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Application of State and local taxes to Government contractors and subcontractors
e
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Post Number: 1
Registered: 01-2008
Posted on Tuesday, January 15, 2008 - 09:13 am:

Prior to submitting first invoice, Sub requested from Prime their Tax exempt Number. Prime is NOT tax exempt. Sub assumed Prime was tax exempt on pass through costs on Federal Contracts. In submitting their bid, Sub failed to include their VA sales and use taxes in their FFP bid.

The RFP and subsequent Subcontract Agreement stated "Except as may be otherwise provided in this Contract, the contract price includes all applicable federal, state, and local taxes and duties."

Sub explained that he is registered to collect Sales and Use Taxes in MD and DC. He would have to "eat" the costs if the Prime does not provide the equivalent MD forms for exemption.

Please provide guidance re: pass through costs to the Government and when sales/use taxes are applicable.

Thank you.

v
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Post Number: 284
Registered: 09-2007
Posted on Tuesday, January 15, 2008 - 09:21 am:

Have you read FAR 29.303, "Application of State and local taxes to Government contractors and subcontractors"? If not, it may answer your questions. If so, what do you not understand?

e
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Posted on Tuesday, January 15, 2008 - 10:21 am:

I have read the clause but still don't have full understanding of what it means in "plain english." Prime pays Federal and State taxes and this issue has never come up with a Sub charging S&U taxes.

v
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Post Number: 285
Registered: 09-2007
Posted on Tuesday, January 15, 2008 - 10:39 am:

FAR 29.303 is not a clause.

I presume that your contract with the government includes the clause 52.229-3, "Federal, State, and Local Taxes (APR 2003)" and that the work is not in North Carolina or New Mexico. Do your or the sub qualify for any state exemptions? If so, can you get evidence to establish exemption from the contracting officer in accordance with paragraph (h) of that clause? If so, get it and pass it on to your sub.

As for subcontract price adjustments, keep it simple. You said that the subcontract includes the following clause: "Except as may be otherwise provided in this Contract, the contract price includes all applicable federal, state, and local taxes and duties." Is anything "otherwise provided"? If not, tell the sub that the clause means what it says. That is what the government is going to tell you.

j
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Post Number: 135
Registered: 09-2007
Posted on Tuesday, January 15, 2008 - 10:58 am:  

Is my assumption that the prime contract is firm fixed-price, as opposed to cost reimbursement, correct? If so, as Vern indicated, don't expect a contract modification to "pass through" to the government the additional costs that the sub wants to be paid for. Clause 52.229-3 is used in FFP contracts, but not in cost reimbursement contracts.

If you want to know if you are liable for the additional costs, you appear to have included the terms of the prime contract in your subcontract.

Now, if the prime contract is a cost reimbursement contract, some additional discussion is warranted...


j

e
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Posted on Tuesday, January 15, 2008 - 10:58 am:  

The contract with the Government does not include clause 52.229-3. The only reference regarding taxes was in the General Contract Provisions Section of the RFP. This section was in our contract and the provision flow downs went to the Sub.

Re: Is anything "otherwise provided." No.

The only item other item under the section of Federal, state and local taxes addresses federal excise tax or duty.

j
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Post Number: 142
Registered: 09-2007
Posted on Tuesday, January 15, 2008 - 05:48 pm:

e, you didn't answer my question. Is this a FFP contract with the government?

Also, Is the "General Contract Provisions Section" part of your subcontract RFP or is it in the prime contract? What is the reference, if it is in the prime contract?

What is the clause discussing federal excise taxes? I think I know but please provide the clause number in your contract.


j

e
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Post Number: 4
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Posted on Wednesday, January 16, 2008 - 11:27 am:  

I mentioned this in my initial post. Yes, this is a FFP contract with the government.

The General Contract Provisions appeared as Section M in the RFP and in the Prime Contract.

This are no clause numbers in the section entitled "Federal, State, and Local Taxes."

a. Except as may be otherwise provided in this Contract, the contract price includes all applicable federal, state, and local taxes and duties.

b. Nevertheless, with respect to any federal excise tax or duty on the transaction or property covered by this Contract, if a statute, court decision, written ruling, or regulation takes effect after the contract date and

1. results in the Contractor being required to pay or bear the burden of any such federal excise tax or duty or increase in the rate thereof which would not otherwise have been payable on such transactions or property, the Contract price shall be increased by the amount of such tax, duty, or rate increase, provided that the Contractor, if requested by the Contracting Officer, warrants in writing that no amount for such newly imposed federal excise tax, duty, or rate increase was included in the contract price as a contingency reserve or otherwise; or

2. results in the Contractor not being required to pay or bear the burden of, or in its obtaining a refund or drawback of, any such federal excise tax or duty which would otherwise have been payable on such transactions or property or which was the basis of an increase in the Contract price, the Contract price shall be decreased by the amount of the relief, refund, or drawback, or that amount shall be paid to the Board as directed by the Contracting Officer. The Contract price shall be similarly decreased if the Contractor, through its fault or negligence or its failure to follow instructions of the Contracting Officer, is required to pay or bear the burden of or does not obtain a refund or drawback of any such federal excise tax or duty.

c. No adjustment pursuant to paragraph (b) above shall be made under this Contract unless the aggregate amount thereof is or may reasonably be expected to be more than two hundred and fifty dollars ($250).

