No retailers excise tax is imposed: (a) On the sale of special fuels for the exclusive use of any State, any political subdivision thereof, or the District of Columbia, or with respect to the use thereof by any of the foregoing.

(b) On the sale of special fuels for export or for shipment to a possession of the United States (which for the purpose of this exemption includes Puerto Rico), and in due course so exported or shipped

(1) This exemption shall be utilized by purchasing on a tax-exclusive basis and furnishing the required proof of exportation or shipment to a possession if:

(i) The purchase is substantial, and (ii) Exportation or shipment to a possession is intended to follow not more than 6 months after title passes to the Government.

(2) To qualify for the exemption of sales for export or for shipment to a possession

or

(i) The supplies must be identified as having been sold by the manufacturer (if the tax is a retailers excise tax) for export or shipment to a possession. The words "for export or shipment to a possession" incorporated into stamped on a contract or purchase order are acceptable to the Internal Revenue Service as evidence that the sale is for export or for shipment to a possession. In solicitations and contracts, the terms of which imply that the supplies will be either exported or shipped to a possession (e.g., delivery to a port of embarkation or special packing requirements for overseas

shipment) where the purchase is not substantial and it is therefore desired to purchase on a Federal Excise taxinclusive basis, the solicitations and the contract should clearly state that proof of export certificates will not be issued.

(ii) The supplies must be exported or shipped to a possession in due course. Proof of export or shipment will be furnished to the contractor in the form set forth in § 1-11.501-1.

(c) On the sale of special fuels to retailers for resale (sales by the United States, or any agency or instrumentality thereof, are not exempt unless specifically made exempt by statute).

(d) On the sale of special motor fuels for use or used in the propulsion of vessels of war or military aircraft of the type enumerated in § 1-11.202(d).

(e) On the sale of special fuels to a nonprofit educational organization or with respect to the use thereof by a nonprofit educational organization.

[31 FR 6372, Apr. 27, 1966]

§ 1-11.202

Manufacturers excise taxes.

No manufacturers excise tax is imposed:

(a) On the sale of any article for use by the purchaser for further manufacture or for resale to a second purchaser in further manufacture. (An article shall be treated as sold for use in further manufacture if sold for use by the purchaser as material in the manufacture or production of, or as a component part of, another taxable article to be manufactured or produced. In the case of truck or bus parts and accessories it is not necessary that the produced article be a taxable article. This exemption does not apply to tires or inner tubes.);

(b) On the sale of any article for export, or for shipment to a possession of the United States (which for the purpose of this exemption includes Puerto Rico). This exemption shall be obtained only when the purchase is substantial and exportation or shipment to a possession is intended to follow not more than 6 months after title passes. For proper utilization of this exemption, see § 1-11.201(b);

(c) On the sale of any article for resale to a second purchaser for

export. If articles upon which a manufacturers excise tax has been paid are resold by a dealer for export, or for shipment to a possession, the manufacturer is entitled to a credit or refund of the tax paid. If it is economically advantageous to do so, this credit or refund shall be utilized by purchase from a dealer on a tax-exclusive basis and execution of the required exemption certificate set forth in § 1-11.501-1;

(d) On sales of supplies for use as fuel supplies, ships' stores, sea stores, or legitimate equipment on vessels of war of the United States or any foreign nation, including aircraft owned by the United States or by any foreign nation and constituting a part of the armed forces thereof, and guided missiles and pilotless aircraft owned or chartered by the United States. This exemption and the exemption from the retailers excise tax on special motor fuels (see § 1-11.201(d) shall be utilized by purchasing on a tax-exclusive basis and furnishing the required exemption certificate (see § 1-11.501-2) only if:

(1) The purchase is substantial;

(2) The contracting officer determines at the time of the purchase that the supplies are intended for use in vessels of war or military aircraft; and

(3) The administrative burden of insuring that the supplies are used for exempt purposes does not make use of the exemption uneconomical. Administrative difficulties normally will not exist if the particular supply is suited exclusively for use in vessels or aircraft.

