Being new to Acquisition, I was surprised to learn recently that State and Franchise Taxes are considered allowable under FAR 31.205-41. Contractors on cost reimbursable contracts are adding these expenses on a routine basis as ODC allowable expenses. I would be interested in knowing anything about the background and reasoning behind this regulation. I just find it a little hard to understand why we reimburse the contractor for their cost, plus add profit, and pay their taxes too. Shouldn't they pay their own taxes?

Being new to Acquisition, I was surprised to learn recently that State and Franchise Taxes are considered allowable under FAR 31.205-41. Contractors on cost reimbursable contracts are adding these expenses on a routine basis as ODC allowable expenses. I would be interested in knowing anything about the background and reasoning behind this regulation. I just find it a little hard to understand why we reimburse the contractor for their cost, plus add profit, and pay their taxes too. Shouldn't they pay their own taxes?

With seven listed exceptions, taxes that are required to be paid and are paid or accrued in accordance withi generally accepted accounting principles are allowable. The first two exceptions have remained substantially the same since T.D. 5000 was published in 1940. Federal income and excess profits taxes were considered unallowable even earlier for the policy reason that reimbursement would effectively release the taxpayer from the payment of such taxes. ...

(From Karen Manos' Government Contract Costs & Pricing 2d. Ed.)

The point being, that (exceptions aside) tax payments are in fact costs and must be accounted for in order to calculate total contract costs. Disputes have arisen regarding allocabilty of such costs, but there have been very few disputes regarding the allowability of tax payments when properly allocated.

Hope this helps.