Overview
FAR Part 29 prescribes policies and procedures for applying federal, state, and local taxes to government contracts. It provides guidance on using tax clauses, asserting the government’s sovereign immunity or exemptions, and the specific procedures for obtaining tax refunds or handling withholdings on foreign procurements.
Key Rules
- Legal Resolution: Tax problems are considered legal in nature; Contracting Officers (COs) are required to consult with agency-designated legal counsel before negotiating with taxing authorities or determining tax validity.
- Sovereign Immunity: While the Federal Government is generally immune from direct state and local taxation, this immunity does not automatically extend to prime contractors or subcontractors unless specifically authorized.
- Federal Excise Taxes: The government is exempt from many federal excise taxes (e.g., manufacturers' taxes on fuel or tires) when the supplies are for export, for "vessels of war," or for the exclusive use of the United States.
- Foreign Procurement Withholding (Section 5000C): A 2% excise tax withholding is required on certain federal procurement payments to foreign persons unless a specific exemption is claimed via IRS Form W-14.
- State-Specific Regulations:
- North Carolina: The government is entitled to refunds on sales/use taxes for construction materials; contractors must provide certified statements to the CO annually.
- New Mexico: Specific agreements exist to eliminate "double taxation" on cost-reimbursement contracts where title to property passes to the government.
- Tax-Inclusive vs. Exclusive Pricing: COs must solicit prices on a tax-exclusive basis when an exemption is known to exist, and on a tax-inclusive basis when no exemption applies.
Responsibilities
- Contracting Officers (CO):
- Selecting and inserting the correct tax clauses based on contract type, location, and dollar value.
- Consulting with legal counsel before any communication with taxing authorities.
- Furnishing evidence of exemption (e.g., Standard Form 1094, "U.S. Tax Exemption Form").
- Ensuring the 2% withholding is applied to foreign payments when required.
- Agency Legal Counsel:
- Resolving specific tax questions and interpreting tax laws/treaties.
- Negotiating with taxing authorities regarding exemptions or refunds.
- Contractors:
- Completing necessary IRS forms (e.g., Form W-14 for foreign entities).
- Providing certified statements for state tax refunds (specifically in North Carolina).
- Refraining from independent negotiations with taxing authorities on cost-reimbursement or tax-escalation contracts.
- Agency Heads: Reviewing and approving any claims that a contractor should be designated as an "agent of the Government" for tax immunity purposes.
Practical Implications
- Avoidance of Overpayment: In real-world scenarios, a CO’s failure to provide an exemption certificate for "vessels of war" or fuel could lead to the government paying significantly higher prices for commodities that are legally tax-exempt.
- Compliance in Foreign Markets: When contracting in Afghanistan or with foreign entities, agencies must be hyper-vigilant regarding the 2% withholding rule; failure to withhold the tax can lead to significant IRS compliance issues for the agency, as the 5000C tax is a tax matter, not a contract dispute.
- Construction Project Management: On North Carolina construction projects, the government must actively manage the refund process. If the contractor fails to submit certified statements by November 30, the government may lose its window to reclaim substantial sales tax funds from the state.
- Risk Mitigation in Fixed-Price Contracts: For domestic fixed-price contracts exceeding the simplified acquisition threshold, the inclusion of FAR 52.229-3 protects the government by ensuring the price includes all applicable taxes, while allowing for adjustments if federal tax laws change mid-performance.