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Office «f *-te Inspector General
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Agency -«« Washington, DC iG1?
Report of Audit
E1Z27-11-B027-71572
REVIEW OF CONTROLS
OVER EPft PROPERTV IN
CONTRACTORS' POSSESSION
tt^-vrv. Room 2404
401 W Street, S.B.
r
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TABLE OF CONTENTS
PAGE
INTRODUCTION 1
SCOPE AND OBJECTIVES 1
SUMMARY OF FINDINGS 3
ACTION REQUIRED 5
BACKGROUND 5
FINDINGS AND RECOMMENDATIONS 8
1. EPA MAY BE UNNECESSARILY PAYING STATE SALES TAXES 8
2. RTF'S CONTRACTORS HAVE NOT REPORTED ALL EPA PROPERTY PURCHASES
WHICH SHOULD BE REPORTED 13
EXHIBIT A COMPUTATION OF ESTIMATED SALES TAXES AND
RESULTANT INDIRECT COSTS AND FEES WHICH
ARE PAID ANNUALLY ON ALL CONTRACTOR PURCHASES
OF EPA PROPERTY 19
APPENDIX 1 -- JUNE 12, 1987, RESPONSE TO DRAFT AUDIT REPORT
FROM THE DIRECTOR, FACILITIES MANAGEMENT AND
SERVICES DIVISION 23
APPENDIX 2 DISTRIBUTION OF AUDIT REPORT 26
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UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON, D.C. 20460
4123
OF
THE INSPECTOR GENEPAL
MEMORANDUM
SUBJECT: Audit Report E1Z27-11-0027-71572
Review of Controls Over EPA Property
In Contractors' Possession
FROM: Kenneth D. Hockman
Divisional Inspector General for Audit
Internal Audit Division (A-109)
TO: William Finister, Director
Facilities Management and
Services Division (PM-215)
David J. O'Connor, Director
Procurement and Contracts
Management Division (PM-214)
INTRODUCTION
On March 30, 1987, we issued Audit Report Number 70964 to the Director,
Office of Administration and Resources Management (OARM), Research.
Triangle Park (RTP). That report, entitled Review of RTF's Controls
Over EPA Property in Contractors' Possession, contained issues which need
to be addressed by Headquarters officials. Those issues are the subject
of this report. To provide a perspective on the scope of our audit work
at RTP, we have included pertinent sections of the March report.
SCOPE AND OBJECTIVES
We reviewed the controls over EPA property in contractors' possession
which were exercised by OARM, RTP. Our objectives were to determine
whether: (a) RTP's inventory of its property was accurate; (b) RTP had an
effective system for ensuring that contractors were complying with Agency
policies and procedures; -and (c) RTP personnel were acting timely to
repossess, reallocate, or dispose of its property when the original contrac-
tors no longer needed it.
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We performed our review in accordance with the Standards For Audit Of
Governmental Organizations,Programs, Activities AndFunctions aspromulgated'
by the Comptroller General of the United States {1981 Revision). We performed
our review at EPA's RTP facilities and the offices of four contractors who
accounted for nearly 80 percent of EPA property for which the RTP Property
Administrator was responsible. Two of these contractors conducted extensive
business at RTP and the other two conducted extensive business in California.
To accomplish our audit objectives we examined:
1. applicable regulations and EPA guidance documents, including
various editions of the EPA Guide for Control of Government
Property by Contractors (Property Guide);
2. contractor file records, particularly purchase documentation, for
one judgmentally selected contract from each of the four contrac-
tors; and
3. the Property Management Section files at RTP.
We compared RTP's inventory with contractors' annual and final inventories
for 29 judgmentally selected contracts, and conducted in-depth interviews
with the RTP Property Administrator, his staff and the property managers
of the four contractors. To determine whether RTP's automated inventory
reports accurately reflected information reported by contractors, we
compared source documentation to the reports. In addition, we discussed
the payment of state sales tax for equipment purchases with the Director,
Sales and Use Tax Division, Department of Revenue, State of North Carolina.
We conducted our field work from June 1986 through January 1987. Our review
included an evaluation of whether the internal control procedures and
practices at RTP were sufficient to provide reasonable assurance that EPA
property in contractors' possession is monitored and safeguarded. The key
internal controls are described in. the Background section. Weaknesses in
the controls are summarized on the next page and detailed later in this
report. No other issues came to our attention which we believed warranted
expanding the scope of the audit.
Although we performed our audit at RTP, two issues came to our attention
which require corrective action by Headquarters. For one issue concerning
the payment of state sales taxes, we received assistance from the Office
of General Counsel, Inspector General Division, and interviewed officials
of the Headquarters' Procurement and Contracts Management Division (PCMD).
We discussed the other issue, which involves revisions to the Property
Guide, with officials of the Headquarters' Facilities Management and Services
Division (FMSD).
