The San Diego Jail Facility (SDJF) and the Monterey County Public Repair and Improvement Authority (MPRI) Tax Refund present an interesting opportunity for construction contractors. As you may be aware, construction contractors are consumers of materials purchased pursuant to a lump sum contract. Because the refund spans approximately a three year period, most construction contractors are finding that the dollars involved in this process are very significant. The claim for refund form was really not designed with construction contractors in mind because in many cases it would be an unmanageable task to photo copy each and every invoice.

Furthermore, the refund unit set up in Sacramento does not want copies of these invoices. Instead, they've asked any person with large volumes of purchases to schedule them by vendor by quarter and an auditor would verify the amount at the taxpayers place of business. The state has hired 13 new auditors for a two year position to deal with these refund matters.

An interesting dilemma has developed with construction contractors concerning fixtures. Contractors are technically the retailer of fixtures. Regulation 1521, however, allows the contractor to report the tax liability on the cost of the fixture (as long as they are not also the manufacturer). This has caused considerable debate about whether contractors are entitled to refunds on fixtures since they are technically not the consumer and the refund program was set up to refund directly to the consumer. For example, an air conditioning contractor that installs a heating and air conditioning system including the heating and air conditioning unit is the consumer of the duct materials and the retailer of the air conditioning and heating units. Most heating and air conditioning contractors would be lump sum contractors and would have purchased all of their materials and fixtures tax paid.

The state's position is that they are not entitled to a refund of tax on the air conditioning and heating units. This position is based on new Revenue and Taxation Code Section 7277 which was part of Senate Bill 263. In that section it states that "a person who has reimbursed a retailer for that payment of that tax or a person, other than in a capacity as a retailer who has paid that tax may file with the Board a claim for refund of the unconstitutional tax..." The Board's interpretation of this is that the fixture contractor's customer is the one entitled to the refund since the contractor is the retailer of fixtures. It appears that this position is clearly arguable in that the contractor is also a person who has reimbursed a retailer (their supplier) for that payment of that tax. Evidently the position of the state is based on trying to prevent a double refund since the contractor's customer is also a person who has reimbursed a retailer (the contractor with respect to fixtures) for that payment of that tax.

Some of the practical problems in compiling the refund has to do with not only the cumbersome work of the scheduling the purchases by quarter and by vendor but also ascertaining that the illegal taxes were charged in the first place. We found, for example, in reviewing San Diego contractors' records that some vendors never charged the San Diego Jail Tax because they were located out of the county. The rule regarding this tax was that the vendor did not have to charge it if they were not doing business in the applicable district.

The state has construed the words "doing business" as including companies that deliver on a regular basis into the district and/or have salesmen or sales offices or distribute goods from within the district. The question, however, for refund purposes, is not whether the vendor should have charged the tax but whether they in fact did charge the tax. For this reason, it may be helpful to know the varying tax rates in different districts to determine whether the illegal tax was ever charged.