Federal, State, and local taxes
Include the appropriate tax clause in fixed-price contracts performed in the U.S. or outlying areas exceeding the simplified acquisition threshold to clarify tax obligations and avoid pricing contingencies.
Overview
FAR 29.401-3 prescribes the use of specific contract clauses regarding the treatment of federal, state, and local taxes in government contracts. It requires the inclusion of the clause at 52.229-3 in solicitations and contracts that are (1) performed wholly or partly in the United States or its outlying areas, (2) are fixed-price, and (3) exceed the simplified acquisition threshold. This ensures that contractors understand their tax obligations and the government's position on tax liability. For noncompetitive contracts meeting these criteria, the contracting officer may use clause 52.229-4 instead, if including 52.229-3 would result in an inappropriate contingency for potential postaward changes in state or local taxes. This provides flexibility to address unique tax risk situations in noncompetitive awards.
Key Rules
- Clause 52.229-3 Requirement
- Must be included in fixed-price contracts performed in the U.S. or outlying areas and exceeding the simplified acquisition threshold.
- Alternative Clause for Noncompetitive Contracts
- Contracting officers may use clause 52.229-4 instead of 52.229-3 in noncompetitive contracts to avoid inappropriate tax contingencies.
Responsibilities
- Contracting Officers: Ensure the correct tax clause is inserted based on contract type, location, and value; assess if an alternative clause is appropriate for noncompetitive contracts.
- Contractors: Review and comply with the tax clause included in their contract, understanding their tax obligations and any adjustments allowed.
- Agencies: Oversee compliance with clause inclusion and proper handling of tax-related contract terms.
Practical Implications
- Ensures clarity on tax liability and prevents disputes over tax treatment in government contracts.
- Impacts contract pricing and risk allocation, especially regarding potential changes in state or local taxes.
- Common issues include incorrect clause usage or misunderstanding of tax adjustment provisions.