FAR 29.401-3—Federal, State, and local taxes.
Plain-English Summary
FAR 29.401-3 tells contracting officers when to include the tax clause for fixed-price contracts performed in the United States or its outlying areas. It covers the standard clause at 52.229-3, Federal, State, and Local Taxes, and a limited alternative clause at 52.229-4, Federal, State, and Local Taxes (State and Local Adjustments). The section applies only when a fixed-price contract is contemplated and the expected value exceeds the simplified acquisition threshold. In practice, this rule is about allocating the risk of federal, state, and local tax changes in the contract price and making sure the solicitation and contract use the right clause. It also recognizes that in some noncompetitive awards, a price may otherwise include an unnecessary contingency for future state or local tax changes, so the contracting officer may use the adjustment clause instead. For contractors, this section affects how they build tax assumptions into pricing; for contracting officers, it affects clause selection and price realism in fixed-price acquisitions.
Key Rules
Use 52.229-3 by default
Insert the clause at 52.229-3 in solicitations and contracts when the contract will be performed wholly or partly in the United States or its outlying areas, a fixed-price contract is contemplated, and the expected value exceeds the simplified acquisition threshold. This is the standard rule unless the limited exception in paragraph (b) applies.
Applies to U.S. performance
The clause requirement is triggered only for work performed wholly or partly in the United States or its outlying areas. If performance is entirely outside those areas, this section does not require the clause under paragraph (a).
Fixed-price contracts only
This section is aimed at fixed-price contracting, where the contractor bears more pricing risk up front. The tax clause helps define how tax changes are treated after award, which is especially important when the price is set before performance begins.
Threshold matters
The clause is required only when the contract is expected to exceed the simplified acquisition threshold. Smaller fixed-price buys are outside this specific clause-insertion rule, though other tax or pricing provisions may still apply.
Limited use of 52.229-4
For a noncompetitive contract meeting all paragraph (a) conditions, the contracting officer may use 52.229-4 instead of 52.229-3 if the price would otherwise include an inappropriate contingency for possible postaward changes in state or local taxes. This is a discretionary pricing adjustment tool, not a mandatory substitution.
Focus on state and local tax changes
The alternative clause is intended to address situations where the contractor would otherwise pad the price to cover uncertain future state or local tax increases. It is meant to avoid overpricing while still addressing legitimate tax risk.
Responsibilities
Contracting Officer
Determine whether the acquisition meets the conditions for clause insertion: U.S. or outlying-area performance, fixed-price structure, and expected value above the simplified acquisition threshold. Insert 52.229-3 by default, and in a qualifying noncompetitive contract decide whether 52.229-4 is appropriate to remove an unnecessary contingency for future state or local tax changes.
Contractor
Build pricing based on the applicable tax clause and the expected tax treatment under the contract. Account for federal, state, and local taxes in the proposal, and avoid assuming the wrong level of postaward tax adjustment risk when the solicitation uses 52.229-3 or 52.229-4.
Agency
Ensure acquisition planning and solicitation templates support correct clause selection for fixed-price contracts performed in the United States or its outlying areas. Provide oversight so contracting personnel apply the simplified acquisition threshold and noncompetitive-use conditions consistently.
Practical Implications
This section is mainly a clause-selection rule, but it has real pricing consequences because the wrong clause can shift tax risk improperly between the government and the contractor.
Contracting officers should check three threshold questions early: where performance will occur, whether the contract is fixed-price, and whether the value exceeds the simplified acquisition threshold.
The noncompetitive exception is narrow; it does not authorize routine use of 52.229-4 in competitive procurements, even if the contracting officer thinks tax contingencies are embedded in pricing.
Contractors should not assume all tax changes are automatically reimbursable or automatically excluded; the applicable clause controls how postaward tax changes are handled.
A common pitfall is overlooking outlying areas or partial U.S. performance, which can trigger the clause even when most work is performed elsewhere.
Official Regulatory Text
(a) Except as provided in paragraph (b) of this section, insert the clause at 52.229-3 , Federal, State, and Local Taxes, in solicitations and contracts if- (1) The contract is to be performed wholly or partly in the United States or its outlying areas; (2) A fixed-price contract is contemplated; and (3) The contract is expected to exceed the simplified acquisition threshold. (b) In a noncompetitive contract that meets all the conditions in paragraph (a) of this section, the contracting officer may insert the clause at 52.229-4 , Federal, State, and Local Taxes (State and Local Adjustments), instead of the clause at 52.229-3 , if the price would otherwise include an inappropriate contingency for potential postaward change(s) in State or local taxes.