Allocable to government work. The primary emphasis of DCAA guidelines in Chapter 7-1403 of the DCAM is to make sure that taxes are allocable to government work. The guidance stresses any taxes leveled on non-government work (e.g. inventory, real property, personal property) is unallowable because it is not allocable to government work. The exception to this is if the amounts involved are insignificant or if comparable results would otherwise be obtained.

Erroneous computations of taxes. The guidance indicates auditors need to be alert for whether there are questions about how claimed taxes were computed, whether there were illegal acts or simply errors. The amounts of the errors are to be identified and reported and if the error is subsequently confirmed a credit or refund should be pursued. Auditors are to follow up to assure that a proper share of credits or refunds received by the contractor are passed on to the government.

Penalties. Penalties assessed by state or local tax authorities are unallowable in accordance with FAR 31.205-15 even if they are unavoidable or incurred inadvertently. However, FAR 31.205-41(a)(3) provides a specific exception to the disallowance of penalties when incurred as a result of following the contracting officer’s direction or permission not to pay taxes assessed by a state or local government.

Interest. Generally interest associated with an intentional (i.e. intentionally paying less than is reasonably estimated to be due) underpayment of state or local taxes is unallowable per FAR 31.205-2 because the interest is considered to be "interest on borrowings." However, interest associated with an underpayment of taxes where the contractor’s intent to borrow cannot be shown is allowable. Also, if the contractor’s underpayment was directed or agreed-to by the CO, FAR 31.205-41(a)(3) allows any resulting interest. Interest incurred as a result of late payments (e.g. not paying financial obligations by the due date) is considered "interest on borrowings" and is therefore unallowable per FAR 31.205-20.

{TAG_FORM_TITLE}