Interim Internal Purchasing Guidelines > 7 Bonds, Insurance, and Taxes > 7.3 Taxes

7.3 Taxes

7.3.1 General

7.3.1.a Contract tax problems are essentially legal in nature and vary widely. Specific tax questions must be resolved by reference to the applicable contract terms and pertinent tax laws and regulations. Therefore, when tax questions arise, contracting officers must request assistance from assigned counsel.

7.3.1.b To ensure consistent treatment within the Postal Service, the Senior Counsel, Contract Protests and Policies, must be consulted before negotiating with any taxing authority for the purpose of:

1. Determining whether a tax is valid or applicable; or

2. Obtaining exemption from, or refund of, a tax.

7.3.1.c Usually, as discussed in 7.3.3.c.2, suppliers are responsible for settling tax applicability questions in consultation with authorities, independent of Postal Service involvement. When the constitutional immunity of the Postal Service from state or local taxation is at issue, however, suppliers should be discouraged from negotiating independently with taxing authorities, and assigned counsel should be consulted, if the contract is either:

1. A cost-reimbursement contract; or

2. A fixed-price contract containing a tax escalation clause.

7.3.1.d See 4.5.7 regarding taxes in connection with utility contracts.

7.3.2 Federal Excise Taxes

7.3.2.a Applicability. Federal excise taxes are levied on the sale or use of particular supplies and services. Subtitle D of the Internal Revenue Code of 1954, Miscellaneous Excise Taxes, 26 U.S.C. 4041 et seq., and its implementing regulations, 26 CFR 40 through 299, cover miscellaneous federal excise tax requirements. Questions on federal excise taxes should be directed to assigned counsel. The most common excise taxes are:

1. Manufacturers' excise taxes imposed on certain motor vehicle articles, tires and inner tubes, gasoline, lubricating oils, coal, firearms, shells, and cartridges sold by manufacturers, producers, or importers; and

2. Special fuels excise taxes imposed at the retail level on diesel fuel and special motor fuels.

7.3.2.b General Exemptions from Federal Excise Taxes. No federal manufacturers' or special fuels excise taxes are imposed when the supplies are for any of the following:

1. Shipment to a U.S. possession or Puerto Rico, or for export. Shipment or export must occur within 6 months of the time when title passes to the Postal Service. When the exemption is claimed, the words "for export or shipment to a possession" must appear on the contract or purchase document, and the contracting officer must furnish the seller proof of export or shipment to a possession (see 26 CFR 48.4041-12).

2. Further manufacture, or resale for further manufacture (this exemption does not include tires and inner tubes, however) (see U.S.C. 4221).

3. Emergency vehicles (see 26 U.S.C. 4064(a) and 4064(b)(1)(c)).

7.3.2.c Solicitations. Contracting officers must solicit price proposals on a tax-exclusive basis when it is known that the Postal Service is exempt from federal excise taxes and the exemption is at least $100. Proposals must be solicited on a tax-inclusive basis when no exemption exists or the exemption is less than $100.

7.3.3 State and Local Taxes

7.3.3.a Definition. State and local taxes means taxes levied by the states, the District of Columbia, Puerto Rico, possessions of the United States, or their political subdivisions.

7.3.3.b Applicability

1. Although the Postal Service, as an establishment of the federal government, is constitutionally immune from state and local taxes imposed directly on it, the applicability of particular taxes is a legal question often requiring the advice and assistance of assigned counsel. The applicability of a tax in a postal transaction may depend on the nature of the tax and whether its legal incidence, as opposed to its economic burden, is on the Postal Service as purchaser. In many instances in which the Postal Service is not constitutionally exempt, it may take advantage of statutory exemptions provided by state or local law.

2. Prime suppliers and subcontractors may not normally be designated as agents of the Postal Service for the purpose of claiming exemption from state and local taxes. Such designation, when appropriate, must be accomplished in the solicitation, and only after coordination with assigned counsel.

7.3.3.c Exemption from Tax

1. Whenever a state or locality asserts its right to tax Postal Service property directly or to tax a supplier's possession or use of, or interest in, Postal Service property, the contracting officer must obtain advice from assigned counsel concerning the appropriate course of action.

2. Under paragraph k of Clause 4-1, or if the contract includes Clause 7-6, Federal, State and Local Taxes, Clause 7-7, Federal, State, and Local Taxes (Short Form), or Clause 7-8, Federal, State, and Local Taxes (Noncompetitive Contract) (see 7.3.4), it is the offeror's responsibility to determine to what extent state and local taxes are applicable to its proposal. The contracting officer should make no representations concerning the applicability of any state or local tax, and except as provided in subparagraph 3 following, the Postal Service should have no involvement in resolving any dispute between the supplier and a taxing authority concerning tax applicability.

3. Consistent with 7.3.3.c.2, and regarding fixed-price contracts, the Postal Service must, upon the supplier's request, furnish the supplier evidence to establish exemption from any specified tax if a reasonable basis for the exemption exists. When requested, the contracting officer may furnish such evidence under cost-reimbursement contracts. Evidence may also be furnished upon request under other contracts that contain no tax provision if the supplier (a) certifies that the contract price does not include the tax or, if the transaction or property is granted an exemption, (b) consents to a reduction in the contract price.

4. Evidence of exemption may include:

(a) A copy of the contract.

(b) Copies of other documents (such as purchase orders, shipping documents, or invoices) identifying the Postal Service as the buyer.

(c) A U.S. Tax Exemption Certificate (Standard Form 1094).

(d) A state or local form indicating that the supplies or services are for the exclusive use of the Postal Service or the federal government.

(e) Any other state or locally required document for establishing exemption.

(f) Shipping documents indicating that shipments are in interstate or foreign commerce.

7.3.3.d Matters Requiring Special Consideration. The resolution of tax issues requiring special consideration must be coordinated with assigned counsel in the course of solicitation preparation. The following are examples of state and local tax issues that may require special contract treatment.

1. When there is a reasonable question of the applicability or allocability of a tax, or when the applicability of a tax is in litigation, the contract may:

(a) State that the contract price includes or excludes the particular tax and is subject to adjustment upon resolution of the tax question; or

(b) Require the supplier to take specific actions regarding payment, non-payment, refund, protest, or other treatment of the tax.

2. When the applicability of state and local taxes depends on the place and terms of delivery, and the effect of tax on the contract price will be substantial, alternative places of delivery and contract terms should be considered in light of tax consequences.

3. When leased equipment is to be obtained under an indefinite-delivery contract, the supplier's property may be subject to a wide variety of state and local property, use, or other taxes. Because these taxes can vary considerably from jurisdiction to jurisdiction, use Clause 7-9, State and Local Taxes (Indefinite Delivery Equipment Rental), to relieve the supplier of uncertainty about tax consequences in this situation.

4. See 4.5.7.b.2.(d) concerning tax issues in connection with utility service contracts.

7.3.4 Contract Clauses

7.3.4.a Paragraph k of Clause 4-1 addresses the supplier's responsibility for including in the contract price all applicable federal, state and local taxes and duties. Clause 7-6, Federal, State, and Local Taxes, or Clause 7-7, Federal, State, and Local Taxes (Short Form), may be used as substitutes for paragraph k of Clause 4-1 when the contract is fixed-price.

7.3.4.b Include Clause 7-8, Federal, State, and Local Taxes (Noncompetitive Contract), in fixed-price noncompetitive contracts, when the contract price does not include any contingency for state or local taxes.

7.3.4.c Include Clause 7-9, State and Local Taxes (Indefinite Delivery Equipment Rental), when leased equipment is to be obtained under a contract for indefinite delivery.