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Methodology Used In Developing Estimate of Unnecessary Sales Tax Payments
In Finding Number 1, we discuss the payment
property purchases and provide an estimate
in exhibit A. Our estimate is noj: based on
of all EPA contracts. Therefore, we cannot
to the universe. Nevertheless, we thought
our best estimate based on the data we revi
on a number of assumptions, and changes to
affect the results of our calculation. Our
are presented in exhibit A.
SUMMARY OF FINDINGS
of state sales taxes on EPA
of unnecessary annual payments
a statistically valid sample
validly project our findings
it would be useful to provide
ewed. Our estimate is based
any of these assumptions would
assumptions and methodology
To prevent the Agency from paying contractors for costs which do not
have to be incurred, PCMD needs to develop a system for determining
whether contractors must pay state sales taxes on purchases of EPA
property. In addition, to improve control over contractor-purchased
property, FMSD needs to clarify guidance concerning how contractors
report purchases of component parts and software.
RTP paid state sales taxes which it did not need to pay because EPA
contracting officials in Headquarters and at RTP, as well as DCAA auditors,
did not review state sales tax regulations or recognize inconsistent tax
payment practices of contractors. While not a statistically valid projec-
tion, we estimate that EPA could have unnecessarily paid approximately
$433,000 _J/of these taxes each year under all contracts (including contracts
that were the responsibility of the other Agency property administration
offices in Cincinnati, Ohio and Washington, D.C.).
Further, we found that RTP contractors had not reported all of their EPA
property purchases for various reasons including:
a. EPA's Property Guide did not require contractors to report
acquisitions of component parts which we believe should be
reported;
b. Contractors' internal reporting procedures did not ensure that
contractors' property officers were alerted when EPA property
was delivered;
c. RTP did not keep contractors informed when reporting criteria were
revised by EPA; and
d. One contractor followed a policy of not reporting software
acquisitions.
Estimate includes indirect costscand fees for equipment purchases
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We were not able to estimate the total amount of reportable property
that was not reported. However, we found that the contractor with the
most RIP property in its possession did not report $65,367 (27 percent)
of the $240,291 of reportable purchases which we reviewed; and another
contractor did not report $40,129 (22 percent) of the $184,537 of report-
able purchases which we reviewed.
According to the RTP Property Administrator, the underlying cause of all
the deficiencies has been a shortage of staff. He stated that he did not
have enough resources to accomplish all internal control policies and
procedures in the prescribed timefrarnes, including informing contractors
of new reporting requirements, requesting and reconciling contractors'
annual and final inventories with RTP's inventories, and providing dispo-
sition instructions to contractors.
In our report to RTP, we made a number of recommendations to improve con-
trols. In commenting on our report, the Director, OARM, RTP, agreed with
our findings and recommendations, and described actions, including a
reorganization of the Property Management Branch, to correct the conditions
we identified.
This report recommends: (1) establishing a system for ensuring that con-
tractors do not pay state sales taxes unnecessarily, and (2) revising the
Property Guide. These actions need to be taken by Headquarters officials.
FMSD and PCMD Comments and PIG Evaluation
We sent a draft of this report to the Director, FMSD, and the Director,
PCMD, on April 10, 1987. The Director,- FMSD, provided a consolidated
response on June 12. We discussed the response with FMSD and PCMD offi-
cials in exit conferences on June 29 and July 15, respectively. The
Director, FMSD, generally agreed with the intent of the recommendations in
our draft report. FMSD and PCMD have initiated various actions to address
the deficiencies including:
-- proposing to insert a clause in appropriate contracts and solicita-
tions requiring the contractor to request that the cognizant
state tax authority determine whether sales taxes must be paid on
equipment purchases;
-- revising the Property Guide to require contractors to report
component parts; and
-- instructing contractors to report purchases of software as
component parts of a computer system.
We believe these actions and those described later in this report will, if
properly implemented, correct the deficiencies identified during our audit.
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ACTION REQUIRED
In accordance with EPA Directive 2750, the action official is required to
provide this office a written response to the audit report within 90 days
of the audit report date. As required by EPA Directive 2750, Chapter 8,
Paragraph 3{a), the response should refer to milestone dates for the
planned corrective actions. We have designated the Director, FMSD, as the
action official for this report.
BACKGROUND
Contractors are normally required to furnish all resources necessary to
perform EPA contracts. However, EPA often determines that it is in the
interest of the Government to provide personal property to a contractor
or authorize the contractor to manufacture or acquire such property.
Government-furnished property may be acquired directly by EPA and furnished
to the contractor, transferred from EPA's in-house inventory, or transferred
from another contract with the same contractor or a different contractor.
