On May 3, 2012, the SBE’s Tax Counsel issued a Legal Opinion Letter that clarifies the application of the sales tax to materials provided by construction contractors in the course of performing T&M work.  While the letter is only an opinion based on assumed facts and is not binding, it does tell contractors the current thinking at the SBE on the issue.  View a copy of the letter.

In summary, the Opinion Letter states that as long as T&M contractors do no enter into agreements that “explicitly provide for the transfer of title to the materials prior to the time the materials are installed” and also do not calculate sales tax on the marked-up value of the materials and then bill their customers for that sales tax in addition to the materials and mark-up, the T&M contractor is a consumer of the materials and is not required obtain a sellers permit or pay sales tax to the state.  That means for most contractors doing T&M work under typical construction contracts, the contractor pays sales tax reimbursement to the retailer when it purchases the material, and its sales tax liability for those materials ends there.

The sales tax law is complicated, and the Board’s Legal Opinion is limited to the facts recited in the letter.  Keep in mind also that the Legal Opinion addresses only the sales tax applicable to “materials.”  Materials are things that lose their identity when incorporated into the work— like concrete, asphalt, lumber, drywall, stone, brick and block, etc.  The tax rules are different for “fixtures”—things that keep their identity after installation, such as air conditioning units, water heaters, light fixtures, sinks, faucets, and bathtubs.  Contractors are considered to be “retailers” of the fixtures they supply to customers and are required to pay sales tax on the transfer of fixtures.  Finally, the application of sales tax depends on the language of the contract documents for each transaction.  While most T&M contracts do not “explicitly provide” for the transfer of title to materials prior to installation, there are some exceptions.  For example, some contracts allow for the contractor to bill early for payment for “materials on hand” securely stored on site but not yet installed.  In some cases those early payment provisions also provide that the owner takes title to the material as soon as payment is made.  The unintended consequence of this type of clause could be to turn the T&M contractor into a retailer of materials, so contractors should review contracts carefully to avoid this unintended tax exposure.

by Wells Fargo Securities, Economics Group

Mark Vitner, Senior Economist
mark.vitner@wellsfargo.com • (704) 383-5635
Anika R. Khan, Senior Economist
anika.khan@wellsfargo.com • (704) 715-0575
Joe Seydl, Economic Analyst
joseph.seydl@wellsfargo.com • (704) 715-1488

Hand work at the Quarry was brutal and far too slow, and it was clearly necessary to mechanize production. In 1901, A.R. Wilson brought in a #3 Gates crusher, operated by a 150 hp Coreless compound steam engine, which increased tonnage from 17 ½ to 20 tons per hour. A small upright engine and generator for electric lights were also added. The face was moved up ten more feet, to the twenty foot level, to bring the rock closer so it could be pushed by cars or wheelbarrows to the crusher. It also made room for the#5 Allis Chalmers crusher, installed in 1902. A 24 inch narrow gauge rail was laid, and six end dump mine cars. Three one horse,  1 ½ yard dump carts also helped carry rock to the crusher from the face.

This is how operations stood until 1905, when a #5 McCully crusher was installed. This crusher  more than doubled production, increasing tonnage to 55 tons per hour, or about 550 tons and 15 railcars per day. 110 men were now employed at the Quarry, and each worked ten hour days. A year later, in 1906, two yard, side dump cars were pushed by hand from the Quarry face, which was at a level about 40 feet above the main line track. Then the 1906 Earthquake completely  destroyed the Quarry crushing plant.

In 1907, a new #8 plant was built. This contained one #8 McCully crusher, two #5 shortheads and a set of 50” by 36” rolls together with screens, elevators and necessary grizzleys to separate the base rock. Two years later, in 1909, a 7 ½ McCully crusher was added and the quarry face was moved up the hill to the 100 foot level where the quarry office was located. A compressor and jack hammer were purchased, and  a 1 ¼ yard Model 20 Marion coal burning railroad type steam shovel on traction wheels took over for the men who had been hand quarrying rock at the face. Mules and horses were added to pull twenty-four 4 yard dump cars to the chute on a 29 inch narrow gauge railroad.

