CHAPTER 22
State and Local Taxes

A common misconception held by sellers is the belief that any products or services sold in connection with a federal government contract are exempt from state or local sales or use taxes. While the United States Government is immune from such taxes, a prime contractor, sub-contractor, or lower tier subcontractor may not be exempt. New Mexico’s Gross Receipt Tax (NMGRT) and sales and use taxes in the Commonwealth of Virginia are good examples of non-exempt taxation of federal government contractors.

RISKS

If the contract does not specify either a disclaimer that buyer assumes responsibility for any and all state and local sales and use taxes relating to the contract, or seller has not priced in the amount for these taxes, seller risks lost revenue from seller’s inability to pass the tax burden onto buyer. While documentation such as U.S. Tax Exemption Form (SF 1094) may suit some state and local governments, not all state or local governments accept such exemptions.

RESPONSE

Ascertain during the proposal stage whether sales or use taxes apply to the state or local government where the product or service is used or delivered. Price the product accordingly. Provide evidence that seller is excused from state and local tax exemptions, and incorporate language into the contract that protects seller from assuming responsibility for any unforeseen state and local sales or use taxes.

FAR 29.305 lists the information/documentation seller needs to show to prove that they are exempt from paying state and local sales or use taxes. This list is reproduced here:

1) A copy of the contract or relevant portion.

2) Copies of purchase orders, shipping documents, credit-card-imprinted sales slips, paid or acknowledged invoices, or similar documents that identify an agency or instrumentality of the United States as the buyer.

3) A U.S. Tax Exemption Form (SF 1094).

4) A state or local form indicating that the supplies or services are for the exclusive use of the United States.

5) Any other state or locally required document for establishing general or specific exemption.

6) Shipping documents indicating that shipments are in interstate or foreign commerce.

If seller is not certain that state and local sales or use taxes apply, the amount of taxes is unknown, or the product is destined to a non-U.S. buyer, insert one of the following clauses into the proposal and negotiate it as one of the terms and conditions of the contract:

STATE TAXES

The price set forth in this proposal [or contract] does not include sales or use taxes, which may be applicable to the goods and/or services proposed. Unless seller receives a sales tax exemption certificate, which exempts the goods and/or services from sales or use taxes, the price of any resultant contract will be increased accordingly to allow for the proper invoicing of this cost. The tax exemption certificate should be sent to [insert seller’s name and address]. If the tax exception certificate provided by buyer does not exonerate seller from paying sales or use taxes, buyer will reimburse seller for those taxes as a separate line item to the contract.

SERVICES CONTRACTS

In accordance with [incorporate applicable tax provision] this is considered a services contract in the state of [insert state]. Tangible personal property purchased under this contract delivered, warehoused, or used within [list state here] is subject to sales and use tax of _______%. This tax is estimated at $________ and is included as a separate line item in our pricing/cost proposal for your convenience.

RESALE CONTRACTS

In accordance with [insert applicable tax provision] this is considered a resale contract in the state of [insert state] as confirmed by the issuance of a resale exemption certificate, Form ___________. Tangible personal property purchased under this contract delivered, warehoused, or used within [insert state] is not subject to the sales and use tax of ________%. If the contract is determined to be other than a resale contract by the appropriate tax authority, buyer will reimburse seller for the cost of the tax including interest and penalties, plus associated burdens.