FAR 29.304—Matters requiring special consideration.
Plain-English Summary
FAR 29.304 explains when State and local tax issues require special handling in federal contracts and gives practical guidance for drafting, pricing, and administering contracts where those taxes may affect the Government’s cost or recovery rights. It covers four main topics: special contract provisions for specified taxes when applicability or allocability is uncertain or being litigated; how place and terms of delivery can change State and local tax consequences on Federal purchases; special issues in indefinite-delivery equipment rental contracts because leased equipment may be taxed differently across jurisdictions; and a detailed North Carolina sales and use tax refund procedure that the Government must follow to recover taxes indirectly paid on construction-related purchases. In practice, this section tells contracting officers and contractors when tax language should be built into the contract, when delivery terms should be evaluated for tax savings, and when special reporting or refund procedures apply. It also makes clear that tax recovery is not automatic: if a State refund statute has procedural requirements, the Government must comply with them to obtain the benefit. The North Carolina discussion is especially operational, because it imposes annual certification, documentation, and filing deadlines that contracting officers must monitor to protect the Government’s refund rights.
Key Rules
Special tax clauses allowed
With agency counsel coordination, a contract may state whether the price includes or excludes a specified tax, or require the contractor to take actions regarding payment, nonpayment, refund, protest, or other treatment of that tax. This is appropriate when the tax’s applicability or allocability is uncertain or when the tax is being litigated.
Delivery terms affect taxability
State and local tax treatment of Federal purchases may depend on where and how delivery occurs. For substantial contracts, the contracting officer should consider alternative delivery points and delivery terms to reduce or avoid tax exposure.
Equipment rentals may face varied taxes
Indefinite-delivery contracts for equipment rental can require the contractor to furnish equipment in any State, and leased equipment may be subject to property, use, or similar taxes in multiple jurisdictions. Because tax amounts vary widely, the contract should account for these differences and use the clause prescribed at 29.401-1 when delivery points are unknown at award.
North Carolina refund rights must be preserved
North Carolina law allows refunds of sales and use taxes indirectly paid on certain construction-related materials, supplies, fixtures, and equipment, and the United States may benefit from that refund only by following the State’s refund procedures. The Government cannot recover unless it meets the State’s filing, substantiation, and timing requirements.
Certified statements are required
For North Carolina refund claims, the Government must obtain certified statements from contractors showing vendor-by-vendor costs and taxes paid, including invoice details for multiple purchases from the same vendor and amounts for warehouse withdrawals. Subcontractor statements must also be obtained through the general contractor, and State and local taxes must be shown separately.
Annual reporting and filing deadlines apply
The North Carolina clause at 29.401-2 requires contractors to submit certified statements to the contracting officer by November 30 for the prior 12-month period ending September 30. The contracting officer must ensure compliance and file the annual refund application by March 31 in the form required by the North Carolina Department of Revenue.
Responsibilities
Contracting Officer
Coordinate with agency-designated counsel when special tax treatment is needed; consider delivery terms and locations for tax consequences on substantial procurements; ensure contractors comply with the North Carolina certified-statement requirement; collect the annual tax data; and file the refund application on time and in the required form.
Contractor
When required by the contract, treat the specified tax as directed in the contract language, including payment, nonpayment, refund, or protest actions; in North Carolina cases, submit a certified statement by November 30 showing taxes paid during the prior period and provide the detailed vendor, invoice, warehouse-withdrawal, and subcontractor information needed to support the refund claim.
Agency-Designated Counsel
Coordinate on contract language that addresses specified taxes, including whether the price includes or excludes the tax and what contractor actions are required regarding tax disputes, refunds, or protests.
General Contractor
For North Carolina refund claims, obtain certified statements from subcontractors and furnish them to the claimant so the Government can substantiate the refund request.
Subcontractor
Provide certified statements to the general contractor showing the relevant costs and taxes paid on covered purchases so the refund claim can be supported.
State of North Carolina Department of Revenue / Commissioner of Revenue
Administer the refund process, prescribe the required substantiation and filing procedures, and receive timely refund applications supported by the required records and certifications.
