Overview
FAR Subpart 29.4 prescribes the specific contract clauses required to manage tax liabilities and exemptions in federal acquisitions. It provides a framework for addressing Federal, State, and local taxes in domestic contracts, as well as tax considerations for international agreements, foreign government contracts, and specific geographic regions like North Carolina, New Mexico, and Afghanistan.
Key Rules
- Domestic Fixed-Price Thresholds: The standard clause for Federal, State, and Local Taxes (52.229-3) is mandatory for fixed-price contracts exceeding the Simplified Acquisition Threshold (SAT) performed in the U.S.
- Contingency Management: For noncompetitive fixed-price contracts, Contracting Officers may use clause 52.229-4 to prevent contractors from including "inappropriate contingencies" for potential post-award tax changes.
- State-Specific Requirements:
- North Carolina: Construction contracts must include clause 52.229-2 to handle state-specific sales and use taxes.
- New Mexico: Cost-reimbursement contracts for specific agencies (e.g., DoD, NASA, DOE) must include clause 52.229-10 to address Gross Receipts and Compensating Taxes.
- Foreign Taxation: Separate clauses are required for foreign fixed-price (52.229-6) and cost-reimbursement (52.229-8) contracts to account for international tax treaties and exemptions.
- Foreign Excise Tax (Section 5000C): Clause 52.229-12 must be inserted in solicitations/contracts where a foreign person is expected to perform, unless an exception (such as humanitarian aid or emergency acquisition) applies.
Responsibilities
- Contracting Officers (COs):
- Determine the correct tax clause based on contract type (fixed-price vs. cost-reimbursement) and location of performance.
- Verify if a noncompetitive contract requires the "State and Local Adjustments" clause to ensure price reasonableness.
- Ensure foreign contractors provide the necessary "Notice and Representation" regarding foreign procurement taxes.
- Contractors:
- Provide accurate representations regarding their status as a foreign person.
- Adhere to specific state tax reporting requirements (especially in NC and NM) to ensure the Government receives appropriate credits or exemptions.
- Requiring Activities/Program Managers:
- Identify and certify when a procurement qualifies for the "humanitarian assistance" exception to foreign tax requirements.
- Federal Agencies:
- Agencies not listed in 29.401-4(c) must independently coordinate with the New Mexico Taxation and Revenue Department if they intend to award cost-reimbursement contracts in that state.
Practical Implications
- Audit Risk: Failure to include the correct tax clause can lead to disputes over whether the government or the contractor is liable for unforeseen tax assessments. In New Mexico, specifically, the clause is vital for ensuring the "double taxation" of cost-reimbursement contracts is avoided.
- Pricing Strategy: In fixed-price domestic contracts, the tax clause effectively shifts the risk of post-award tax changes to the government (under specific conditions), allowing contractors to bid more competitively without padding their prices for tax uncertainty.
- International Complexity: Contracts performed in Afghanistan or involving foreign governments require specialized clauses (52.229-13/14 or 52.229-7/9). These clauses are critical for maintaining the tax-exempt status of U.S. Government expenditures under Status of Forces Agreements (SOFA) or bilateral treaties.
- Compliance Burden: The "Tax on Certain Foreign Procurements" (52.229-12) places a significant reporting burden on foreign entities, requiring them to disclose their tax status early in the solicitation process.