EPA's property control system is primarily intended to control nonexpendable
EPA property._ EPA's most recent Property Guide defines nonexpendable property
as:
Property other than furniture, which has a unit
cost of $50 or more including accessories; is
complete in itself; does not lose its identity
or become a component part of another item when
placed in use; is of a durable nature with an
expected life of 1 year or more; and must be
accounted for by the contractor and reflected
in EPA property records. Furniture is reportable
regardless of cost.
Property administration is the responsibility of three offices located in
RTP, Headquarters, and Cincinnati. Each office has a Property Administrator.
The RTP Property Administrator has two assistants who devote 90 percent of
their time to monitoring property transactions. All EPA property purchased
by Superfund contractors is the responsibility of the Property Administrator
in Headquarters.
EPA's computerized Personal Property Accounting System (PPAS) is used to
track nonexpendable property in contractors' possession. On June 12, 1986,
the PPAS for RTP showed 6,976 items of EPA property, costing $28.6 million,
in the possession of 50 contractors, under 105 contracts. EPA's system for
controlling this property includes eight key features:
- authorization;
- education of the contractoV;
- identification of property by decal number;
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- notification of property receipt;
- itemization of charges for property purchases on separate invoice
1 ine;
- submission of invoice and disclosure report to cognizant
project officer for approval';
- submission of annual inventory report; and
- submission of final inventory report.
The first step in EPA's property control system involves contractors
obtaining EPA's authorization before they can be furnished nonexpendable
government property or purchase nonexpendable property for use under EPA
contracts. Authorization is given in the original contract or subsequent
modifications. The cognizant EPA contracting officer provides the authori-
zation, based on a written justification of need which is prepared by the
cognizant project officer. .Control procedures require that EPA's contracts
management divisions provide the Property Administrators with copies of
all contracts and modifications which authorize property acquisitions.
Upon receipt of these authorizations, the Property Administrator begins a
file and prepares to monitor the pending acquisitions. (Depending on the
urgency of the situation, contractors may purchase property while
simultaneously seeking EPA approval).
A second critical area for controlling Agency property is EPA's procedure
for educating contractors about their obligations. Once EPA's Property
Administrator has been informed that a contractor is authorized to obtain
EPA property, the Property Administrator contacts the contractor, explains
the role of EPA's Property Administrator and provides the contractor with
a copy of the current Property Guide. This Property Guide tells the contrac-
tor what he is required to do.
Third, the Property Administrator also provides the contractor with a supply
of sequentially numbered EPA decals which the contractor will subsequently
affix to property as it is acquired. A decal number identifies property
throughout its useful life.
Fourth, EPA's property control system calls for the contractor to report
the acquisition of EPA property to EPA's Property Administrator via a
specific report form. Different forms might be required depending on
whether the acquired property was purchased by EPA and shipped to the
contractor, transferred from another contract, or purchased by the
contractor (in this last case, EPA Form 1730-1 should be submitted).
Each form describes the property and shows the cost of the item as well
as its EPA decal number. Once property is reported, EPA's property
control system calls for the Property Administrator to confirm, that the
property is authorized and record it in EPA's PPAS.
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Fifth, in those instances when a contractor purchases property, EPA's
property control system requires the contractor to show the total of
all reportable property purchases on a separate invoice line item, and to
identify the purchased property by submitting EPA Form 1730-1 (Report)
with the invoice.
Sixth, before a payment is made, RTP's Financial Management Division should
submit the contractor's invoice to the cognizant project officer for his
approval, along with the relevant Report.
After property has been authorized, acquired, and reported, and the
contractor has been reimbursed, EPA's property control system requires
that the contractor make a periodic status report to EPA. Specifically,
on the contract's anniversary date, the contractor must submit an annual
report of each contract's EPA inventory and certify whether all property
items are still required for continued contract performance.
The last' key feature in EPA's property control system is that the contractor
must submit a final inventory to EPA's Property Administrator within 30 days
after the completion of the period of performance or delivery of all required
items under the contract. This inventory covers reportable property (non-
expendable property) as well as nonreportable property (generally, property
that costs less than the prevailing reporting threshold or has a useful
life of less than 1 year). After receipt of the final inventory, the
Property Administrator generally must consult with the project officer to
decide on the disposition of the property.
Two offices in Headquarters are involved with issues discussed in this
report. FMSD, among its other duties, is responsible for issuing revisions
to EPA's Property Guide. PCMD develops Agency procurement policies and
regulations and provides technical guidance to all field contracting
operations.
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FINDINGS AND RECOMMENDATIONS
1. EPA MAY BE UNNECESSARILY PAYING STATE SALES TAXES
EPA may be unnecessarily reimbursing contractors who paid sales taxes on
property purchases because contracting officials in Headquarters and
RTP, as well as.DCAA auditors, did not review sales tax regulations or
recognize inconsistent tax payment practices of contractors.