If supplies upon which a manufacturers excise tax has been paid are sold. by a dealer for any of the exempt uses enumerated above, the manufacturer is entitled to a credit or refund of the tax paid. If it is economically advantageous to do so, this credit or refund shall be utilized by purchases from a dealer on a tax-exclusive basis and execution of the required exemption certificate set forth in § 1-11.501-2;

(e) On the sale of any article for the exclusive use of a State or local government (including the District of Columbia); and

(f) On the sale of any article to a nonprofit educational organization for its exclusive use.

[29 FR 10254, July 24, 1964, as amended at 31 FR 6372, Apr. 27, 1966]

§ 1-11.203 Supplies and services for the exclusive use of the United States.

By virtue of action taken by the Secretary of the Treasury, pursuant to section 4293 of the Internal Revenue Code, exemption is available, and shall be obtained, to the extent indicated, from the following Federal excise taxes:

(a) Tax on communication services and facilities furnished directly to the United States (as distinguished from being furnished to a Government contractor) and paid for directly by the Government. (Such exemption is obtained without any exemption certificate);

(b) Tax on transportation of persons for transportation furnished the United States upon a Government transportation request. (Such exemption is obtainable by use of such transportation request).

[29 FR 10254, July 24, 1964, as amended at 31 FR 6372, Apr. 27, 1966]

Subpart 1-11.3-State and Local Taxes

§ 1-11.300 Scope of subpart.

(a) This subpart sets forth policies regarding the immunity or exemption of Government procurements from State and local sales and use taxes.

(b) As used in this subpart, the term "State and local taxes" includes taxes of the States, the District of Columbia, the possessions of the United States, Puerto Rico, and political subdivion thereof.

[46 FR 17560, Mar. 19, 1981]

§ 1-11.301 Policy.

(a) As a general rule, purchases made by the Government itself are immune exempt from State and local sales and use taxes. However, whether purchases made by the Government itself are actually immune or exempt from these taxes requires both an analysis of the constitutional princi

ples of sovereign immunity and the provisions of the particular State and local law involved.The Government is constitutionally immune from State and local taxes, the legal incidence of which is on the vendee. In cases where the legal incidence of State and local taxes is on the vendor, the Government may be exempt if State or local law or regulations so provide. Personal and real property are immune from State and local property taxes when title is vested in the Government and the property is both owned and possessed by the Government. In all cases, the immunity or exemption shall be used to the fullest extent possible by providing adequate evidence that an agency of the Government is the purchaser of the goods or services or the owner of the property and is thus not subject to the taxes. However, in the interest of economy and reduced paperwork, §§ 1-3.604-7 and 111.502-2(b) limit the assertion of immunity or an exemption to transactions on which a particular State or local tax exceeds $10.

(b) When purchases are not made by the Government itself, but by a prime contractor of the Government or by a subcontractor under a prime contract, the right to an exemption of the transaction from a sales or use tax may not rest on the Government's immunity from direct taxation by States and localities. It may rest instead on provisions of the particular State or loal law involved or, in some cases, the transaction may not in fact be expressly exempt from tax. Similarly, Government-owned property in the possession of a contractor or subcontractor on tax day may give rise to situations where States or localities may have the right to tax the contractor's or subcontractor's possession of, interest in, or use of that property.

(c) Whenever there is any doubt as to the availability of the Government's immunity or exemption from any State or local tax, the matter shall be handled in accordance with § 111.000(b).

(d) The types of evidence of tax immunity or exemption which may be employed are identified in § 1-11.5021. Usually this evidence is provided by documents created in the normal

course of transacting purchase, and no additional evidence, such as a tax exemption certificate, will be necessary. [46 FR 17560, Mar. 19, 1981]

Subpart 1-11.4-Contract Clauses

81-11.401 Fixed-price type contracts.

The clauses prescribed in this subpart are for use in fixed-price type contracts except those to be performed entirely outside the United States, its possessions, and Puerto Rico.

§ 1-11.401-1 Advertised and certain negotiated contracts.

(a) Use of clause. Except as provided in § 1-11.401-4, the clause set forth in paragraph (c) of this § 1-11.401-1 shall be used in:

(1) All formally advertised contracts except construction contracts;

(2) All formally advertised construction contracts when the contract price may reasonably be expected to exceed $10,000;

(3) Negotiated fixed-price type contracts in excess of $10,000 where the contracting officer is satisfied, because of competition or otherwise, that the contract price does not include any contingency for State and local taxes;

and

(4) At the discretion of the contracting officer in negotiated fixed-price type contracts in excess of $2,500 but not in excess of $10,000. However, this clause shall not be used in purchases made pursuant to Subpart 1-3.6.

