Overview
FAR Subpart 29.2 outlines the policies and procedures regarding the application of Federal excise taxes to government contracts, specifically focusing on manufacturers' and special-fuels taxes. It mandates that executive agencies maximize the use of available tax exemptions and provides guidance on when to solicit prices on a tax-inclusive versus tax-exclusive basis.
Key Rules
- Tax Application: Federal excise taxes typically apply to the sale or use of specific supplies (e.g., motor vehicles, tires, fuel, firearms) and services.
- Exemption Mandate: Agencies are required by regulation to take maximum advantage of all available Federal excise tax exemptions.
- Solicitation Basis:
- Tax-Exclusive: Solicited when it is known the Government is exempt.
- Tax-Inclusive: Solicited when no exemption exists.
- Standard Exemptions: No excise taxes are imposed on supplies for:
- Exclusive use by States or political subdivisions (including D.C.).
- Exports to foreign countries (if shipped within 6 months of title transfer).
- Further manufacturing or fuel/supplies for vessels of war.
- Nonprofit educational organizations and emergency vehicles.
- Foreign Contract Withholding (Section 5000C): A 2% excise tax must be withheld from payments to foreign contracting parties unless a valid exemption is claimed via IRS Form W-14.
- Dispute Jurisdiction: Substantive tax issues and disputes—particularly regarding the Section 5000C foreign tax—are under the jurisdiction of the IRS, not the contracting agency.
Responsibilities
- Contracting Officers (COs):
- Determine whether to solicit on a tax-inclusive or tax-exclusive basis.
- Ensure "for export" notations are included on purchase documents when applicable.
- Furnish exemption certificates to sellers (e.g., for Vessels of War).
- Collect and withhold the 2% tax on foreign contract payments in the absence of a completed IRS Form W-14.
- Refer technical tax law questions to agency-designated counsel or the IRS.
- Contractors:
- Complete and submit IRS Form W-14 with offers and invoices to claim exemptions from foreign procurement withholding.
- Provide proof of export to the CO when claiming export exemptions.
- Self-certify exemptions, subject to IRS audit.
- Agency Counsel:
- Provide legal guidance on questions arising from excise tax requirements.
- Internal Revenue Service (IRS):
- Adjudicate all disputes regarding the imposition, collection, or exemption of taxes.
Practical Implications
- Cost Savings: By identifying exemptions early (such as those for fuel or tires), COs can significantly reduce the total contract price, ensuring the government does not pay unnecessary "pass-through" tax costs.
- Administrative Diligence: For foreign acquisitions, the 2% withholding is a "default" action. If a CO fails to withhold this from a foreign contractor who hasn't provided a Form W-14, the agency may be non-compliant with Department of the Treasury regulations.
- Contract vs. Tax Law: It is critical for practitioners to realize that a disagreement over these taxes is often not a "Contract Dispute" under the Disputes clause; rather, it is a tax matter that must be settled between the contractor and the IRS.
- Documentation: Real-world compliance hinges on paperwork—specifically the "for export" labels on shipping documents and the retention of exemption certificates for up to 12 calendar quarters.