Practical Implications
Tax issues can materially change contract cost, so contracting officers should not treat State and local taxes as a routine afterthought when pricing or structuring a procurement.
If the tax status is unclear or under litigation, the contract should say exactly who bears the tax and who must pursue refunds or protests; otherwise disputes can arise later over entitlement and reimbursement.
Delivery point and delivery term choices can create or eliminate tax liability, especially on large purchases, so acquisition planning should include tax analysis before award.
Indefinite-delivery equipment rental contracts are especially vulnerable to multi-jurisdiction tax variation, so unknown delivery locations should trigger the prescribed clause and careful pricing review.
The North Carolina refund process is deadline-driven and documentation-heavy; missing the contractor certification deadline, failing to separate State and local taxes, or not collecting subcontractor statements can cause the Government to lose refund money permanently.
Official Regulatory Text
The imposition of State and local taxes may result in special contract considerations including the following: (a) With coordination of the agency-designated counsel, a contract may (1) state that the contract price includes or excludes a specified tax or (2) require that the contractor take certain actions with regard to payment, nonpayment, refund, protest, or other treatment of a specified tax. Such special treatment may be appropriate when there is doubt as to the applicability or allocability of the tax, or when the applicability of the tax is being litigated. (b) The applicability of State and local taxes to purchases by the Federal Government may depend on the place and terms of delivery. When the contract price will be substantial, alternative places and terms of delivery should be considered in light of possible tax consequences. (c) Indefinite-delivery contracts for equipment rental may require the contractor to furnish equipment in any of the States. Since leased equipment remains the contractor’s property, States and local governments impose a wide variety of property, use, or other taxes on equipment leased to the Government. The amount of these taxes can vary considerably from jurisdiction to jurisdiction. See 29.401-1 for the prescription of the contract clause to be included in contracts when delivery points are not known at time of contracting. (d) The North Carolina State and local sales and use tax. (1) The North Carolina Sales and Use Tax Act authorizes counties and incorporated cities and towns to obtain each year from the Commissioner of Revenue of the State of North Carolina a refund of sales and use taxes indirectly paid on building materials, supplies, fixtures, and equipment that become a part of or are annexed to any building or structure erected, altered, or repaired for such counties and incorporated cities and towns in North Carolina. In United States v. Clayton , 250 F. Supp. 827 (1965), it was held that the United States is entitled to the benefit of the refund, but must follow the refund procedure of the Act and the regulations to recover what it is due. (2) The Act provides that, to receive the refund, claimants must file, within 6 months after the claimant’s fiscal year closes, a written request substantiated by such records, receipts, and information as the Commissioner of Revenue may require. No refund will be made on an application not filed within the time allowed and in such manner as the Commissioner may require. The requirements of the Commissioner are set forth in regulations that provide that, to substantiate a refund claim for sales or use taxes paid on purchases of building materials, supplies, fixtures, or equipment by a contractor, the Government must secure from the contractor certified statements setting forth the cost of the property purchased from each vendor and the amount of sales or use taxes paid. In the event the contractor makes several purchases from the same vendor, the certified statement must indicate the invoice numbers, the inclusive dates of the invoices, the total amount of the invoices, and the sales and use taxes paid. The statement must also include the cost of any tangible personal property withdrawn from the contractor’s warehouse stock and the amount of sales or use tax paid by the contractor. Similar certified statements by subcontractors must be obtained by the general contractor and furnished to the claimant. Any local sales or use taxes included in the contractor’s statement must be shown separately from the State sales or use taxes. (3) The clause prescribed at 29.401-2 requires contractors to submit to contracting officers by November 30 of each year a certified statement disclosing North Carolina State and local sales and use taxes paid during the 12-month period that ended the preceding September 30. The contracting officer shall ensure that contractors comply with this requirement and shall obtain the annual refund to which the Government may be entitled. The application for refund must be filed each year before March 31 and in the manner and form required by the Commissioner of Revenue. Copies of the form may be obtained from the- State of North Carolina, Department of Revenue, PO Box 25000 Raleigh, North Carolina 27640.