EPA's Acquisition Regulations (EPAAR), the Property Guide, and the
Contracts Management Manual do not contain any information regarding
state sales tax obligations. The Federal Acquisition Regulations (FAR)
provide general guidance concerning these obligations. FAR 29.302(a)
states:
Generally, purchases and leases made by the Federal
Government are immune from State and local taxation.
Whether any specific purchase or lease is immune, however,
is a legal question requiring advice and assistance of the
agency-designated counsel.
However, with respect to property purchases by contractors or subcon-
tractors, FAR 29.303(b) states:
When purchases are not made by the Government itself, but
by a prime contractor 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 local law
involved, or, in some cases, the transaction may not in fact
be expressly exempt from the tax.
Essentially, the tax provisions of each state nust be considered before
a determination can be made of whether sales taxes should be paid in a
particular state on a contractor's purchase of property on EPA's behalf.
We visited two contractors who conducted extensive business in North
Carolina. One of these contractors did not pay state sales taxes on its
purchases of EPA property, but the other did. We estimate RTP reimbursed
this contractor nearly $75,000 in 1986 because of this company's sales tax
payments. (The first column of exhibit A shows this computation.) We have
concluded that these taxes should not have been paid. Our conclusion is
based partly on statements which were made to us on December 3, 1986, by
the Director, North Carolina Sales and Use Tax Division, who said that
North Carolina sales taxes do not need to be paid on contractor purchases
of equipment or materials when title to the property always vests with EPA.
Our conclusion is also based on correspondence, dated August 16, 1979,
from a North Carolina Revenue Field Auditor to an EPA contractor:
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We have reviewed the facts concerning your relationship with
EPA, and your ability to act as an agent/contractor, on EPA's
behalf. It appears that you ACS correct in not paying Sales
Taxes on any items consumed in performance of your contract
[such as materials and supplies]. It is also correct for
you not to pay Sales Taxes on equipment whose title vests
in the Federal Government. In both instances above,
[the compa'ny] passes the costs relating to acquisition of
these articles directly to the Federal Government, and
title never vests in [the company].
The business manager of the contractor we visited stated that he paid North
Carolina sales taxes on purchases of EPA property because he thought the
taxes should be paid. The Acting Chief, Procurement Branch B, Contracts
Management Division (CMD), RTP, stated that none of the contractor's
sales tax payments had been questioned by DCAA auditors.
In addition to the North Carolina contractors, we visited two contractors
who conducted extensive business in California. We found that both of these
contractors had exemptions from paying state sales taxes on their purchases
of EPA property. However, one of' these contractors paid a small amount ($367)
of California sales taxes on 5 of the 23 EPA property purchases we reviewed.
This contractor's Accounting Manager acknowledged that the sales taxes should
not have been paid. She explained that the company would sometimes avoid
controversy and pay sales taxes if the vendor's sales representative insisted
that they be paid.
It was not practical for us to visit contractors from the other 48 states,
or contact tax officials from these states to determine whether sales
taxes should be paid. However, we believe it is reasonable to assume
that state tax policies of other states may be similar to the two states
we reviewed. Accordingly, we developed our best estimate of sales t.ixes
EPA may be paying unnecessarily.
Our best estimate is that approximately $433,000 in sales taxes are being
paid annually that should not be paid. Our estimate covers all contractor
purchases of EPA property, including property which is the responsibility
of EPA's Property Administrators in Washington, D.C. and Cincinnati, Ohio.
We included this property in our estimate because the Property Administrators
at both locations told us they did not know any reason why the sales tax
issue would not be as relevant to their contractors as it is to the RTP
contractors. We emphasize that our estimate is not a scientific or
statistically valid estimate. It is partly based on information which was
obtained from a judgmental sample. It is also partly based on several key
assumptions, and changes in any one assumption could have a significant
impact on our estimate. In addition, our estimate does not include
adjustments for several factors which would have been included if we
had been able to quantify them. Sxhibit A details these factors, our
assumptions, and our complete methodology.
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We discussed the sales tax issue in detail with an RTP contract specialist;
the Acting Chief, Procurement Branch B, RTP; and the Attorney-Advisor,
Office of General Counsel, RTP. They accompanied us to a meeting with the
Director, North Carolina Sales and Use Tax Division. During the meeting,
the Director explained the conditions under which contractors would be
exempt from payin'g sales taxes. He subsequently explained these conditions
in a letter to the Acting Director, CMD, RTP. In February 1987, CMD began
to notify contractors that.they should request exemptions from payments
of North Carolina sales taxes.
In regard to sales taxes paid on closed contracts, the RTP Attorney-Advisor
told us that there is no legal basis for recovering these expenditures.
In regard to sales taxes of states other than North Carolina, the Acting
Director, CMD, RTP, said that the availability of exemptions for its
contractors had not been resolved.