(b) Description. The clause provides that the contract price includes all applicable taxes. It provides for an increase or decrease in the contract price to compensate for changes in applicable Federal excise taxes or duties. It does not provide for any adjustment in the contract price to compensate for changes in State or local taxes (but see § 1-11.401-4(b)).

(c) Contract clause.

FEDERAL, STATE, AND LOCAL TAXES

(a) Except as may be otherwise provided in this contract, the contract price includes all applicable Federal, State, and local taxes and duties.

(b) Nevertheless, with respect to any Federal excise tax or duty on the transactions or property covered by this contract, if a statute, court decision, written ruling, or regulation takes effect after the contract date, and

(1) Results in the Contractor being required to pay or bear the burden of any such Federal excise tax or duty or increase in the rate thereof which would not otherwise have been payable on such transactions or property, the contract price shall be increased by the amount of such tax or duty or rate increase: Provided, That the Contractor if requested by the contracting officer, 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; or

(2) Results in the Contractor not being required to pay or bear the burden of, or in his obtaining a refund or drawback of, any such Federal excise tax or duty which would otherwise have been payable on such transactions or property or which was the basis of an increase in the contract price, the contract price shall be decreased by the amount of the relief, refund, or drawback, or that amount shall be paid to Government, as directed by the Contracting Officer. The contract price shall be similarly decreased if the Contractor, through his fault or negligence or his failure to follow instructions of the Contracting Officer, is required to pay or bear the burden of, or does not obtain a refund or drawback of, any such Federal excise tax or duty.

(c) No adjustment pursuant to paragraph (b) above will be made under this contract unless the aggregate amount thereof is or may reasonably be expected to be over $100.

(d) As used in paragraph (b) above, the term "contract date" means the date set for the bid opening, or if this is a negotiated contract, the date of this contract. As to additional supplies or services procured by modification to this contract, the term "contract date" means the date of such modification.

(e) Unless there does not exist any reasonable basis to sustain an exemption, the Government, upon request of the Contractor, without further liability, agrees, except as otherwise provided in this contract, to furnish evidence appropriate to establish exemption from any tax which the Contractor warrants in writing was excluded from the contract price. In addition, the Contracting Officer may furnish evidence to establish exemption from any tax that may, pursuant to this clause, give rise to either an increase or decrease in the contract price. Except as otherwise provided in this contract, evidence appropriate to establish exemption from duties will be furnished only at the discretion of the Contracting Officer.

(f) The Contractor shall promptly notify the Contracting Officer of matters which will result in either an increase or decrease in the contract price, and shall take action with respect thereto as directed by the Contracting Officer.

[29 FR 10254, July 24, 1964, as amended at 31 FR 6373, Apr. 27, 1966; 40 FR 44140, Sept. 25, 1975]

§ 1-11.401-2 Certain negotiated contracts.

(a) Use of clause. Except as provided in § 1-11.401-4, the clause set forth in paragraph (d) of this § 1-11.401-2 shall be used in all negotiated fixed-price contracts in excess of $10,000 when the contracting officer is not satisfied that the contract price excludes contingencies for State and local taxes.

(b) Description. The clause provides that the contract price includes all applicable Federal, State, and local taxes. It provides for an increase or decrease in the contract price to compensate for changes in Federal excise taxes or duties, and, with some exceptions, for changes in State and local taxes.

(c) Instruction. If the clause set forth in paragraph (d) of this § 111.401-2 is used and the contract price includes an estimated amount for anticipated taxes on completed supplies covered by the contract or on the contractor's possession of, interest in, or use of property, title to which is in the Government, the contracting officer shall (1) include in the contract file detailed information with regard thereto and (2) insure that the contract price does not include taxes not allowable under § 1-15.205-41(a). (d) Contract clause.

FEDERAL, STATE, AND LOCAL TAXES

(a) As used throughout this clause, the term "contract date" means the date of this contract. As to additional supplies or services procured by modification of this contract, the term "contract date" means the date of such modification.

