

June 23, 1993

GRAY DAVIS
Controller, Sacramento

BURTON W. OLIVER
Executive Director

D--- B. B---, CPA
City Internal Auditor
City of R--- Finance Department
XXXX --- Street
---, CA 92522
Re:

SR -- XX XXXXXX

Dear Mr. B---:
This is in response to your letter of April 8, 1993, requesting our opinion concerning the applications of use tax to the portion of the contract price which is reduced by liquidated damages. There is no charge of this opinion. A Canadian firm contracted to fabricate and install an electrical transformer. The contract was for a lump sum without a separate charge for installation. The contract provided for liquidated damages to be deducted from the contract price for late completion. Your letter concluded that the cost for custom installation “apparently cannot be segregated from the other labor” in determining the amount to which a sales or use tax will apply. Revenue and Taxation Code § 6012 (c) (3) provides that gross receipts do not include the price for installing the property. This is true even if not separately stated, so long as it is possible to reasonably determine the portion of the total price which is properly allocated to installation. It should be noted, however, that “installation” means “emplacement” only. It does not included assembly or fabrication in place. The primary concern in your letter was the proper treatment of liquidated damages. We do not have the exact terms of your contract, but liquidated damages are commonly deducted from the sales price, on a daily or other unit of time basis, for late completion. For example,
$100.00 per day is deducted from the sales price for each day beyond a specified date that it takes for the contractor to complete the contract. Such damage payment or credit do not reduce the gross sales price, but are a convenient formula for determining civil damages payable for breach of contract. The California Supreme court has held that adjustments made to the sales price which represent damages, shall not be used to reduce the sales price. In Southern California Edison Co.; and San Diego Gas &

D--- B. B---

-2-

June 23, 1993
295.0367

Electric Co. vs. State Board of Equalization (1972) 7 Cal.3d 652, 661, 663, they held that the legislature intended that the terms “sales price” and “gross receipts” as used in Revenue and Taxation Code §§ 6011 & 6012 refer to “the price agreed upon at the initial sales transaction” (emphasis in original text), that an “’adjusted’ [settlement] price, an entirely fictitious figure, can hardly justify the return of taxes based upon actual sales prices properly collected….” If you have any other questions, please contact me. Sincerely,

Donald L. Fillman
Tax Counsel

DLF:es
bc:

--- --- – District Administrator