7 Bonds, Insurance, and Taxes
7.1.1.a Policy. Bonds (other than bonds required for construction contracts) (see
7.1.2.a) and performance guarantees should only be obtained when needed
to protect the interest of the Postal Service. Purchase plans (see 2.1)
must describe and explain any requirements for bonds and performance
guarantees.
1. Annual bond. A single bond in place of separate bonds to secure all of
a supplier's obligations under contracts entered into during a specific
fiscal year.
2. Bond. A written instrument executed for the benefit of the Postal
Service as security for the supplier's obligations, and to assure
payment of any bonded loss. A bond is executed by an offeror or
supplier identified in the instrument as the principal, together with a
second party identified as the surety.
3. Consent of surety. An acknowledgment by a surety that its bond
continues to apply to the contract as modified.
4. Fidelity bond. A bond to assure the faithful performance of an
employee's duties to his or her employer and the employer's clients.
The bond is used to cover losses such as employee thefts or
embezzlements.
5. Patent infringement bond. A bond given as security for a supplier's
obligations under a patent clause.
6. Payment bond. A bond to assure payment of all persons supplying
labor and material under a contract.
7. Performance bond. A bond given as security for the supplier's
obligations under a contract.
8. Irrevocable letter of credit (ILC). A written commitment by a federally
insured financial institution to pay all or part of a stated amount of
money on demand by the Postal Service until the expiration date of the
letter. The letter of credit cannot be revoked or conditioned.
9. Penal amount. The amount specified in a bond (expressed in terms of
dollars or a percentage of the contract price) as the maximum payment
for which the surety is obligated.
10. Surety. An individual or corporation legally liable for another's debt,
default, or failure to satisfy a contractual obligation.
7.1.2 Performance and Payment Bonds for Construction
Contracts
1. The Miller Act (40 U.S.C. 2701-270f) requires performance and
payment bonds or alternate payment protection for any construction,
alteration, or repair of any public building or public work valued at over
$25,000.
2. For construction contracts greater than $25,000 but less than
$100,000, the contracting officer must select a payment bond and one
or more of the following payment protections, giving consideration to
inclusion of an irrevocable letter of credit as one of the selected
alternatives.
(a) An irrevocable letter of credit.
(b) Certificates of deposit. The supplier deposits certificates of
deposit from a federally insured financial institution with the
contracting officer, in an expectable form, executable by the
contracting officer.
(c) A tripartite escrow agreement. The prime supplier establishes an
escrow account in a federally insured financial institution and
enters into a tripartite escrow agreement with the financial
institution, as escrow agent, and all of the suppliers of labor and
material. The escrow agreement must establish the terms of
payment under the contract and of resolution of disputes among
parties. The Postal Service makes payments to the supplier's
escrow account, and the escrow agent distributes the agreement,
or triggers the disputes resolution procedures if required.
(d) A deposit of the types of security listed in 7.1.9.d.
3. The supplier will submit to the Postal Service one of the payment
protections selected by the contracting officer.
4. For construction contracts greater than $100,000, the supplier must
provide the following:
(a) A payment bond.
(b) A performance bond.
5. Amount
(a) Unless the contracting officer determines that a lesser amount is
adequate for the protection of the Postal Service, the penal
amount of a performance bond must equal 100 percent of the
original contract price (see (c) below), and, if the contract price
increases, an additional amount equal to 100 percent of the
increase. The contracting officer must include the bond amount
in the schedule.
(b) Unless the contracting officer makes a written determination
supported by specific findings that a payment bond in this amount
is impractical, the amount of the payment bond must equal 100
percent of the original contract price (see (c) below), and, if the
contract price increases, an additional amount equal to 100
percent of the increase. The amount of the payment bond may
not be less than the amount of the performance bond. The
contracting officer must indicate the bond amount in the schedule.