Waste rock, as it was called prior to 1920, was all 2 ½ inch minus, except that which went to the dump. No scalping was done on any material going to the dump. The first plant fed the baserock (or waste) directly to a conveyor which went to a bunker over the rails. There it was loaded into railroad cars and taken to Southern Pacific yards throughout the region, all of which were built with free baserock from Logan Quarry. What couldn’t be given away to the Southern Pacific was brought back up the hill by conveyor and taken to the waste dump. Beginning in 1920, this conveyor was reversed and waste rock was brought back from the dump to be scalped.

In 1900, the conveniences we take for granted today did not exist. Travel between Company headquarters in Watsonville and the Logan Quarry was either by train, horse and buggy or by mule team. Arthur Wilson made that trip practically every day, by mule team, for a number of years. A cookhouse provided meals for the men and a bunkhouse gave them a place to sleep. Conditions were crude and there was little sanitation. There were washbasins and outhouses, and showers were taken at the end of a hose, but if you wanted hot water you heated it yourself in a can or old kettle.

In the beginning, about fifteen men each worked ten hour days. They loaded out five 35 ton railcars per day, averaging about 12 tons per day per man, totaling 180 tons. 18 and 20 pound rock hammers were the crushers, and rock forks were the only screens. Drilling was done by double jack drills – one man held the drill, and two men pounded on it with 20 pound sledge hammers. Since there were no cutting torches, 20 pound sledge hammers were used when necessary to cold cut steel.

“In 1900 the cars were all loaded by hand with wheelbarrows; they were wheeled right out onto the rail cars. Carts were run up a ramp and the rock was dumped right into the cars. These were all flat cars; they held 35 tons and were fitted with 4 by 4 stakes and side boards furnished by the Company. All of the boards were branded “G.R. Co.” and another brand which said “Return to Logan California”. Switching was done by hand and with mules, and the cars were all moved by pinch bars while being loaded. Men with pinch bars would start the cars and then mules would keep them going.”

Men used picks and shovels to take rock from the face, which was ten feet above the main railroad line, to a steam plant which operated two small crushers and screens. When operations began, they made a six-inch rock and a minus and that was it. They could furnish a 6 inch rock and a 6 inch to 2 ½ inch rock which had been separated by rock forks. What they had left over was filler. Many of the roads that we travel today were built with that material.

Coming next: The First Decade of Operations at Logan Quarry

Pacheco was born in Santa Barbara in 1831. As a child, he was sent to be educated in Hawaii and later worked as a seaman’s apprentice. He studied law, in 1853 was elected judge of the San Luis Obispo Superior Court, and became a state senator in 1857. During the American Civil War, Governor Leland Stanford appointed him brigadier general of the First Brigade of California’s “Native Cavalry.” After the war he met and married a beautiful and talented young playwright, Mary Catherine McIntyre, whose sister Joanna was Arthur Wilson’s mother. Pacheco became Governor of California, was elected Representative to the U.S. Congress, California lieutenant governor and state treasurer, and for a time was warden of San Quentin prison.   He served as Regent of the University of California, and as a U.S. diplomat was appointed Envoy to the Central American States.

Arthur Wilson’s father had died in 1870, and Pacheco stepped in to help out as a father figure, sharing with his young nephew a love of horses and sailing and encouraging his interest in mining engineering. During the 1880s Pacheco partnered in the San Francisco firm of Hale and Pacheco, which dealt with mining investments.  Romualdo Pacheco died in Oakland in 1899, a year before Arthur Wilson founded Granite Rock Company.

Ninety-four years later, Graniterock established the Pacheco  Scholarship Award through San Benito County’s Mexican American Committee on Education (MACE). Each year, a four thousand dollar scholarship goes to a deserving high school graduate who plans to attend a University of California campus in the fall. Scholarship awards are announced at the Annual Cinco de Mayo M.A.C.E. scholarship banquet. Graniterock is proud to be a part of this tradition, and proud of “Uncle Romualdo,” who is a part of our Graniterock Family history.

Factory orders rose 1.3% in February as businesses ordered more machinery and equipment from U.S. factories. Factory orders make up 12% of the U. S. economy.

Higher oil prices, specifically gasoline prices, have not yet been reflected in lower consumer demand for goods and services. However, it seems unlikely that the consumer will continue to ignore the higher cost of refueling their family vehicles.

Job growth appears to be continuing at the 200,000 new-jobs-per-month level. Employment growth at this level will not significantly bring down the unemployment rate because new job entrants are entering the market.

