FAR 52.229-3—Federal, State, and Local Taxes.
Plain-English Summary
FAR 52.229-3, Federal, State, and Local Taxes, allocates tax risk between the Government and the contractor for fixed-price contracts by stating what taxes are included in the contract price and when that price must be adjusted. This clause defines key terms such as after-imposed Federal tax, after-relieved Federal tax, all applicable Federal, State, and local taxes and duties, contract date, and local taxes, including taxes imposed by U.S. possessions and territories such as Puerto Rico and the Northern Mariana Islands when performance occurs there. It also addresses special treatment for taxes imposed under 26 U.S.C. 5000C, which may not be included in the contract price or reimbursed. The clause provides upward price adjustments for certain new or increased Federal excise taxes or duties, downward adjustments for tax relief or refunds, and reductions when the contractor’s fault, negligence, or failure to follow the Contracting Officer’s instructions causes the contractor to bear a tax it otherwise would not have borne. It sets a $250 threshold before any adjustment is made, requires prompt contractor notice of tax matters that may affect price, and obligates the Government to furnish evidence of tax exemption when a reasonable basis exists. In practice, this clause is important because it prevents hidden tax contingencies from being shifted into the price, preserves fairness when tax laws change after award, and creates a clear process for handling tax-related price changes during performance.
Key Rules
Tax definitions control adjustments
The clause’s defined terms determine whether a tax change qualifies for a price adjustment. The contract date is the benchmark for identifying taxes already in effect, while after-imposed and after-relieved Federal taxes cover later legislative, judicial, or administrative changes affecting the contract’s transactions or property.
Price includes existing taxes
The contract price is presumed to include all applicable Federal, State, and local taxes and duties in effect on the contract date. Contractors generally bear those taxes unless the clause specifically allows an adjustment.
Section 5000C taxes excluded
Taxes imposed under 26 U.S.C. 5000C may not be included in the contract price and may not be reimbursed. This is a mandatory exclusion and overrides any attempt to build those taxes into pricing.
After-imposed Federal taxes increase price
If a new or increased Federal excise tax or duty arises after the contract date, the contract price must be increased by the amount the contractor is required to pay or bear. The contractor must provide a written warranty that the tax increase was not already included in the price as a contingency reserve or otherwise.
After-relieved Federal taxes reduce price
If a later change relieves the contractor from paying a Federal excise tax or duty, or provides a refund or drawback, the contract price must be decreased by the amount of the relief. This prevents the contractor from keeping a price amount for a tax it no longer owes.
Contractor fault can eliminate relief
No upward or downward adjustment is allowed for a Federal excise tax or duty that the contractor bears, or fails to recover, because of the contractor’s fault, negligence, or failure to follow the Contracting Officer’s instructions. The contractor cannot shift avoidable tax losses to the Government.
Minimum adjustment threshold applies
No price adjustment is made unless the amount exceeds $250. Small tax changes below that threshold are absorbed without formal contract modification.
Notice and cooperation are required
The contractor must promptly notify the Contracting Officer of tax matters that reasonably may affect the contract price and must take action as directed. This supports timely administration and helps the Government protect exemption rights or document tax changes.
Government must support exemptions
When the contractor requests evidence of tax exemption and a reasonable basis exists, the Government must furnish appropriate evidence without liability. This helps the contractor avoid paying taxes that should not apply to the contract.
Responsibilities
Contracting Officer
Monitor tax-related developments affecting the contract, direct the contractor to take appropriate action when needed, and furnish evidence of tax exemption when a reasonable basis exists. The Contracting Officer also administers any price adjustment resulting from after-imposed or after-relieved taxes and ensures the contractor does not recover taxes caused by its own fault or negligence.
Contractor
Include all applicable taxes in pricing except where the clause prohibits inclusion, such as taxes under 26 U.S.C. 5000C. The contractor must promptly notify the Contracting Officer of tax changes that may affect price, provide a written warranty before receiving an increase for an after-imposed Federal tax, take directed action, and bear losses caused by its own fault, negligence, or failure to follow instructions.