(c) The original contract price is (1) the award price of the contract;
(2) the price payable for the estimated total quantity of a
requirements contract; or (3) the price payable for the specified
minimum quantity of an indefinite delivery contract. The original
contract price does not include the price of any options except
options exercised at the time of contract award.
6. Solicitation Provisions
(a) For requirements estimated to exceed $25,000 but not greater
than $100,000, include Provision 7-5, Alternate Payment
Protections. Complete the provision by specifying the payment
protection selected, the penal amount required, and the deadline
for submission. For payment bonds, include Provision
7-2, Payment Bond Requirements.
(b) For requirements estimated to exceed $100,000, include
Provision 7-1, Performance Bond Requirements, and
Provision 7-2, Payment Bond Requirements.
7.1.3 Performance and Payment Bonds for Other than
Construction Contracts
7.1.3.a Performance Bonds
1. Requirement. Performance bonds may be required only if the
contracting officer determines that performance bonding is essential to
the interest of the Postal Service. Examples of situations in which a
performance bond may be needed include times when:
(a) A contract provides for the use of Postal Service property or
funds in contract performance;
(b) A supplier has sold all its assets to, or merged with, another firm
and the Postal Service needs assurance of the new firm's
capability; or
(c) The product or service is not scheduled for first delivery until at
least 12 months after contract award, and substantial progress
payments are contemplated.
2. Amount. The penal amount must be the minimum needed to protect the
Postal Service's interest.
3. Solicitation Provision. Include Provision 7.1, Performance Bond
Requirements, in solicitations for nonconstruction contracts if it is
determined that performance bonding is essential to the interest of the
Postal Service. If the penal amount is less than 100 percent of the
contract price, the provision must be modified accordingly.
7.1.3.b Annual Performance Bonds. Annual performance bonds may be used only
for contracts other than construction contracts. The penal amount of such a
bond may not be more than the total amount of all contracts secured by the
bond.
1. Requirement. Payment bonds may be required only if the contracting
officer determines that payment bonding is essential to the interest of
the Postal Service. Examples of situations in which a payment bond
may be needed include times when:
(a) A contract is for supplies or services unique to the Postal Service
that can be obtained only from a source that is not the producer
of the supplies or services;
(b) A supplier has sold all its assets to, or merged with another firm
and the Postal Service needs assurance of the new firm's
responsibility;
(c) Supplies requiring substantial production costs are not scheduled
for first delivery until several months after contract award, and no
progress payments are contemplated; or
(d) Uninterrupted provision of the supplies or services is essential to
the continued operation of Postal Service functions.
2. Amount. The penal amount must be the minimum needed to protect the
Postal Service's interest.
3. Solicitation Provision. Include Provision 7-2, Payment Bond
Requirements, in solicitations for nonconstruction contracts if it is
determined that payment bonding is essential to the interest of the
Postal Service.
7.1.3.d Annual Payment Bonds. Annual payment bonds may be used only for
contracts other than construction contracts. The penal amount of such a bond
must be sufficient to cover the bonded portions of the contracts awarded.
7.1.4 Patent Infringement Bonds
A patent infringement bond may be required under a contract containing a
patent indemnity clause if a performance bond is not obtained. The penal
amount must be the minimum necessary to protect the Postal Service's
interest. Clause 7-1, Patent Infringement Bond Requirements, must
be included in the contract if the supplier may be required to submit a patent
infringement bond.
7.1.5 Fidelity Bonds
A fidelity bond in an amount sufficient to protect the interest of the Postal
Service may be required for any contract that requires supplier employees to
handle Postal Service funds. When a fidelity bond is required, Provision
7-3, Fidelity Bond Requirements, must be included in the solicitation,
and the amount must be reviewed periodically to ensure that the Postal
Service's interest is adequately protected.
7.1.6 Contract Postal Unit Bonds
Contract postal unit bonds impose obligations on a supplier similar to those
required under performance, payment, and fidelity bonds. Generally, contract
postal unit bonds are required before a contract postal unit contract may be
awarded, but in certain circumstances this requirement can be waived by the
contracting officer.