If you’re a contractor who’s worked in the industry for very long, you’ve probably been required to purchase a surety bond at some point. But how much do you really know much about these risk mitigation tools, other than the fact that you’re required to buy them from time to time? From my experience as a surety specialist, the answer is usually “not much.” Construction professionals have to learn about contractor bonding the hard way far too often — after they’ve had their bonding requests denied by numerous surety providers. Only then do most construction professionals become interested in these little understood insurance products. Contractors who have an understanding of contractor bondingwill be better prepared to undergo the surety bond application process when the time arises. With a basic knowledge of contract bonds, construction professionals know what it takes to qualify for a bond, as well as why they’re required to purchase one in the first place. As such, this article will explore five key aspects of contractor bonding that every construction professional should know.

1. Contractor bonding ensures construction professionals are properly licensed.

Government agencies at state and local levels typically require construction professionals to purchase contractor license bonds before they can be legally licensed to perform certain tasks. The surety bond process requires the contractor to prove financial stability as a way of ensuring clients’ investments will be protected should licensing laws be ignored. If a construction professional cannot qualify for or afford the required contractor license bond, a license will not be issued. Changes to contractor licensing requirementsare made frequently, so make sure you’re always in compliance with the contractor license bond rules in your area.

2. Contractor bonding reinforces industry regulations.

Without contractor bonding, government agencieswould struggle to enforce industry regulations. Contractor bonding holds construction professionals accountable for their ability to follow industry regulations. When contractors fail to follow laws as outlined in their bonds, the government can make a claim against the bond. Government agencies typically establish new surety bond requirements after a contractor’s work has resulted in financial loss in one way or another.

3. Contractor bonding is not insurance.

Although surety bonds are insurance products, they do not work as do traditional insurance policies. Whereas most insurance policies function as a way for the policyholder to recover losses, the beneficiaries of contractor bonds are project owners, consumers and government agencies. To put it simply, contract bonds are more like lines of credit. The surety bond amount is guaranteed in case construction professionals should fail to perform as expected. When contractors fail to fulfill their duties under the bond’s legal obligations, the obligee can make a claim on the bond to gain reparation. Most bonding agreements include an indemnification clause that requires the contractor or contracting firm to repay the surety for losses if a claim is made. From time to time, contractors cannot afford to pay for their claims, in which case sureties must eat the losses. This is why surety providers are so stringent during the application process.

4. Contractor bonding can be difficult to qualify for.

When surety providers underwrite contract bonds, they risk losing money. Because sureties intend to minimize the risk that comes along with contractor bonding, they thoroughly review contract bond applications. The process usually involves a review of past contractor bonding, work performance and financial credentials that often include credit scores. If any of these three factors seem questionable, the surety might deny a construction professional’s request for a bond.

5. Contractor bonding can be expensive.

Surety bond premiums will vary for each contract bond you have to provide. The exact surety bond cost you’ll pay will depend on a few factors, including

• the contract’s projected cost
• the state, county or city in which you get the bond
• your professional experience and previous work history
• your bonding history
• your financial credentials

The stronger your application, the lower your premium will be. Unfortunately, lack of experience and poor financial credentials can hinder a contractor’s ability to qualify for a bond. As such, contractors who are new to the industry and those who have low credit scores can have trouble qualifying for surety bonds required of large government projects. If unable to purchase the surety bond(s) as required, a contractor or contracting firm will not be awarded the project. By finishing projects on time and without error, contractors can increase their bonding capacity. Contractors should always pay all subcontractors and material providers on time as well. Managing finances and projects in a responsible manner can help contractors be better prepared to apply for their contract bonds. Recognizing these factors will improve your ability to secure the contract bonds you need for a lower price.

Danielle Rodabaugh is a principal for SuretyBonds.com, an online surety bond agency that issues surety bonds nationwide. As a part of the company’s ongoing educational outreach program, Danielle writes informational articles that help construction professionals answer the question “what is a surety bond?” — Danielle Rodabaugh SuretyBonds.com Stay Current With All Bonding Info! Google+ Twitter Facebook

Sixty-four percent said that California is a very difficult place to do business due to “too much government regulation.” Regulations included California’s complicated workplace regulations. The next concerns were high state and local taxes, and the state budget deficit.

Climate, weather and quality of life were identified as the top advantages to doing business in California. Some state business leaders were identified as positive as was the State’s culture for innovation.