Since the issue affects all instances in which a contractor purchases
property on EPA's behalf, we discussed contractors' payments of state
sales taxes with PCMD officials during our audit field work. The
officials told us that they would have to study the issue.
PCMD COMMENTS
In his memorandum of June 12, the Director, FMSD, who coordinated FMSD's
and PCMD's response to the draft report, stated that the determination of
eligibility for a tax exemption can only be made after analyzing state
tax law. The Director pointed out a number of factors, including the
nature of the product to be purchased; the place and terms of delivery;
and the applicable state law, are involved in reaching the determination.
For this reason, PCMD proposes to develop and publish for comment a clause
which will require the contractor to seek a determination from the state
tax authority concerning whether the firm is exempt from the payment of
state sales tax. This clause will be included in appropriate solicitations
and contracts.
According to the Director, it would not be practical or economically
feasible to use Agency resources to iiake determinations on a case-by-case
basis. Concerning our draft report recommendation on ". . . Providing
contractors.with guidance on how to obtain such exemptions," the Director
maintained such guidance would be impractical since exemption determina-
tions must be made on a case-by-case basis. In response to our draft
report recommendation that PCMD develop a system for monitoring whether
contractors are complying with determinations, the Director stated that
PCMD will require contractors to show state and other sales taxes as a
separate item on invoices submitted to EPA.
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01G EVALUATION OF .PCHD COMMENTS
In developing our draft report recommendations on this issue, we recog-
nized PCMD could choose from a number of options to ensure that
exemption determinations were made. The options included using Agency
contracting and legal personnel to contact state tax authorities and/or
requiring contractors to make such contacts. The Director proposes to
take the latter approach.
We believe the chosen approach will be beneficial as long as PCMD does
not rely exclusively on a contractor's efforts. One contractor we review-
ed paid state sales taxes unnecessarily for many years because the firm,
after contacting the state, failed to provide the state enough facts to
obtain a correct determination. To protect the Government's interest,
PCMD should consider reviewing a contractor's request for determination
before it is submitted to the state tax authority. More importantly, if
a contractor later reports that it must pay sales taxes, PCMD should
perform a follow-up review, except for circumstances such as those descri-
bed below. For example, PCMD might determine whether .the state tax
authority knows that EPA will: (a) authorize the contractor's purchase,
(b) reimburse the contractor for the precise amount of the purchase, and
(c) retain title to the property and list the property as an asset on
Agency records. Follow-up reviews may not be necessary when: (1) the
characteristics of a current contract are the same as those of another con-
tract on which the state has already made a determination, and (2) sales
tax payments are expected to be small.
Depending on the wording of the proposed contract clause, contractors may
not need guidance concerning how to request an exemption. Until such time
that the clause becomes standard contracting procedure, we are recommending
that the Director assist contractors in obtaining determinations.
Finally, we believe that requiring a contractor to show sales tax payments
on a separate line on the firm's invoice will assist the Agency, including
those who audit contracts, in determining whether the contractor is acting
in accordance with the state's determination. Because this requirement is
not in place and PCMD has not developed a procedure for reviewing contractors'
invoices, we are making a- recommendation in this report.
Based on PCMO's comments, we made minor revisions to our draft report recom-
mendations. (See PCMD's comments on page 24 for the draft report recommen-
dations). These revisions did not change the meaning of the recommendations
in our draft report. Since PCMD plans to rely on contractor-obtained
determinations, we have clarified our draft recommendation that PCMD develop
a plan to determine the availability of exemptions. Given PCMD's plans,
we are recommending that PCMD perform a follow-up review of contractor-
obtained determinations, should the circumstances warrant it.
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RECOMMENDATIONS
We recommend that the Director, PCMD, ensure that contractors do not pay
state sales taxes unnecessarily when purchasing property for E?A contracts.
To accomplish this objective, we recommend tiiat the Director:
1. assist contractors in obtaining exemption determinations, whenever
such assistance is requested;
2. perform follow-up reviews, as warranted, of determinations that
sales taxes should be paid; and
3. determine whether contractors who pay sales taxes are complying
with state determinations.
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2. RTF'S CONTRACTORS HAVE NOT REPORTED ALL EPA PROPERTY PURCHASES MICH
SHOULD BE REPORTED - _
None of the four contractors whom we visited reported all of their EPA
property purchases which should be reported. As a result, RTP personnel
did not have the opportunity to confirm that the property was authorized,
and the property was not recorded in RTF's inventory. When property does
not appear in RTP's records, the Property Administrator and cognizant
project officer" are not able to monitor its use or deterr.iine whether it
is still needed.
EPA's Property Guide states:
Upon receipt of property acquired with contract funds, the
contractor shall complete EPA Form 1730-1, 'Report of
Nonexpendable Government Property Acquired by Contractor,'. . .
and forward it to the Property Administrator.