7.1.7 Other Types of Bonds
Bonds other than those discussed in this chapter may be required when the
contracting officer considers them in the Postal Service's interest. In these
cases, appropriate solicitation provisions and contract clauses must be
drafted with the assistance of assigned counsel.
7.1.8 Execution of Bonds
7.1.8.a Prescribed Formats. See the relevant handbook for guidance and
procedures.
7.1.8.b Other Formats. When there is no prescribed format for a bond (as when a
patent infringement or fidelity bond is required), a suitable commercial bond
form may be used, or an appropriate format may be prepared with the
assistance of assigned counsel.
7.1.8.c Original Copy. An original signed copy of any bond must be retained in the
solicitation or contract file.
7.1.8.d Authority of Agents. Bonds signed by persons acting in a representative
capacity must be accompanied by proof that the agent is authorized to act in
that capacity. Proof may be a notarized power of attorney, or a properly
executed corporate certificate or resolution, attested to by the corporate
secretary.
7.1.8.e Partnership as Principal. When a partnership is a principal, the names of all
members of the firm must be listed in the bond, following the trade name of
the firm (if any) and the phrase "a partnership composed of." When a
corporation is a principal, the state of incorporation must be listed.
7.1.8.f Date. Unless an annual bond is accepted, performance or payment bonds
must be dated after the date of the contract. (See 4.3 for award
procedures for construction contracts.)
7.1.8.g Contract Modifications
1. When a contract modification increases the contract price, the supplier
and the surety must execute a consent of surety and increase the penal
amount, and submit it to the contracting officer. When more than one
surety's consent is required, each surety must execute the form.
2. When an increased bond amount is obtained from a party other than
the original surety, the original surety must execute a consent of surety.
3. Novation agreements (see 6.5.4.a.2) require the execution of a
consent of surety.
7.1.9.a Acceptable Sureties
1. Bonds must be supported by acceptable corporate sureties, or by
assets acceptable as security for the supplier's obligation.
2. Clause 7-2, Additional Bond Security, must be included in all
contracts for which a bond is required.
7.1.9.b Corporate Sureties. Any corporate surety offered for a bond furnished the
Postal Service must appear on the list contained in Treasury Department
Circular 570. The amount of the bond may not exceed the underwriting limit
stated for the surety in that list.
7.1.9.c Individual Sureties. The Postal Service does not accept individual sureties.
7.1.9.d Deposit of Assets Instead of Surety Bonds
1. In lieu of any bond (other than a payment bond for a construction
contract), the supplier may deposit certain kinds of assets with the
Postal Service instead of furnishing a bond.
2. The only assets acceptable in place of a surety bond are described
below:
(a) United States bonds or notes with a maturity date less than 5
years from the date of the contract, together with an agreement
authorizing collection or sale in the event of default. The par value
of the bonds or notes must be at least equal to the penal amount
of the bond.
(b) A certified check, cashier's check, bank draft, postal money order,
or currency. The deposit must be at least equal to the penal
amount of the surety bond, and payable solely to the order of the
Untied States Postal Service.
3. The contracting officer must deposit currency, checks, and drafts with
the information service center, with instructions to hold the funds for the
benefit of the supplier. A perpetual inventory of all deposited items must
be kept by the senior contracting official at the purchasing office.
4. When the supplier pledges assets instead of providing a surety bond,
the supplier must complete the bond form as principal, and the bond
form must describe the assets pledged.
5. For all purchases involving the furnishing of bonds (other than payment
bonds for construction contracts), include Provision 7-4,
Deposit of Assets Requirements, in the solicitation.
6. Include Clause 7-3, Deposit of Assets Instead of Surety Bonds,
in every contract requiring a bond for which assets may be deposited in
lieu of bonds.
7.1.9.e Irrevocable Letters of Credit
1. Any person required to furnish a bond has the option to furnish a bond
secured by an ILC in an amount equal to the penal sum required to be
secured. A separate ILC is required for each bond.
