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Business Taxes Law Guide—Revision 2024

Transactions and Use Tax Annotations


800.0000 Application of Transactions (Sales) Tax and Use Tax—Regulation 1823

Annotation 800.0009.250


800.0009.250 Fixed Price Contract-Decrease in Tax Rate. The Santa Cruz Earthquake Recovery Tax of .50 percent expired on March 31, 1997. On April 1, 1997, the new Santa Cruz County Public Library transactions and use tax of .25 percent commenced. Thus, on March 31, 1997, the combined sales and use tax rate in Santa Cruz was 8.25 percent and, on April 1, 1997, the rate was 8 percent. The question arises as to the proper tax rate due with respect to fixed-price contracts and leases entered into prior to April 1, 1997 which specify a tax rate of 8.25 percent. (The applicable tax rate to leases of mobile transportation equipment is set forth in Regulation 1661(b)(2)(B), the analysis below relates to all other transactions:)

The basic rule of the Sales and Use Tax Law and the Transactions and Use Tax Law is that the rate applicable to the sales or use of tangible personal property is the rate in effect when the taxable sale or taxable use occurs. The only exception to this rule is when there is an exemption from a tax rate increase (including a new district tax). There is nothing in the fixed-price contract exemptions provided by sections 7261(g) and 7262(f) which requires the payment of more tax than is due. Rather, these provisions are applicable only to provide an exemption and not to require payment of more tax than is due simply because the contract of sales (or leases) states that tax will be paid at a rate higher than is actually due when the transaction occurs.

An alternate argument is that the rate should be 7.75 percent on April 1, 1997 for persons with fixed-price contracts would be based on the theory that the fixed-price contract protects the parties from new tax commencing after the contract date even though the fixed-price in the contract specified a rate in excess of the proper total rate in effect April 1, 1997. The fixed-price contract exemptions were adopted to protect the expectations of the participants to a contract of sale or lease from a tax rate increase, not to provide them a windfall of paying less tax than has been specified in their contract of sale. When the contract qualifies as a fixed-price contract under section 7261(g) or 7262(f) because it specifies the tax rate in effect when the parties entered into the contract, the rate that applies is the lesser of the rate at the time the taxable transaction occurs or the amount of tax specified in the contract.

In this situation, the lesser of those rates is 8 percent, which is the correct rate applicable in Santa Cruz County on and after April 1, 1997, without regard to any fixed-price contracts that may specify a tax of 8.25 percent. 1/24/97.