Business leaders believe that State elected officials should be focused on the economy and job creation. The other high priority issues to be addressed should be labor regulations governing overtime, wages and rest periods, and the quality of public schools and higher education.

Fifty-nine percent of business leaders believe that the State’s budget problems should be resolved mostly through budget cuts. Thirty-eight percent say that they would prefer a combination of budget cuts and higher taxes. Top spending priorities or business leaders remained: K-12 education should be most spared from budget cuts, followed by economic development and job creation, higher education, and courts and public safety. Top change is to reform public pensions to more resemble private sector 401(k) plans.

Since education makes up half of the State’s budget, business leaders want to reform the education system to strengthen the role of the principal, expand teacher training, ease termination of incompetent teachers, and pay higher salaries to teachers who improve student performance. The business leaders would like to guarantee funding to the University of California and California State University systems in order to ensure a continued innovative and skilled workforce.

To see the complete survey response, go to www.calchamber.com/businessclimate.

Both the House and Senate, members of both political parties, continue to support highway expansion and maintenance funding but there is disagreement over whether or not the funding level should match or exceed the total gasoline and diesel taxes collected (pump taxes) and how many years the new funding bill should last.

Oil tank drivers are up at midnight to hit the road so that Graniterock’s hot mix plants will have oil early in the morning that same day. “We haul a 380-degree Fahrenheit product in from Bakersfield, Benicia and Martinez and need to remain very alert while loading, driving and unloading the truck. Hot oil sloshes around in the tanks and can cause trailers to become unstable around corners,” explains driver Gabriel Orozco. He also notes that tanker drivers must be vigilant to keep water out of the tanks, especially during rainy seasons. If water comes in contact with heated oil it causes steam to expand the load and overflow the top of the trailer.

Bulk cement drivers are also up early to get loads of cement, fly ash, and slag to Graniterock’s ready-mix concrete branches. Our transportation fleet drivers recently celebrated a milestone of two million miles completed with ZERO lost-time injuries, preventable collisions or property damage incidents. Just imagine the challenge of driving 80,000 pounds of loaded truck up and over Highway 17, and then consider that these drivers do it safely every day.

 Driver Mike Duran stresses the importance of respecting trucks on the roadway. “Please keep in mind that bottom dump trucks weigh 13 tons unloaded and hold about 27 tons of material for a total weight of 40 tons. You want to leave distance between you and a truck because it takes quite a bit to bring a truck like this to a stop.”  Mike says that he sees more and more drivers weaving on the roadway and crossing lines. “When I get up near them, I see that they are texting on their cellphones, eating and drinking.I’ve even seen one driver typing on a laptop computer in the passenger seat. Pay attention to your driving. That’s enough responsibility to worry about.”

Transfer truck drivers are often required to go into backwoods areas that require a great deal of training and experience. Graniterock’s emphasis on safety has led to improvements such as the five mirrors installed on the right side of Ricki

Mancebo’struck to help her see any vehicle that gets too close to her. There are also three mirrors on the left driver’s side. “All lights on the truck have been upgraded and provide greater visibility. When the trailer is dropped off, all of the lights flash on the trailer and the lights on the tongue remain on so no one will trip over it or drive over it,” said Ricki. A new convex mirror installed on the right side of bulk cement trucks makes it possible for drivers to see what is immediately adjacent to the right front tire and hood. Without the convex mirror there would be a blind spot.

Graniterock transportation drivers safely delivered forty-one thousand loads during 2011and more than 98% of them arrived on time. Our customers comment on the safety of our drivers and that “Graniterock’s drivers take the time to learn what we (the contractor) want to get accomplished and when we want it done. Graniterock Drivers are the best we’ve ever had on our job.” How do they do it?  According to Transportation Manager Denny Mahler, “We all agreed that we wanted to have no accidents. We set a short-term goal of 500,000 miles without an incident, and when we made that we moved it to 750,000 miles and then 1,000,000 miles. The reason for this success is because our drivers truly do care about each other.”

Graniterock transportation drivers care about safety, for themselves and for all of us who share the road.  Each day they are on the job, doing whatever they can to safely provide quality service to our customers. The next time you pass one of our big rigs on the highway, please take a moment to consider their challenges and your driving habits, and do whatever you can to help keep our roads safe and accident free.