2. The ILC must be irrevocable, unconditional, expire only as provided in
paragraph 6 below and be issued by an acceptable federally insured
financial institution. ILCs over $5 million must be confirmed by another
acceptable financial institution that had letter of credit business of at
least $25 million in the past year.
3. To draw on the ILC, the contracting officer will use a sight draft and
present it with the ILC to the issuing financial institution or the
confirming financial institution (if any).
4. If the supplier does not furnish an acceptable ILC, or other acceptable
substitute, at least 30 days before an ILC's scheduled expiration, the
contracting officer shall immediately draw on the ILC.
5. If, after the period of performance of a contract where ILCs are used to
support payment bonds, there are outstanding claims against the
payment bond, the contracting officer will draw on the ILC prior to the
expiration date of the ILC to cover these claims.
6. Expiration dates will be established as follows:
(a) For construction contracts subject to the provisions of the Miller
Act, the later of:
(1) One year following the expected date of final payment;
(2) For performance bonds only, until completion of any
warranty period; or
(3) For payment bonds only, until resolution of all claims filed
against the performance bond during the one-year period
following final payment.
(b) For other contracts not subject to the Miller Act, the later of:
(1) 90 days following final payment; or
(2) Until completion of any warranty period for performance
bonds only.
7. The ILC must be issued or confirmed by a federally insured financial
institution rated investment grade or better.
(a) The supplier shall provide the contracting officer a credit rating
that indicates the financial institution has the required rating(s) as
of the date of issuance of the ILC.
(b) If the contracting officer learns that a financial institution's ratings
has dropped below the required level, the contracting officer will
give the supplier 30 days to substitute an acceptable ILC or will
draw on the ILC using a sight draft.
8. When the contract performance period is extended, the contracting
officer will require the supplier to provide an ILC with an appropriately
extended maturity that meets the requirements of 7.1.9.e.6 above.
7.1.10 Contract Administration
7.1.10.a Information and Notice to Sureties
1. Correspondence. A copy of all correspondence relating to contract
modification, termination, renewal, or nonperformance must be
provided to each surety, with proof of delivery requested. Additional
information on contract performance and payment must be provided to
sureties upon request.
2. Furnishing Information to Subcontractors and Suppliers. When a payment
bond has been provided, the contracting officer may furnish the name and
address of the surety or sureties to persons who have furnished, or have
been requested to furnish, labor or materials for use in performing the
contract. The contracting officer may furnish additional general information
on such matters as the progress of the work, the payments made, and the
estimated percentage of completion.
3. Failure to Perform. The contracting officer must send each surety a
copy of any notice of impending termination, demand for adequate
assurances, assessment of liquidated or other damages, or other
formal notice of failure to perform under the contract, with a notice that
the surety may be liable for damages suffered by the Postal Service.
4. Claims Against Sureties. If a supplier's failure to perform necessitates a
claim against a surety, the contracting officer must give the surety
written notice of the amount of and reasons for the claim. If the surety
refuses to pay or does not respond, the contracting officer must obtain
procedural assistance from assigned counsel. The contracting officer
will only authorize payment from an ILC (or any other cash equivalent
security) upon a judicial determination of the rights of the parties, a
signed notarized statement by the supplier that the payment is due and
owed, or a signed agreement between parties as to the amount due
and owed.
7.1.10.b Surety Takeover Agreements
1. Because of the surety's liability for damages resulting from a supplier's
default, the surety has certain rights and interests in the completion of
the contract work and the application of any undisbursed funds. Before
terminating a contract for default, the contracting officer must consider
any proposal by the surety for completion of the work. The surety
should be permitted to complete the work unless the contracting officer
has reason to believe that the persons or firms proposed by the surety
to complete the work are not competent or qualified.