(b) Except as may be otherwise provided in this contract, the contract price includes, to the extent allocable to this contract, all Federal, State, and local taxes which, on the contract date:

(1) By Constitution, statute, or ordinance, are applicable to this contract, or to the transactions covered by his contract, or to property or interests in property; or

(2) Pursuant to written ruling or regulation, the authority charged with administering any such tax is assessing or applying to, and is not granting or honoring an exemption for, a contractor under this kind of contract, or the transactions covered by this contract, or property or interests in property.

(c) Except as may be otherwise provided in this contract, duties in effect on the contract date are included in the contract price, to the extent allocable to this contract.

(d)(1) If the Contractor is required to pay or bear the burden

(i) Of any tax or duty which either was not to be included in the contract price pursuant to the requirements of paragraphs (b) and (c), or of a tax or duty specifically excluded from the contract price by a provision of this contract; or

(ii) of an increase in rate of any tax or duty, whether or not such tax or duty was excluded from the contract price; or

(iii) of any interest or penalty on any tax or duty referred to in (i) or (ii) above; the contract price shall be increased by the amount of such tax, duty, interest, or penalty allocable to this contract: Provided, That the Contractor, if requested by the Contracting Officer, warrants in writing that no amount of such tax, duty, or rate increase was included in the contract price as a contingency reserve or otherwise; and Provided further, That liability for such tax, duty, rate increase, interest, or penalty was not incurred through the fault or negligence of the Contractor or his failure to follow instructions of the Contracting Officer.

.

(2) If the Contractor is not required to pay or bear the burden, or obtains a refund or drawback, in whole or in part, of any tax, duty, interest, or penalty which:

(i) Was to be included in the contract price pursuant to the requirements of paragraphs (b) and (c);

(ii) Was included in the contract price; or (iii) Was the basis of an increase in the contract price; the contract price shall be decreased by the amount of such relief, refund, or drawback allocable to this contract, or the allocable amount of such relief, refund, or drawback shall be paid to the Government, as directed by the Contracting Officer. The contract price also shall be similarly decreased if the Contractor, through his fault or negligence or his failure to follow instructions of the Contracting Officer, is required to pay or bear the burden, or does not obtain a refund or drawback of any such tax, duty, interest, or penalty. Interest paid or credited to the Contractor incident to a refund of taxes shall inure to the benefit of the Government to the extent that such interest was earned after the Contractor was paid or reimbursed by the Government for such taxes.

(3) Invoices or vouchers covering any adjustment of the contract price pursuant to this paragraph (d) shall set forth the amount thereof as a separate item and shall identify the particular tax or duty involved.

(4) This paragraph (d) shall not be applicable to social security taxes; income and franchise taxes, other than those levied on or measured by (i) sales or receipts from sales, or (ii) the Contractor's possession of, interest in, or use of property, title to which is in the Government; excess profits taxes; capital stock taxes; unemployment compensation taxes; or property taxes, other than such property taxes, allocable to this contract, as are assessed either on completed supplies covered by this contract, or on the Contractor's possession of, interest in, or use of property, title to which is in the Government.

(5) No adjustment pursuant to this paragraph (d) will be made under this contract unless the aggregate amount thereof is or may reasonably be expected to be over $100.

(e) Unless there does not exist any reasonable basis to sustain an exemption, the Government upon request of the Contractor, without further liability, agrees, except as otherwise provided in this contract, to furnish evidence appropriate to establish exemption from any tax which the Contractors warrants in writing was excluded from the contract price. In addition, the Contracting Officer may furnish evidence appropriate to establish exemption from any tax that may, pursuant to this clause, give rise to either an increase or decrease in the contract price. Except as otherwise provided in this contract, evidence appropriate to establish exemption from duties will be furnished only at the discretion of the Contracting Officer.

(f)(1) The Contractor shall promptly notify the Contracting Officer of all matters pertaining 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.

(2) Whenever an increase or decrease in the contract price may be required under this clause, the Contractor shall take action as directed by the Contracting Officer, and the contract price shall be equitably adjusted to cover the costs of such action, including any interest, penalty, and reasonable attorney's fees.

§ 1-11.401-3 Supplementary clauses.

(a) Contracts performed in possessions of the United States or Puerto Rico. When a contract will be performed in whole or in part in a possession of the United States or in Puerto Rico, and either the clause set forth in § 1-11.401-1 or that in § 1-11.401-2 is