Did a construction contractor have to return all sales-tax reimbursement to customers before receiving a refund of tax computed on the wrong contract-price measure?

Plain-English summary

The contractor did not have to return every dollar of tax reimbursement collected from customers before receiving the proposed refund. It needed to return the excess amount tied to the overpayment.

The memorandum defined that excess as the tax reimbursement computed on the difference between the gross contract price and the taxable cost of materials. Tax on the material cost remained the contractor's proper liability, so returning that portion to customers was not required as a condition of the refund.

The cited California Supreme Court case had conditioned recovery on proof that the refund would be returned to the customers from whom the excess was collected. The memorandum read that condition as matching the amount sued for, not the total reimbursement collected.

Common questions

Did the contractor have to refund the tax attributable to material cost?

No, according to the memorandum.

What had to be returned to customers?

The excess reimbursement measured by the difference between tax on gross contract price and tax on taxable material cost.

Could failure to return more than that excess defeat the refund?

No.

Citations and references

• Decorative Carpets, Inc. v. State Board of Equalization — cited for conditioning the taxpayer's refund on returning the excess amount to affected customers

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/465-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/465-0060.pdf

Original ruling text

State of California

Board of Equalization

Memorandum
To:

Petition and Refund Unit

From:

Tax Counsel (EHS)

Subject:

“R”

465.0060
Date:

April 13, 1964

Your memo of March 3, 1964 questions a proposed refund upon the basis that the taxpayer, a construction contractor, is refunding to the customer only the tax measured by the difference between the gross contract price and the taxable material cost. The writer of this memo apparently believes that the taxpayer must refund the total amount of the tax reimbursement to his customers, and to assume the tax liability on the cost of materials before any refund can be allowed. In my opinion, this is an incorrect analysis. The “excess reimbursement”, it seems to me, is the amount of reimbursement computed upon the difference between the taxable material cost and the gross contract price. In reviewing the Decorative Carpets decision, I note that the amount for which a refund was sought was, according to the stipulation of facts, “the difference between the tax on the cost to plaintiff of the carpeting and other materials used in the performance of such contracts and the sales tax reimbursement, in fact, collected from customers as a result of such contracts.” In its opinion, the California Supreme Court directed that the trial court enter judgment for plaintiff “only if it submits proof satisfactory to the court that the refund will be returned to plaintiff’s customers from whom the excess payments were erroneously collected.” Thus, plaintiff in that case could have secured a refund by returning to its customers only the amount of the refund sued for, and not the total amount of tax reimbursement collected. Accordingly, I believe that the refund to “R” should not be disallowed by reason of the claimant not refunding to the customer an amount in excess of that computed on the difference between the material cost and the gross contract price.

EHS:fb

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