2. Because of the possibility of conflicting demands for the defaulting
supplier's unpaid earnings (including retained percentages and unpaid
progress payments), the surety may condition its offer of completion
upon the execution of a takeover agreement establishing the surety's
right to payment from the unpaid earnings. If so, and with the
concurrence of the Vice President, Supply Management, the
contracting officer may enter into such an agreement with the surety in
writing after the effective date of contract termination. The contracting
officer should consider including the defaulting supplier as a party to the
agreement in order to preclude any disagreement on the supplier's
residual rights.
3. The agreement must provide that the surety will complete the work
according to all contract terms and conditions, and that the Postal
Service will pay the surety the balance of the contract price unpaid at
termination, but not more than the surety's costs and expenses, subject
to the following conditions:
(a) Any unpaid earnings of the defaulting supplier, including retained
percentages and progress payments for work accomplished
before termination, are subject to debts owed the Postal Service
by the supplier, except to the extent that the unpaid earnings are
required to pay the completing surety the actual costs and
expenses it incurs in completing the work, exclusive of the
surety's payments and obligations under the payment bond given
in connection with the contract.
(b) The agreement may not waive or release the Postal Service's
right to liquidated damages for any delay in completion of the
work that is not excusable under the contract.
(c) If the contract proceeds have been assigned to a financing
institution, the surety may not be paid from unpaid earnings
unless the assignee consents to the payment in writing.
(d) The surety may be reimbursed for discharging its liabilities under
the payment bond of the defaulting supplier only when:
(1) There is mutual agreement among the Postal Service, the
defaulting supplier, and the surety;
(2) The Postal Service Board of Contract Appeals makes a
final determination of the amount due; or
(3) A court of competent jurisdiction orders payment.
7.1.10.c Contract Completion
1. Upon supplier completion of all contract obligations, the contracting
officer must issue a Certificate of Completion to any surety. The
certificate's terms may not release the surety from any obligation under
a payment bond.
2. When the supplier has deposited assets instead of providing a surety
on a payment bond, the contracting officer must refund the assets, with
accrued interest, within 90 days after final completion of contract
performance, unless notice of a claim is received during the 90-day
period. If a claim is received, the assets may be released only with the
agreement of the claimant or by order of a court of competent
jurisdiction.
3. Assets deposited to secure any other bond may be refunded, with
accrued interest, upon final completion and receipt of the supplier's
release (see 6.4.3.c).
4. Upon request, the contracting officer will furnish a Certificate of
Substantial Completion to sureties of a construction supplier if the
project is substantially complete (usable for the purpose intended). If
the contracting officer is uncertain whether the project is substantially
complete, the advice of assigned counsel must be obtained.
7.2 Insurance
7.2.1.a General. Suppliers may be required to carry insurance only when necessary
to protect the interest of the Postal Service. Examples of situations that may
warrant insurance are when:
1. It is desirable to use the facilities and service of the insurance industry
(for example, safety protection and claim services);
2. Insurance is necessary or desirable in connection with contract
performance (for example, in transportation of valuable Postal Service
property); or
3. Commingling of property or other contract conditions makes insurance
reasonably necessary for protection of the parties' interests.
7.2.1.b Fixed-Price Contracts
1. The Postal Service is not usually concerned with the insurance carried
by fixed-price suppliers, except in special circumstances such as the
following:
(a) The supplier, or a segregated operation of the supplier, is
engaged primarily in work for the Postal Service.
(b) Postal Service property of substantial value is involved.
(c) The contract work required is performed within a Postal Service
facility.
(d) The Postal Service agrees to assume risks for which the supplier
ordinarily obtains commercial insurance.
2. In circumstances such as those described in subparagraph 7.2.1.b.1.
above, the types and amounts of liability insurance prescribed in 7.2.2
may be required. However, a qualified program of self-insurance (see
7.2.3) may be substituted for any of those types of insurance.
3. Professional services suppliers must be required to carry errors and
omissions insurance in accordance with 7.2.4.