d. As used in paragraph (b) above, the term "contract date" means the date set for the bid opening or, if this is a negotiated Contract, the date of this Contract. As to additional supplies or services procured by modificaiton to this Contract, the term "contract date" means the date of such modification.

e. Unless there does not exist any reasonable basis to sustain an exemption, the Board, upon request to the Contractor, without further liability, agrees, except as otherwise provided in this Contract to furnish evidence appropriate to establish exemption from any tax which the Contractor warrants in writing was excluded from the contract price. In addition, the Contracting Officer may furnish evidence to establish exemption from any tax that may, pursuant to this clause, give rise to either an increase or decrease in the contract price. Except as otherwise provided in this Contract, evidence appropriate to establish exemption from duties will be furnished only at the discretion of the Contracting Officer.

j
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Post Number: 149
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Posted on Wednesday, January 16, 2008 - 02:36 pm:

Thanks, e. To clarify, in your initial post, you said that the subcontract was FFP. You didn't mention the prime contract type.

Now that it is clear that the prime contract is FFP, if this is a federal contract that is subject to FAR rules, the government was supposed to include the clause 52.229-3 in the contract. Although I don't use the Uniform Contract Format much, Section M of the prime contract is normally considered to be for pre-award requirements. Clauses pertaining to after award contract requirements are usually included in the other sections of the contract.

However, you said that the "General Contract Provisions" (this was a pre-FAR term that we used to use, at least on Corps of Engineers contracts, for "contract clauses") are in Section M of the (prime - I assume) contract. Okay, regardless of the preceding discussion - the prime contract general provision states that "Except as may be otherwise provided in this Contract, the contract price includes all applicable federal, state, and local taxes and duties." So, the Feds aren't liable for any additional sales and use taxes that the sub mistakenly thought it was exempt from, therefore didn't include in its FFP subcontract proposal.

From your presentation, it would appear that the prime contractor has also included the same or similar terms in the subcontract. So - absent some other provision or term to the contrary in the subcontract, the prime might not be liable to the sub for state sales and use taxes not included in the subcontract proposal, either. That is a matter between the sub and prime according to the subcontract terms, conditions and applicable state laws.

The subcontractor should have known or asked about state or local sales and use taxes applicable to the specific contract/location, etc.

Next point of clarification - if this not a Federal prime contract, please advise. I'm curious...


j

e
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Post Number: 5
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Posted on Wednesday, January 16, 2008 - 04:04 pm:

This is a Federal prime contract with the Board of Governors of the Federal Reserve.

Sub INSISTS that we must be tax exempt since we do work for the Government. We are not tax exempt. Our position is that there are no sales taxes OR sales and use taxes to the Government for our services (i.e. labor). If the sub provided "widgets" to us or some other type of tangible property, then we would be subject to sales taxes. Is this a fair assumption?

Thank you, J!

j
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Post Number: 152
Registered: 09-2007
Posted on Wednesday, January 16, 2008 - 04:19 pm:

e, each state establishes its own rules concerning exemptions for federal contractors from sales or use taxes. It is fairly easy to find out what your state(s) rules are. You and the sub should not presume anything without checking.

You should know what taxes are being imposed upon labor, so I assume that you are correct. Sales taxes are usually not charged on labor, but are charged on goods (and sometimes on some services or rentals of stuff, things like movie or theatre tickets, etc. ?).

I can only say that sales to the Federal Government are normally exempt (under the Supremacy clause of the Constitution, I think) from state and local sales taxes. Sales to federal contractors are usually? often? considered indirect sales to the federal government, thus not exempt from sales taxes. But some states may be different.

I do pay sales taxes on gasoline for GSA vehicles with the DoD gasoline credit card - but I think that DoD obtains a credit when they pay the bills.


j


ju
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Post Number: 35
Registered: 09-2007
Posted on Wednesday, January 16, 2008 - 05:45 pm:

e:

Don't assume anything with respect to exemption from state taxes. Exemption eligibility varies by state and the fact that a US Government contract is involved is not, in and of itself, determinative. I've had evil surprises on state tax liability under US Government O&M services contracts in Colorado and Washington, DC.

Get advice on this from an expert practicing in the state(s) involved.

Ju

b
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Post Number: 17
Registered: 09-2007
Posted on Friday, January 18, 2008 - 12:17 pm:  

I may have been wrong to do this,
but on a federal contract performed in Colorado
where I was a sub supplying materials I bought at Home Depot,
I showed Home Depot a copy of the PRIME contract
and filled out a form
and they didn't charge me sales tax.

Last year on a federal contract performed in Arizona,
my first out-of-state job in years,
for sales tax exemption,
the State required an application in advance,
a $2,000 "bond" or escrow, which they would hold onto for 2 years,
all to avoid 7% tax on less than $20,000 in materials.
I learned this at the sales counter of a supplier,
as my workforce was mobilizing to the jobsite.
Poor planner that I was, I just sucked it up.

SO-
absolutely, it varies by State.
Check it out when bidding.

b
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Post Number: 18
Registered: 09-2007
Posted on Friday, January 18, 2008 - 12:20 pm:   

If it had been performed on tribal lands,
rather than on federal lands,
there was another set of rules altogether.

c
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Post Number: 58
Registered: 09-2007
Posted on Thursday, January 24, 2008 - 09:23 am:

While researching another issue I found that taxes are discussed in GAO's Red Book regarding appropriation law. While not exactly on topic with this discussion thread I am adding the information for future reference. The discussion can be found beginning at Page 4-289 of Vol 1 Chapter 4.

 

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