The Property Guide, dated April 1986, defined "nonexpendable property" as
property which has a unit cost of $50 or more including
accessories; is complete in itself; does not lose its identity
or become a component part of another item when placed in use;
is of a durable nature with an expected life of T year or more;
. . . [emphasis added].
Only contractor purchases of nonexpendable property must be authorized in
advance by EPA or reported to the Property Administrator.
We could not readily estimate the total amount of EPA property purchases
that were not reported to RTP. However, the RTP contractor with the most
EPA property in its possession (Contractor X) did not report $65,367 (27
percent) of its $240,291 of reportable purchases which we reviewed; and
the RTP contractor with the second most EPA property (Contractor Y) did
not report $40,129 (22 percent) of its $184,537 of reportable purchases
which we reviewed. These two contractors accounted for 66 percent of
RTP's inventory of EPA property in contractors' possession on June 12,
1986.
There were many different reasons why EPA property purchases were
not reported- including:
a. EPA's Property Guide did not require contractors to report
acquisitions of component parts which we believe should be
reported;
b. Contractors' internal reporting procedures did not ensure that
contractors' property officers were alerted when EPA property
was delivered;
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c. RTP did not keep contractors informed when reporting criteria were
revised by EPA; and
d. One contractor followed a policy of not reporting software
acquistions.
The following sections briefly discuss each of these situations.
a. Headquarters needs to amend EPA's Property Guide so that component
parts are reported!
Contractor Y did not report various property acquisitions to the RTP
Property Administrator, including:
Total Cost
(Including
Supplemental
Items)
Item Unit Price
Tylan Mass Flow Controller {4 Units) $ 700
Bioanalytical Systems Electrochemical 3,575
Detector
PVS Ternary Solvent Delivery System 7,500
DPU Multichannel Integrator 2,350
Total
$ 3,690
4,098
9,700
2,530
$20,018
These acquisitions accounted for approximately 11 percent of the contractor's
purchases which we reviewed. The contractor's property officer told us
that these acquisitions were not reported to the Property-Administrator
because they were "components to an equipment item ..." and, in accordance
with EPA's Property Guide, were not reportable.
In our opinion, the contractor's interpretation is justified by the
literal terminology in the Property Guide's definition of nonexpendable
property. However, we believe original component parts (but not replace-
ment parts), which last more than 1 year and cost more than the reporting
threshold amount, should be reported for the same reasons that other
property is reportedto help ensure that EPA's resources are used properly.
The Director, Facilities Management and Services Division at RTP, agreed
that the subject property items should be reported.
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b. RTF_'s Property Administrator needs to review contractors'
procedures forreporting acquisitions of EPA property
Contractors are required to maintain a system for controlling EPA property,
but they are not required to submit a description of their system to the
Property Administrator. Part II, paragraph A of EPA's Property Guide
states:
The contractor is required to establish and maintain . . .
a system to control, protect, preserve, and maintain,
all Government property provided under the contract.
This system is subject to review by the Property Adminis-
trator on behalf of the Contracting Officer, who may
require corrections or improvements necessary to protect
the Government's interest.
At the time of our review, Contractor Y had not submitted a descrip-
tion of its system for controlling EPA property to the Property Administra-
tor. Contractor Y's procedure required that a technician return a particular
form to the contractor's property officer (CPO) whenever the technician
affixed a decal to EPA equipment. Then the CPO would inform the Property
Administrator that EPA property had been acquired (only then could the
CPO report the decal number). However, there was no follow-up system
(other than the annual inventory) for the CPO to confirm whether the form
was always returned after the decal was affixed. The CPO told us that
the technician did not always return the form, but all such oversights
were corrected when the annual inventory, was taken. We found that certain
purchases of EPA property were not reported and the contractor was unable
to explain why. In the absence.of another explanation, we concluded
these purchases were not reported because the CPO had not been informed
by the technician that the property had arrived. These purchases amounted
to 9 percent ($16,026) of the reportable EPA property purchases which we
reviewed for this contractor.
Contractor X submitted a description of its system for controlling E5A
property. However, as shown on the following page, we found that this
contractor had not reported the cost of 27 percent (80 items for $65,367)
of its EPA property purchases which we reviewed.
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Reported Promptly Upon
Acquisition
Reported As A Result Of
Our Inquiry .
Not Reported As Of 12-20-86;
Information Being Gathered
To Complete Report
Total Purchases Reviewed
Number
of Items
56
40
40
136
55,218
J.0,149
5240,291
Cost
Percentage
73
23
100
The contractor's Property Coordinator told us that the items had
not been reported before our review because she "did not always receive
reports that purchased equipment had been received."