7.2.1.c Non-Fixed-Price Contracts
1. The types of insurance referred to in 7.2.2, with limits of liability as
prescribed in 7.2.2, are required under non-fixed-price prime contracts
and any non-fixed-price subcontracts under them. However, a qualified
program of self-insurance (see 7.2.3) may be substituted for any such
type of required insurance.
2. Professional services suppliers must be required to carry errors and
omissions insurance in accordance with 7.2.4.
3. The contracting officer may waive a requirement for insurance with the
advice of assigned counsel.
7.2.2 Types of Insurance
7.2.2.a Workers' Compensation and Employers' Liability Insurance. Compliance with
applicable workers' compensation and occupational disease statutes is
required, and employers' liability coverage must be obtained when available.
In jurisdictions where occupational disease is not compensable by law, the
supplier must carry insurance for occupational disease under the employers'
liability section of the insurance policy.
7.2.2.b General Liability Insurance
1. The supplier must carry bodily injury liability insurance, with minimum limits
of $100,000 per person and $500,000 per accident, on a comprehensive
form of policy. The contracting officer, at his or her discretion, may require
higher limits of insurance coverage. Clause 7-4, Insurance, should
be amended to reflect the higher levels of insurance coverage.
2. The supplier must carry property damage liability insurance in an
amount determined by the contracting officer when the nature of the
contract operations warrants it, or when those operations are not
separable from the supplier's commercial operations.
7.2.2.c Automobile Liability Insurance. The supplier must carry automobile liability
insurance on a comprehensive form of policy that provides for bodily injury and
property damage liability covering the operation of all automobiles used in
contract performance. Minimum limits of $100,000 per person and $500,000
per accident for bodily injury and $100,000 per accident for property damage
must be carried. The contracting officer, at his or her discretion, may require
higher limits of insurance coverage. Clause 7-4, Insurance, should be
amended to reflect the higher levels of insurance coverage.
7.2.3 Self-Insurance
A qualified program of self-insurance covering any kind of liability may be
approved in place of any type of insurance discussed in 7.2.2 when found to
be in the interest of the Postal Service. However, in a jurisdiction where
workers' compensation does not completely cover employers' liability to
employees, a program of self-insurance for workers' compensation may be
approved only if:
1. The supplier also maintains an approved program of self-insurance for
any employer's liability that is not covered; or
2. The supplier has shown that the combined cost to the Postal Service of
self-insurance for workers' compensation and commercial insurance for
employers' liability will not exceed the cost of covering both kinds of
risks by commercial insurance.
7.2.4 Errors and Omissions Insurance
7.2.4.a Professional Services. Suppliers providing the following categories of
services must carry errors and omissions (malpractice) insurance:
1. Accountants.
2. Architects.
3. Engineers.
4. Fiscal agents.
5. Medical doctors and dentists.
7.2.4.b Amount. Insurance coverage should be at least $200,000, unless the
contracting officer determines that a different limit is needed to protect the
interests of the Postal Service.
7.2.4.c Waiver. The contracting officer may waive the requirement for errors and
omissions insurance in whole or in part, with the concurrence of assigned
counsel.
7.2.4.d Other Professional Services. The contracting officer may require other
professional services suppliers to carry errors and omissions insurance when
in the interest of the Postal Service.
7.2.5 Insurance Policies
When insurance is required, it may be provided either by specific insurance
policies or by the supplier's existing insurance policies. When existing
policies are used, they must be amended to make the Postal Service a loss
payee.
7.2.6 Contract Clauses
Include Clause 7-4, Insurance, when a supplier is required to carry
insurance. Include Clause 7-5, Errors and Omissions, when errors
and omissions insurance is required in accordance with 7.2.2.
When insurance (other than errors and omissions insurance issued on an
occurrence basis) is required by the contract, the insurance policy must
contain an endorsement to the effect that a cancellation of or material change
in the policy that adversely affects the interest of the Postal Service will not
be effective until at least 30 days after written notice of the cancellation or
change is given to the contracting officer.
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.
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, other than those awarded
using commercial procedures, 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.
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