Government contractors are subject to specific state and local taxes, regardless of the language of the contract. It is important for contractors to be aware of the tax laws of the states in which they operate and any locality that imposes taxes. In some states, such as Illinois, a contractor can have some capacity to dictate the taxation of their purchases by changing the structure and form of the contract. However, in states such as Virginia, the content of the transaction is analyzed to determine if a contractor has to pay sales tax on their purchases.
This is done through the “true object” test, which looks at whether the real object of the contract is the provision of a service or the sale of tangible personal property. Civil servants are government employees, so the government entity is responsible for withholding and paying federal income, social security and Medicare taxes. They must also issue a W-2 form, wage and tax return, to a public official. Gross revenues from construction activities undertaken to improve real estate by or for the U. S.
are subject to the B&O tax contracted by the government. However, since federal constitution prohibits directly imposing a tax on the federal government, contractors do not collect sales tax on charges for that work. Government contractors often assume that all goods and services provided to the federal government are exempt from state taxes. However, this is not always true. Under a contract containing clause 52.229-3 or 52.229-4, federal, state and local taxes may be applicable in accordance with those clauses.
Charges from subcontractors to prime contractors in government contract work are not subject to sales tax. The Commissioner's requirements for obtaining a refund of sales or use taxes paid for the purchase of construction materials, supplies, accessories or equipment by a contractor are set out in regulations. The Government must obtain certified statements from the contractor stating the cost of the property purchased from each seller and the amount of sales or use taxes paid from each seller. In order to substantiate a request for a refund of sales or use taxes paid for the purchase of construction materials, supplies, accessories or equipment by a contractor, an IRS Form W-14 must be completed by the foreign contracting party receiving federal procurement payments and submitted with each receipt or invoice. The problem arises when contractors do not incorporate state tax costs into their proposed price despite being required to pay taxes under applicable state legislation. This was highlighted in a recent decision by the Armed Forces Contract Appeals Board which stated that two things are guaranteed in life: death and taxes, and federal contractor status cannot exempt one from taxes. Activities such as the mere sale of tangible personal property or provision of professional services to the federal government are not included in this classification. With coordination from an attorney designated by an agency, a contract may indicate that either the price includes or excludes a specific tax or require certain steps regarding payment, non-payment, reimbursement, protest or other treatment of a specific tax. Clause 52.229-12 Tax on Certain Foreign Purchases should be used on applications and contracts performing in Afghanistan awarded on behalf of or in support of NATO which are governed by NATO's Status of Forces Agreement (SOFA).
The contracting officer should provide an exemption certificate for warship supplies with each receipt or invoice. Finally, when tax issues arise hiring officers should seek assistance from their agency's designated legal counsel.