Before July 1986, the Property Administrator at RTP did not require
contractors to submit descriptions of their systems for controlling EPA
property. He stated he had not requested such descriptions because he
did not have the resources to review them. He further stated that only a
few contractors had submitted descriptions. However, in July 1986, the
Property Administrator began to advise contractors that they needed to
submit written descriptions of their system for controlling Govern-
ment property. By February 1987, he had requested 97 contractors to
furnish descriptions of their systems and 62 had done so. Since descrip-
tions of contractors' control systems had seldom been requested prior to
July 1986, we asked the Property Administrator how often he reviewed
these systems at contractors' sites. He stated that he was not able to
visit many sites because of limited travel funds.
c. RTP's Property Administrator needs to inform contractors when
EM's reporting criteria is revise?
RTP's Property Administrator did not send copies of EPA's revisions of
Property Guides to all contractors. As a result, some contractors did
not know that the reporting threshold amount had been lowered and some
property that should have been reported was not reported.
EPA's Property Guide, dated September 1979, specified that a contractor
should report all purchases of EPA property which cost $200 or more and
met several other requirements. A revised Property Guide, dated November
1981, raised the reporting threshold to $500. According to the RTP
Property Administrator, around January 1985, he and the EPA Property
Administrators in Cincinnati, Ohio and Washington, D.C., agreed that the
16
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reporting threshold should be lowered from $500 to $200. Therefore, when
a contract was awarded after this agreement and a copy of the 1931 Property
Guide was sent to a contractor, the RTP Property Administrator inked out
the old threshold amount of $500 and wrote in $200. In April 1986, a
revised Property Guide lowered the reporting threshold to $50.
In December 1986, only one of the six contractors whom we contacted was using
the correct $50 threshold. Three were using a $500 reporting threshold,
one was using'a $200 threshold, and one was inconsistently using both a $500
and a $200 threshold depending on which employee prepared the report form.
.At least one contractor was following the September 1979 Property Guide even
though it had been superseded for over 5 years by the Guide in effect for
the period reviewed.
The Property Administrator told us he did not have enough resources
to prepare correspondence and send new Property Guides to all contractors
every time it was revised. Instead, he mailed the current Property Guide
to contractors when a new contract was awarded.
We were unable to estimate the total amount of property which was not
reported because contractors did not know the correct threshold. When a
contractor uses a reporting threshold that is too high, there is no
efficient way for us to review purchases below the threshold, eliminate
items that should not be reported for nonmonetary reasons, and determine
the additional costs that should have been reported. Accordingly, the
only way we could readily estimate the effect of a contractor's use of a
$500 reporting threshold, instead of a $200 threshold, was to review the
reported purchases of a contractor who used the correct $200 reporting
threshold. We reviewed $77,000 of EPA property purchases by a contractor
who used the correct $200 reporting threshold and found that 11 percent
of these purchases cost between $200 and $500. Therefore, had this
contractor used the wrong threshold, the firm who have underreported its
property purchases by as much as $7,700.
d. Headquarters needs to provide a written policy for reporting
software purchases
EPA's Property Guide does not provide guidance on whether software pur-
chases should be reported. We found that Contractor Y had not informed
the Property. Administrator of any software purchases which we reviewed.
Software property items which met EPA's definition of reportable property
accounted for approximately 2 percent ($3,795) of the contractor's pur-
chases which we reviewed. The contractor did not report these purchases
because the firm considered all software, including Lotus 1-2-3 and dBase
III, to have a useful life of less than 1 year. We believe that the
Property Administrator should have the opportunity to evaluate whether
any software purchases, which may have a useful life of more than 1 year
and meet the cost reporting threshold in the Property Guide, should be
recorded in EPA's inventory. It is also our opinion that EPA's project
officers .should have the opportunity to evaluate the necessity of such
acquisitions. «
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The Director, Facilities Management and Services Division, RTP, agreed tliat
additional guidance on software accountability is needed.
FMSD COMMENTS
In his memorandum of June 12, the Director, FMSD, stated that the Property
Guide would be revised to require contractors to report component parts.
He also agreed that additional guidance on software accountability is
needed. Until the Agency can develop a comprehensive software policy,
FMSD will instruct contractors to treat software as a component part of
computer system purchases.
PIG EVALUATION OF FMSD COMMENTS
The actions planned by FMSD will, if properly implemented, correct the
deficiencies described in this finding. Because FMSD has not taken formal
action, we have retained our draft report recommendations.
RECOMMENDATIONS
We recommend "that the Director, FMSD, revise the EPA Property Guide to
require .contractors to:
1. report a property item's total acquisition cost, including
component parts that may lose their identity or become part of
another item, and
2. treat software purchases like other property items. In particular,
contractors should be directed to: (a) not assume that software
purchases have a useful life of less than one year, and (b) refer
the matter to the cognizant EPA property officer when doubt exists
concerning an item's useful life.
