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ASBCA Says Contractor Wasn’t Exempt From State Tax

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Koprince Law LLC

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They say that two things in life are guaranteed – death and taxes – and status as a federal contractor may not exempt one from the latter, according to a recent Armed Services Board of Contract Appeals decision.

In Presentation Products, Inc. dba Spinitar, ASBCA No. 61066 (2017), the ASBCA held the contractor was liable to pay a state tax, and the government had no duty to reimburse the contractor. The problem arose from the fact that the contractor did not incorporate state tax costs into its proposed price, despite being required to pay the taxes under the terms of the contract and applicable state law.

Under the terms of the firm fixed-price contract, Presentation Products Inc. (doing business as Spinitar) was to provide the Army with installation of a video conferencing system in Fort Shafter Flats, Hawaii. The solicitation included FAR 52.212-4 (Instructions to Offerors–Commercial Items), which provides, in paragraph (k): “Taxes. The contract price includes all applicable Federal, State, and local taxes and duties.”

Hawaii places a general excise tax (or GET) on businesses rather than a sales tax on customers, which is not automatically waived when the customer is the federal government. The GET is an excise tax imposed on the gross revenues of businesses “derived from the privilege of doing business in Hawaii.” Under Hawaii’s GET, businesses are not required to collect GET from their customers, but may pass it on to customers upon agreement by the customer.

Seemingly under the belief the contract would not be subject to Hawaii’s GET, Spinitar’s proposal stated “[t]he above prices do not include any applicable sales taxes. Hawaii’s GET tax reimbursement policy implemented for federal purchases will be utilized.” The contract incorporated the terms of the solicitation, including FAR 52.212-4(k).

Upon commencing performance of the contract, Spinitar learned the goods and installation services being provided were subject to Hawaii’s GET of 4.5 percent, amounting to $7,624.14. Spinitar submitted a claim to the contracting officer, arguing that it should be reimbursed by the federal government. The contracting officer denied Spinitar’s claim.

In appealing its case to the ASBCA, Spinitar relied on the fact that it expressly noted in its price proposal that it had not included the GET in its price and that “Hawaii’s GET tax reimbursement policy implemented for federal purchases will be utilized.” Therefore, Spinitar argued, the government should reimburse Spinitar for the GET payment.

The ASBCA wrote that Spinitar “appeared to be surprised to learn from conversations with the Hawaii Department of Taxation that the GET exemption for goods sold to the federal government would not apply” to its contract. Spinitar was wrong, and “[t]he government is not liable for Spinitar’s mistake.” The ASBCA denied Spinitar’s appeal.

Government contractors often assume that all goods and services provided to the federal government are exempt from state taxes. Not so.

While this is a very complex area of law, Spinitar demonstrates that there is no blanket “federal contractor exemption” from state taxes. Accordingly, prior to submitting a proposal, federal contractors should do their homework and learn whether the contract they are bidding on will be subject to applicable state taxes. Failure to do so could leave the contractor responsible for taxes not included within the contractor’s proposed pricing–and the government won’t be liable for the contractor’s mistake.


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