Overview
This section clarifies that Government contractors and subcontractors generally do not share the Federal Government's sovereign immunity from State and local taxation and establishes the procedures for addressing tax claims on contractor-held property or purchases.
Key Rules
- Agent Designation: Contractors and subcontractors are not normally considered "agents of the Government" to claim immunity from sales or use taxes; any exception requires Agency Head review and a thorough legal analysis.
- Basis of Exemption: When contractors purchase goods, tax exemptions must be based on specific State or local laws rather than the Federal Government's constitutional immunity from direct taxation.
- Government Property: If a State or locality attempts to tax Government-owned property in a contractor's possession (including property acquired via progress payments), the Contracting Officer must seek advice from agency-designated counsel.
- Protection of Interest: The Government’s interests regarding tax disputes must be protected by following the formal procedures outlined in FAR 29.101.
Practical Implications
- Contractors should not assume they are exempt from State and local taxes simply because they are performing a federal contract and must instead look to specific local statutes for relief.
- Because "agent of the Government" status is rare and requires high-level approval, Contracting Officers and contractors must proactively coordinate with legal counsel when State authorities assert tax jurisdiction over Government-funded assets.