52.229-4 Federal, State, and Local Taxes (State and Local Adjustments)
Source: FAR 52.229-4 on acquisition.gov
FAR 52.229-4 ensures contract prices are fairly adjusted for significant changes in Federal, State, or local taxes after award, requiring prompt contractor notification and strict compliance with procedures.
Overview
FAR 52.229-4 addresses how Federal, State, and local taxes are handled in government contracts, specifically focusing on adjustments to the contract price due to changes in tax obligations after contract award. The clause defines key terms such as after-imposed tax, after-relieved tax, and excepted tax, and establishes procedures for increasing or decreasing the contract price based on tax changes. It also outlines the responsibilities of both contractors and contracting officers regarding tax notifications, exemptions, and adjustments, and sets a $250 threshold for any price adjustment under this clause.
Key Rules
- Inclusion of Taxes in Contract Price
- Unless otherwise specified, the contract price includes all applicable Federal, State, and local taxes and duties in effect on the contract date, except for certain taxes under 26 U.S.C. 5000C, which cannot be included or reimbursed.
- Adjustments for Tax Changes
- The contract price may be increased for after-imposed taxes or taxes specifically excluded from the contract price, provided the contractor did not include a contingency for such taxes and was not at fault.
- The contract price must be decreased for after-relieved taxes or for taxes included in the contract price that the contractor is not required to pay due to their own fault or negligence.
- Notification and Documentation
- Contractors must promptly notify the Contracting Officer of any tax matters that could affect the contract price and follow the Contracting Officer’s directions.
- Threshold for Adjustments
- No adjustment is made unless the amount exceeds $250.
- Tax Exemptions
- The Government will provide evidence for tax exemption if requested and justified by the contractor.
Responsibilities
- Contracting Officers: Must review contractor notifications, direct appropriate actions, and provide exemption documentation when justified.
- Contractors: Must include all applicable taxes in pricing (unless excluded), notify the Contracting Officer of tax changes, request exemptions when appropriate, and comply with directions regarding tax matters.
- Agencies: Oversee compliance and ensure equitable adjustments are made as required.
Practical Implications
- This clause ensures that contractors are neither unfairly penalized nor unduly enriched by tax changes after contract award. Contractors must be diligent in tracking tax changes and communicating with the Contracting Officer. Failure to notify or follow instructions can result in loss of reimbursement or required repayment. Common pitfalls include misunderstanding which taxes are included/excluded and missing the $250 adjustment threshold.
As prescribed in 29.401-3 , insert the following clause:
Federal, State, and Local Taxes (State and Local Adjustments (Feb 2013)
(a) As used in this clause-
After-imposed tax means any new or increased Federal, State, or local tax or duty, or tax that was excluded on the contract date but whose exclusion was later revoked or amount of exemption reduced during the contract period, other than an excepted tax, on the transactions or property covered by this contract that the Contractor is required to pay or bear as the result of legislative, judicial, or administrative action taking effect after the contract date.
After-relieved tax means any amount of Federal, State, or local tax or duty, other than an excepted tax, that would otherwise have been payable on the transactions or property covered by this contract, but which the Contractor is not required to pay or bear, or for which the Contractor obtains a refund or drawback, as the result of legislative, judicial, or administrative action taking effect after the contract date.
All applicable Federal, State, and local taxes and duties means all taxes and duties, in effect on the contract date, that the taxing authority is imposing and collecting on the transactions or property covered by this contract.
Contract date means the effective date of this contract and, for any modification to this contract, the effective date of the modification.
Excepted tax means social security or other employment taxes, net income and franchise taxes, excess profits taxes, capital stock taxes, transportation taxes, unemployment compensation taxes, and property taxes. "Excepted tax" does not include gross income taxes levied on or measured by sales or receipts from sales, property taxes assessed on completed supplies covered by this contract, or any tax assessed on the Contractor’s possession of, interest in, or use of property, title to which is in the Government.
Local taxes includes taxes imposed by a possession or territory of the United States, Puerto Rico, or the Northern Mariana Islands, if the contract is performed wholly or partly in any of those areas.
(b)
(1) Unless otherwise provided in this contract, the contract price includes all applicable Federal, State, and local taxes and duties, except as provided in subparagraph (b)(2)(i) of this clause.
(2) Taxes imposed under http://uscode.house.gov/view.xhtml?req=granuleid:USC-prelim-title26-section5000&num=0&edition=prelim" target="_blank">26 U.S.C. 5000 C may not be-
(i) Included in the contract price; nor
(ii) Reimbursed.
(c) The contract price shall be increased by the amount of any after-imposed tax, or of any tax or duty specifically excluded from the contract price by a term or condition of this contract that the Contractor is required to pay or bear, including any interest or penalty, if the Contractor states in writing that the contract price does not include any contingency for such tax and if liability for such tax, interest, or penalty was not incurred through the Contractor’s fault, negligence, or failure to follow instructions of the Contracting Officer.
(d) The contract price shall be decreased by the amount of any after-relieved tax. The Government shall be entitled to interest received by the Contractor incident to a refund of taxes to the extent that such interest was earned after the Contractor was paid by the Government for such taxes. The Government shall be entitled to repayment of any penalty refunded to the Contractor to the extent that the penalty was paid by the Government.
(e) The contract price shall be decreased by the amount of any Federal, State, or local tax, other than an excepted tax, that was included in the contract price and that the Contractor is required to pay or bear, or does not obtain a refund of, through the Contractor’s fault, negligence, or failure to follow instructions of the Contracting Officer.
(f) No adjustment shall be made in the contract price under this clause unless the amount of the adjustment exceeds $250.
(g) The Contractor shall promptly notify the Contracting Officer of all matters relating to Federal, State, and local taxes and duties that reasonably may be expected to result in either an increase or decrease in the contract price and shall take appropriate action as the Contracting Officer directs. The contract price shall be equitably adjusted to cover the costs of action taken by the Contractor at the direction of the Contracting Officer, including any interest, penalty, and reasonable attorneys’ fees.
(h) The Government shall furnish evidence appropriate to establish exemption from any Federal, State, or local tax when-
(1) The Contractor requests such exemption and states in writing that it applies to a tax excluded from the contract price; and
(2) A reasonable basis exists to sustain the exemption.
(End of clause)