FAR 29.303—Application of State and local taxes to Government contractors and subcontractors.
Plain-English Summary
FAR 29.303 explains how State and local sales and use taxes apply when Government contractors and subcontractors make purchases or hold Government-owned property. It addresses three main topics: whether contractors may be treated as agents of the Government for tax-immunity purposes, how tax exemptions for contractor-made purchases must be analyzed under State or local law rather than assumed from Federal immunity, and how to handle tax claims involving Government-owned property in a contractor’s or subcontractor’s possession. The section exists to prevent contractors from incorrectly claiming the Government’s constitutional immunity from direct taxation and to ensure the Government’s interests are protected through proper contract and tax procedures. In practice, it means tax treatment depends heavily on the exact facts, the applicable State or local statute, and the contract structure, not just on the fact that the work is for the Government. It also requires escalation to the agency head or agency counsel when a contractor is asserted to be an agent of the Government or when a taxing authority seeks to tax Government property or a contractor’s use of it. For contracting officers and contractors, the practical significance is that tax issues must be identified early, documented carefully, and reviewed through the proper legal channels before positions are taken with State or local tax authorities.
Key Rules
No normal agency status
Prime contractors and subcontractors are not normally treated as agents of the Government for purposes of claiming immunity from State or local sales or use taxes. Any claim that a contractor is acting as the Government’s agent must be treated as an exception, not the rule.
Agency-head review required
Before anyone contends that a contractor is an agent of the Government for tax-immunity purposes, the matter must be referred to the agency head. The referral must include all relevant facts and a thorough analysis of applicable legal precedents.
Tax exemption depends on State law
When a contractor or subcontractor makes the purchase, the transaction cannot rely automatically on the Government’s immunity from direct taxation. Any exemption must come from the specific State or local tax law, or the transaction may simply be taxable.
Protect Government interest procedurally
The Government’s interest in contractor purchases must be protected using the procedures in FAR 29.101. This means tax issues should be handled through the prescribed contract and administrative processes rather than informal assumptions.
Government-owned property may be taxed
When Government-owned property is in a contractor’s or subcontractor’s possession, States or localities may try to tax the property itself or the contractor’s possession, use, or interest in it. These situations require legal review because the tax theory may vary by jurisdiction and by the nature of the property interest.
Counsel review for property tax issues
If a State or locality asserts a tax on Government property or on the contractor’s use or possession of that property, the contracting officer must seek review and advice from agency-designated counsel before proceeding.
Responsibilities
Contracting Officer
Identify tax issues involving contractor purchases or Government-owned property, avoid assuming tax immunity applies, and refer disputed property-tax matters to agency-designated counsel for review and advice. The contracting officer should also ensure the Government’s interests are protected through the procedures in FAR 29.101.
Agency Head
Review any proposed contention that a contractor is an agent of the Government for State or local sales or use tax immunity purposes. The agency head must consider the full factual record and legal precedent before any such position is advanced.
Agency-Designated Counsel
Provide legal review and advice when States or localities assert taxes on Government-owned property or on a contractor’s possession, use, or interest in that property. Counsel should help determine the appropriate response and legal posture.
Prime Contractor
Do not assume or claim Government-agent status for tax immunity unless the issue has been properly reviewed and approved. When making purchases, the prime contractor must look to applicable State or local law and contract procedures rather than relying on Federal immunity alone.
Subcontractor
Follow the same limitations as prime contractors: do not presume Government-agent status or automatic tax exemption, and evaluate any claimed exemption under the applicable State or local law and contract procedures.
Agency
Use the procedures in FAR 29.101 to protect the Government’s interest in transactions involving contractor purchases and tax treatment, and ensure internal review channels are available for disputed tax matters.
Practical Implications
Contractors often cannot avoid sales or use tax simply because the work is for the Government; the key question is who is legally making the purchase and what the State or local law says.
A common pitfall is treating a contract clause, funding source, or Government benefit as automatic tax immunity. FAR 29.303 requires a fact-specific and jurisdiction-specific analysis.
If a contractor is holding Government-owned property, tax authorities may try to tax the property or the contractor’s use of it, so the issue should be flagged early and reviewed by counsel.
Claims that a contractor is the Government’s agent for tax purposes are exceptional and require high-level review with supporting facts and legal precedent; they should not be made casually in correspondence or invoices.
Contracting officers should coordinate tax issues through the proper FAR procedures and legal channels rather than negotiating directly with tax authorities without review.
Official Regulatory Text
(a) Prime contractors and subcontractors shall not normally be designated as agents of the Government for the purpose of claiming immunity from State or local sales or use taxes. Before any activity contends that a contractor is an agent of the Government, the matter shall be referred to the agency head for review. The referral shall include all pertinent data on which the contention is based, together with a thorough analysis of all relevant legal precedents. (b) When purchases are not made by the Government itself, but by a prime contractor or by a subcontractor under a prime contract, the right to an exemption of the transaction from a sales or use tax may not rest on the Government’s immunity from direct taxation by States and localities. It may rest instead on provisions of the particular State or local law involved, or, in some cases, the transaction may not in fact be expressly exempt from the tax. The Government’s interest shall be protected by using the procedures in 29.101 . (c) Frequently, property (including property acquired under the progress payments clause of fixed-price contracts or the Government property clause of cost-reimbursement contracts) owned by the Government is in the possession of a contractor or subcontractor. Situations may arise in which States or localities assert the right to tax Government property directly or to tax the contractor’s or subcontractor’s possession of, interest in, or use of that property. In such cases, the contracting officer shall seek review and advice from the agency-designated counsel on the appropriate course of action.