Contractors need to understand the laws for applying state sales and use taxes to purchased goods and services on government contracts. It can be a costly mistake that eats away at your profit.
Sales tax is a tax applied on sales of goods and some services. Sales taxes are added to the price of taxable goods or services and collected at the time of the sale unless the transaction is exempt. Use taxes are due on the use or consumption of taxable goods or services when sales tax was not paid at the time of purchase.
Some contractors assume that because they are selling goods and services to the federal government, the sales and use tax on the goods and services are exempt. However, sales and use taxes of each state are not applied consistently and contractors need to understand the regulations of their state.
What Does the FAR State?
FAR 29.302 Application of State and local taxes to the Government
- Generally, purchases and leases made by the Federal Government are immune from State and local taxation. Whether any specific purchase or lease is immune, how-ever, is a legal question requiring advice and assistance of the agency-designated counsel.
- When it is economically feasible to do so, executive agencies shall take maximum advantage of all exemptions from State and local taxation that may be available. If appropriate, the contracting officer shall provide a Standard Form 1094, U.S. Tax Exemption Form (see part 53), or other evidence listed in 305(a) to establish that the purchase is being made by the Government.
Of course, it is clear as mud. It states purchases are immune when made by the Government and then states it is a legal question. So it depends. However, it does state the contracting officer shall take advantage of State tax exemptions that may be available and provide the Tax Exemption form or other evidence.
How is This Requirement Passed Down to the Contractor and are Sales and Use Taxes Allowable?
Yes, they are if an exemption is not available to the contractor. FAR 31.205-41 Taxes states that state taxes are allowable if they are required to be and are paid unless an exemption was available to the contractor that was not taken.
What are the Regulations of the State?
If you thought this blog was going to provide the answer, it doesn’t. There is not a one size fits all set of state tax regulations; it is dependent on each state. One state may require the completion of the sales tax exemption form. Some states require a statement in the contract that title passes to the Government. The FAR 52.245-1 Government Property clause in cost reimbursable contracts states title will be passed to the Government, which may or may not suffice.
And just because sales tax is exempt doesn’t necessarily mean the “use tax” is exempt. States may also have restrictions on what types of purchases qualify for an exemption under a government contract and whether the purchases are in state or from another state. There are court cases that address sales and or use taxes but each decision is based on the regulations of that state.
Takeaway
Contractors should review their state regulations on sales and use tax, understand the filing requirements and maintain good documentation. Confirm whether an exemption is available and whether the state or the Government provides the exemption form. Make sure you understand whether the exemption is for sales tax only or sales and use tax.
When an exemption is not applicable, ensure that the sales and use tax are priced into the proposal/contract as they are an allowable costs under FAR 31.205-41. You don’t want to find out several years later when the State Department of Revenue comes knocking on your door, performs an audit and you owe back sales and/or use taxes and penalties. The Government may not reimburse the taxes after the fact, even though they were an allowable tax. This means any tax or penalty you owe is deducted from your profit.
Redstone GCI assists contractors throughout the U.S. and internationally with understanding the Government’s expectations and supporting contractors on FAR subpart 31, allowable and unallowable costs. We would be happy to be part of your team.
Lynne is a Director with Redstone Government Consulting, Inc. providing government contract consulting services to our clients primarily related to Commercial Item Determinations and support, Cost Accounting Standards, DFARS Business System Audits, Proposals, and Incurred Cost. Prior to joining Redstone Government Consulting, Lynne served in several capacities with DCAA and DCMA for over 35 years. Professional Experience Lynne began her career working with DCAA in the Honeywell Resident Office, Clearwater, FL in 1984. Lynne’s experience included various positions which involved conducting or reviewing forward proposals or rate audits, financial capability audits, progress payments, accounting and estimating systems, cost accounting standards, claims and disclosure statement reviews. She is an expert in FAR, DFARS, CAS and testified as an expert witness. Lynne assisted in drafting the commercial item guidance for DCAA Headquarters. Lynne was assigned as a Regional Technical Specialist where she provided guidance to 20 field offices on highly complex or technical issues relative to forward pricing, financial capability or progress payment issues. As an Assistant for Quality, she was involved in reviewing and ensuring audit reports were in compliance with policy and GAGAS as well as made NASBA certified presentations to the staff including but not limited to billing reviews, CAS, unallowable cost and progress payments. To enhance her experience in government contracting, Lynne accepted a position with DCMA in 2015 as part of the newly organized DCMA Cadre of Experts in the Commercial Item Group. This included performing reviews of prime contractor’s assertions and/or commercial item determinations as well as performing price analyses. Lynne was a project lead and later became a lead analyst where she engaged with the buying commands on requests and reviewed price analysis reviews performed by a team of 5 analysts. She also assisted the DCMA CPSR team relative to commercial items and co-instructed the Commercial Item Training presented to DCMA. Education Lynne earned a Bachelor of Science Degree in Accounting from the University of Central Florida. Certifications State of Florida Certified Public Accountant State of Alabama Certified Public Accountant Defense Acquisition Workforce Improvement Act (DAWIA) Level III- Auditing DAWIA Level III – Contracting