FAR 52.229-4—Federal, State, and Local Taxes (State and Local Adjustments).
Plain-English Summary
FAR 52.229-4 allocates responsibility for Federal, State, and local taxes and duties in fixed-price contracting when tax laws or tax administration change after contract award. It defines key tax terms such as after-imposed tax, after-relieved tax, all applicable taxes and duties, contract date, excepted tax, and local taxes, including special treatment for taxes in U.S. possessions and territories. The clause also states the baseline rule that the contract price includes applicable taxes in effect on the contract date, while excluding taxes imposed under 26 U.S.C. 5000C from both inclusion and reimbursement. It then explains when the contract price must be increased for new or increased taxes, decreased for tax relief or refunds, and decreased when the contractor loses a tax benefit through its own fault, negligence, or failure to follow contracting officer instructions. The clause sets a $250 threshold for adjustments, requires prompt contractor notice of tax matters that may affect price, and obligates the Government to provide evidence of tax exemption when requested and justified. In practice, this clause is about preventing either party from unfairly bearing tax changes that occur after award, while also making sure contractors manage tax issues diligently and document them properly.
Key Rules
Key tax definitions
The clause defines after-imposed tax, after-relieved tax, all applicable taxes and duties, contract date, excepted tax, and local taxes. These definitions control when a tax change is eligible for a price adjustment and what kinds of taxes are covered or excluded.
Baseline price includes taxes
Unless the contract says otherwise, the contract price includes all applicable Federal, State, and local taxes and duties in effect on the contract date. The only express exception in paragraph (b) is that taxes imposed under 26 U.S.C. 5000C may not be included in the price or reimbursed.
Price increases for new taxes
The contract price must be increased for after-imposed taxes, or for taxes specifically excluded from the price by contract terms, if the contractor must pay them and certifies in writing that no contingency for the tax was included in the price. The contractor must also show that the liability did not arise from its fault, negligence, or failure to follow the contracting officer’s instructions.
Price decreases for tax relief
The contract price must be reduced when a tax becomes after-relieved, including when the contractor receives a refund or drawback. The Government is also entitled to interest earned on a tax refund after the contractor was paid for the tax, and to repayment of any refunded penalty that the Government had borne.
Contractor fault shifts the burden
If a tax was included in the contract price but the contractor ends up paying it, or fails to obtain a refund, because of its own fault, negligence, or failure to follow contracting officer instructions, the contract price is decreased rather than increased. The clause prevents contractors from recovering tax losses caused by their own actions or omissions.
Minimum adjustment threshold
No price adjustment is made unless the amount exceeds $250. This avoids administrative processing of very small tax changes and means parties should track cumulative impacts carefully.
Notice and direction requirements
The contractor must promptly notify the contracting officer of tax matters that may reasonably increase or decrease the contract price and must take action as directed. If the contracting officer directs action, the contract price is equitably adjusted to cover the contractor’s resulting costs, including interest, penalties, and reasonable attorneys’ fees.
Government exemption support
When the contractor requests an exemption, states in writing that the exemption applies to a tax excluded from the price, and there is a reasonable basis to support the exemption, the Government must furnish evidence needed to establish the exemption. This helps the contractor avoid paying taxes that should not apply to the contract.
Responsibilities
Contracting Officer
Determine whether tax changes or exemptions affect the contract price, direct the contractor’s actions when needed, and provide evidence of tax exemption when the contractor requests it and a reasonable basis exists. The contracting officer must also ensure any equitable adjustment reflects the clause’s rules and that tax-related changes are handled consistently with the contract terms.
Contractor
Include applicable taxes in the contract price unless the contract states otherwise, monitor tax law and administration changes, promptly notify the contracting officer of tax matters that may affect price, request exemptions in writing when appropriate, and provide the required written statement that no contingency for an after-imposed tax was included in the price. The contractor must also avoid creating tax liability through fault, negligence, or failure to follow instructions.
Government
Bear the economic effect of after-imposed taxes when the clause conditions are met, receive price reductions for after-relieved taxes and contractor-caused tax losses, and furnish exemption evidence when requested and justified. The Government is also entitled to recover interest and refunded penalties in the circumstances described by the clause.
Taxing Authority
Impose, relieve, refund, or revoke taxes through legislative, judicial, or administrative action that may trigger a contract price adjustment. Although not a contract party, its actions determine whether a tax is after-imposed or after-relieved under the clause.
Practical Implications
Contractors should track tax changes from award through closeout, because post-award changes can increase or decrease the contract price and may require quick notice to preserve rights.
The written statement that no contingency for the tax was included in the price is critical for recovering after-imposed taxes; without it, the contractor may have difficulty obtaining an adjustment.
Small tax changes under $250 are not adjusted, so contractors should watch cumulative effects across multiple invoices, modifications, or tax events.
Contractor-caused tax problems are not recoverable under this clause, so poor tax compliance, missed filings, or ignoring contracting officer instructions can turn a potential increase into a price decrease.
When a tax exemption may apply, contractors should request Government support early and document the legal basis, because the clause requires both a contractor request and a reasonable basis before the Government must furnish evidence.
Official Regulatory Text
As prescribed in 29.401-3 , insert the following clause: Federal, State, and Local Taxes (State and Local Adjustments (Feb 2013) (a) As used in this clause- After-imposed tax means any new or increased Federal, State, or local tax or duty, or tax that was excluded on the contract date but whose exclusion was later revoked or amount of exemption reduced during the contract period, other than an excepted tax, 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. After-relieved tax means any amount of Federal, State, or local tax or duty, other than an excepted tax, 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 effective date of this contract and, for any modification to this contract, the effective date of the modification. Excepted tax means social security or other employment taxes, net income and franchise taxes, excess profits taxes, capital stock taxes, transportation taxes, unemployment compensation taxes, and property taxes. "Excepted tax" does not include gross income taxes levied on or measured by sales or receipts from sales, property taxes assessed on completed supplies covered by this contract, or any tax assessed on the Contractor’s possession of, interest in, or use of property, title to which is in the Government. 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) Unless otherwise provided in this contract, 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 tax, or of any tax or duty specifically excluded from the contract price by a term or condition of this contract that the Contractor is required to pay or bear, including any interest or penalty, if the Contractor states in writing that the contract price does not include any contingency for such tax and if liability for such tax, interest, or penalty was not incurred through the Contractor’s fault, negligence, or failure to follow instructions of the Contracting Officer. (d) The contract price shall be decreased by the amount of any after-relieved tax. The Government shall be entitled to interest received by the Contractor incident to a refund of taxes to the extent that such interest was earned after the Contractor was paid by the Government for such taxes. The Government shall be entitled to repayment of any penalty refunded to the Contractor to the extent that the penalty was paid by the Government. (e) The contract price shall be decreased by the amount of any Federal, State, or local tax, other than an excepted tax, that was included in the contract price and 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 Federal, State, and local taxes and duties 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. The contract price shall be equitably adjusted to cover the costs of action taken by the Contractor at the direction of the Contracting Officer, including any interest, penalty, and reasonable attorneys’ fees. (h) The Government shall furnish evidence appropriate to establish exemption from any Federal, State, or local tax when- (1) The Contractor requests such exemption and states in writing that it applies to a tax excluded from the contract price; and (2) A reasonable basis exists to sustain the exemption. (End of clause)