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July 13, 2021

How Manufacturers Can Save on Sales/Use Tax for Government Contracts

Manufacturing companies that sell equipment to the federal government or government contractors could be eligible for a tremendous tax benefit. The opportunity can help reduce sales/use taxes paid for consumables purchased in support of such government contracts.

The federal government is the single largest purchaser of goods and services and is not subject to sales/use tax. If a manufacturer is needlessly paying tax on overhead purchases, the government is indirectly paying that tax through the manufacturer’s costs.

What Manufacturers May Be Overlooking

Federal Acquisition Regulations (FAR) govern the US Government’s purchases and these regulations are strictly followed. Many federal contracts provide for title transfer of contractor-acquired property. There are specific clauses that can be present in a contract either by language or reference to the clause number. This information can easily be overlooked, unless the manufacturer/contractor knows the clause number and what it represents. The clause numbers vary, depending on the type of contract: fixed price, cost reimbursement, etc.

Utilizing Tax Savings for a Competitive Advantage

In many states, “title transfer” is equivalent to “sale”, and therefore is a purchase for resale by the manufacturer/contractor. Transfer of possession is not necessary for the resale exemption to apply. Items on which the exemption can apply are: office supplies, computers, copiers, some fixed assets, and more. The top government manufacturers/contractors take advantage of this opportunity and can factor the savings into their bids, thereby outbidding those manufacturers who are unaware of the opportunity, or who do not take advantage of it. Many manufacturers are also unaware that they can also be reimbursed by the federal government for the cost to acquire the refund as it reduces the cost the federal government pays.

The Anders State and Local Tax Services Group has the expertise to pursue these refunds and can do so on a contingency basis. Contact an Anders advisor below to learn more about a reverse audit for your business.

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