FAR 52.229-1—State and Local Taxes.
Plain-English Summary
FAR 52.229-1, State and Local Taxes, addresses how state and local taxes are treated in a federal contract when those taxes are levied on or measured by the contract price or the sales price of the services or completed supplies furnished under the contract. The clause establishes that the contract price excludes those taxes, even if another taxes clause might otherwise apply, and it requires the contractor to identify the excluded taxes separately on invoices. It also gives the Government two ways to handle the tax burden: either pay the tax amount to the contractor or provide documentation that supports a tax exemption. In practice, this clause is meant to prevent tax costs from being unintentionally built into the contract price, while also creating a clear billing process for taxes that are not included in the price. It matters because it affects pricing, invoicing, tax compliance, and the evidence needed to claim an exemption from state or local taxation.
Key Rules
Contract price excludes certain taxes
The contract price does not include state and local taxes that are levied on or measured by the contract price or the sales price of the services or completed supplies furnished under the contract. This means the contractor should not treat those taxes as part of the base contract price unless the contract or applicable law says otherwise.
Separate tax identification on invoices
The contractor must state excluded taxes separately on its invoices. This requirement makes the tax amount visible to the Government and prevents the tax from being hidden inside the billed contract price.
Government must pay or support exemption
For taxes excluded from the contract price, the Government must either pay the tax amount to the contractor or provide evidence needed to sustain an exemption. The clause therefore places responsibility on the Government to resolve the tax issue rather than leaving the contractor to absorb it.
Applies to state and local taxes only
This clause is limited to state and local taxes, and specifically to taxes levied on or measured by the contract or sales price of the covered supplies or services. It does not itself address all possible tax types, such as federal taxes or taxes unrelated to the contract or sales price.
Works alongside other tax clauses
The clause begins with a 'notwithstanding' statement, meaning it controls over inconsistent language in the referenced Federal, State, and Local Taxes clause. In practice, contracting personnel must read the contract’s tax provisions together to determine which clause governs a particular tax issue.
Responsibilities
Contracting Officer
Ensure the clause is included when prescribed, understand which taxes are excluded from the contract price, and decide whether the Government will pay the tax amount or provide exemption evidence. The contracting officer should also make sure the contract and invoicing instructions align with the tax treatment required by the clause.
Contractor
Exclude covered state and local taxes from the contract price, identify those taxes separately on invoices, and bill only the tax amounts that are properly excluded. The contractor should also maintain records supporting the tax treatment and coordinate with the Government if exemption documentation is needed.
Government
Either reimburse the contractor for the excluded tax amount or furnish the evidence necessary to support a tax exemption. The Government must also ensure that its tax-exemption position is documented and usable for the contractor’s compliance purposes.
Agency finance or payment office
Process invoices that separately state excluded taxes and ensure payment is made in accordance with the contract’s tax treatment. The payment office should verify that billed tax amounts are consistent with the contract and any exemption evidence provided.
Practical Implications
Contractors should price carefully and not assume all taxes are included in the base price; covered state and local taxes may need to be billed separately.
Invoices that fail to separate tax amounts can delay payment or create disputes over whether the tax is reimbursable.
Contracting officers should confirm whether the Government intends to pay the tax or rely on an exemption, because the clause requires one of those outcomes.
The clause can create problems if the contractor does not know which taxes are measured by the contract or sales price, so tax review at award and before invoicing is important.
If exemption evidence is required, the Government must provide documentation that is actually sufficient under the applicable state or local tax rules; otherwise the contractor may still face tax liability.
Official Regulatory Text
As prescribed in 29.401-1 , insert the following clause: State and Local Taxes (Apr 1984) Notwithstanding the terms of the Federal, State, and Local Taxes clause, the contract price excludes all State and local taxes levied on or measured by the contract or sales price of the services or completed supplies furnished under this contract. The Contractor shall state separately on its invoices taxes excluded from the contract price, and the Government agrees either to pay the amount of the taxes to the Contractor or provide evidence necessary to sustain an exemption. (End of clause)