Government
Provide exemption evidence when requested and when a reasonable basis exists, and adjust the contract price when the clause requires an increase or decrease. The Government also benefits from the clause’s protection against improper inclusion of certain taxes and against contractor-created tax costs.
Taxing Authority
Impose, relieve, refund, or drawback taxes through legislative, judicial, or administrative action that may trigger contract price changes. Although not a contract party, its actions determine whether the clause’s adjustment provisions apply.
Practical Implications
Contractors should price in all taxes in effect on the contract date unless the clause specifically excludes them; failing to do so can create margin loss because later relief is not automatic unless the clause applies.
The written warranty for after-imposed Federal taxes is a common compliance point. If the contractor cannot certify that the tax increase was not already included in the price, the upward adjustment may be challenged.
The $250 threshold means very small tax changes are not adjusted, so both sides should track cumulative impacts and not assume every tax change triggers a modification.
Contractors should notify the Contracting Officer early when tax law changes or exemption issues arise; delay can complicate proof, increase administrative burden, and create disputes over whether the contractor acted diligently.
The clause is especially important for contracts performed in U.S. territories or possessions, where local tax treatment may differ and exemption evidence may be needed to avoid unnecessary tax costs.
Official Regulatory Text
As prescribed in 29.401-3 , insert the following clause: Federal, State, and Local Taxes (Feb 2013) (a) As used in this clause- After-imposed Federal tax means any new or increased Federal excise tax or duty, or tax that was exempted or excluded on the contract date but whose exemption was later revoked or reduced during the contract period, on the transactions or property covered by this contract that the Contractor is required to pay or bear as the result of legislative, judicial, or administrative action taking effect after the contract date. It does not include social security tax or other employment taxes. After-relieved Federal tax means any amount of Federal excise tax or duty, except social security or other employment taxes, that would otherwise have been payable on the transactions or property covered by this contract, but which the Contractor is not required to pay or bear, or for which the Contractor obtains a refund or drawback, as the result of legislative, judicial, or administrative action taking effect after the contract date. All applicable Federal, State, and local taxes and duties means all taxes and duties, in effect on the contract date, that the taxing authority is imposing and collecting on the transactions or property covered by this contract. Contract date means the date set for bid opening or, if this is a negotiated contract or a modification, the effective date of this contract or modification. Local taxes includes taxes imposed by a possession or territory of the United States, Puerto Rico, or the Northern Mariana Islands, if the contract is performed wholly or partly in any of those areas. (b) (1) The contract price includes all applicable Federal, State, and local taxes and duties, except as provided in subparagraph (b)(2)(i) of this clause. (2) Taxes imposed under 26 U.S.C. 5000 C may not be- (i) Included in the contract price; nor (ii) Reimbursed. (c) The contract price shall be increased by the amount of any after-imposed Federal tax, provided the Contractor warrants in writing that no amount for such newly imposed Federal excise tax or duty or rate increase was included in the contract price, as a contingency reserve or otherwise. (d) The contract price shall be decreased by the amount of any after-relieved Federal tax. (e) The contract price shall be decreased by the amount of any Federal excise tax or duty, except social security or other employment taxes, that the Contractor is required to pay or bear, or does not obtain a refund of, through the Contractor’s fault, negligence, or failure to follow instructions of the Contracting Officer. (f) No adjustment shall be made in the contract price under this clause unless the amount of the adjustment exceeds $250. (g) The Contractor shall promptly notify the Contracting Officer of all matters relating to any Federal excise tax or duty that reasonably may be expected to result in either an increase or decrease in the contract price and shall take appropriate action as the Contracting Officer directs. (h) The Government shall, without liability, furnish evidence appropriate to establish exemption from any Federal, State, or local tax when the Contractor requests such evidence and a reasonable basis exists to sustain the exemption. (End of clause)