Laws, Regulations & Annotations

Business Taxes Law Guide – Revision 2018

Sales and Use Tax Annotations

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190.0000 CONSTRUCTION CONTRACTORS—Regulation 1521

Annotation 190.0461


190.0461 Joint Venture Liability. Two construction contractors enter into a joint venture agreement for the specific purpose of performing a construction contract. The joint venture contracts to construct a highway in California with a third party, other than the United States.

Contractor A supplies the construction materials by producing rock, sand and gravel from its own quarry. These materials are contributed to the commencing joint venture by Contractor A. Joint venture partner, Contractor B, will install the construction materials and contribute this installation labor to the joint venture. In addition to receiving an interest in the joint venture, Contractors A and B receive a commitment from the joint venture to be paid an amount that represents their respective value of the materials and labor sold by the joint venture to its customer.

Under the Sales and Use Tax Law, sales tax does not apply to a transfer of property to a commencing entity (e.g., a joint venture) in exchange solely for an interest in that commencing entity. However, tax applies if the transferor receives consideration such as cash, notes, or an assumption of indebtedness, and the transfer does not otherwise qualify for an exemption. The Sales and Use Tax Law does not provide a means by which to avoid tax when the transfer of property to a commencing entity in exchange for a membership interest also includes the simultaneous sale of that property. Since Contractor A receives consideration at the time it transfers the construction materials, i.e., the commitment by the joint venture to pay a specified amount concurrent with the joint venture's transfer of the construction materials to a third party, such consideration constitutes a sale that is subject to tax. The gross receipts from that sale are measured by the amount received by Contractor A for the construction materials, including fabrication and excavation. While Contractor B transfers installation labor to the joint venture for consideration, that is not a sale of taxable tangible personal property and thus is not taxable. 4/30/03. (2004–1).