We included recommendations for other issues addressed in this finding in
our report to RTP.
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EXHIBIT A
Co-putatlon Of Estimated Sales Taxes And Hesuttant Indirect Costs and FMS
Annually On All Contractor Purchases Of EPA Property
C Od T R A C T 0 R
Are Paid
TOTAL HQTES
'TriSraV1' M-W*'623 S1'W-576 ^.8« W1.7B $417.5,3 $333.076 $1,303.642
Percent Of Property x
Purchased By Contractor
tmt. Of Property $1
Purchased By Contractor
Avg. tear* of Use >
Annual Purchases Of $
Report «ble Property
Ratio Of Property s
Purchased To Total
Property Reported
Total Taxable Annual $1
Purchases
Actual Tax Rate x
EstlMted Tax Paid $
For RTP Purchases
Indirect Cost Factor x
EstlMted Tax and $
Indirect Costs
.35
--
.633,318
4
408,330
'
3.61
« ^mmmrnt-
.474.071
.045
66.333 ]
1.1061
73,371
.35
493,352
4
123.338
3.61
445,250
.07
t 31.167
1.1468
35,742
.35
238.306
4
59,577
3.61
215,073
.05125
$ 11.022
1.0428
11,494
.35
161.603
4
40.401
3.61
145.348
.045
$ 6,563
1.1300
7.416
.35 .35
1<«,158 116,577
4 |
36,539 29,144
3.61 ' 3.61
131,906 105,210
.045 .06125
$ 5.936 $ 6.444 ]
1.1100 1.1940
S.589 7,694
.35
456.275
4
114,069
3.61
411,789
.045
t 18.530
1.1216
20.783
(1)
(2!
(3!
(4)
(5)
Fee Factor
EstlMted Tax, Indi-
rect Cost « Fee
1.020
1.048
1.077
1.079 1.Q754
1.0499
(6)
t 74.838 I 37.458 I 11.494 j 7.987 $ 7.109 j 8.274 $ 21.820 $163,980
__ __-_ _____ _____ ______ _______
Percent Of All EPA Property «t HTP » .39 J7)
EstfMted Tax Paid For All EPA Purchases (And Indirect Cast and Fee On Tax) $433,282 (8)
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Footnotes to Exhibit A
(1) On June 12, 1986, RTP's inventory showed that 50 contractors possessed
approximately $28.6 million of EPA property. We contacted the 10
contractors with the largest amount of EPA property. These 10 contrac-
tors accounted for $26.4 million of the total. Four of these contractors,
who accounted for approximately $18.4 million, did not pay sales taxes
on purchases of EPA property. Their inventories on June 12, 1986, are
excluded entirely from our computations. The other six contractors
paid sales taxes. Their inventories on June 12, 1986, are shown
individually in six separate columns of the table to this exhibit.
The 40 contractors whom we did not contact accounted for approximately
$2.2 nillion of the property in RTP's inventory on June 12, 1986.
However, since only 60 percent of the largest 10 contractors paid sales
taxes, we assumed that only 60 percent of the remaining 40 contractors
paid sales taxes. Accordingly, we reduced the $2.2 million figure to
$1,303,642 ($28,555,298 - 26,382,560 = $2,172,738 x .6 = $1,303,642).
This is the first figure in the last complete column of our table.
(2) Contractors did not pay sales taxes on property which was provided to
them by EPA. There is no way to readily determine the amount of inven-
tory on June 12, 1986, which was purchased by contractors (as contrasted
with property which was provided to contractors by EPA). RTP's Property
Administrator estimated that 35 percent of all EPA property in contractors'
possession was purchased by contractors. Accordingly, we multiplied the
amount of a contractor's inventory on June 12, 1986, by .35 to estimate
the amount of the inventory which was purchased by the contractor.
(3) We asked the RTP Property Administrator to estimate how long the average
property item would last. His estimate was 4 years. Therefore, we
divided our computation of contractor-purchased property by 4 to
estimate the amount of average annual purchases.
(4) RTP's inventory records do riot show contractor purchases of RT? property
items which last less than 1 year or cost less than a prevailing thres-
hold amount (these Hems are not reportable). However, sales taxes
.vere paid on these items just like the items in RTP's inventory on
June 12., 1986. To estimate the sales taxes paid, we relied on informa-
tion which was readily available in the books of a contractor whom we
visited. This contractor maintains separate accounts for EPA property
purchases which were reported and those which were not reported.
These accounts showed there were $2.61 of purchases which was not
reported for every dollar of purchases which was reported during the
company's 1985 fiscal year. Without additional information, we assumed
for estimation purposes that a similar ratio existed for all other
contractor purchases of EPA property. Accordingly, we multiplied
our computation of a contractor's purchases of reported EPA property
by a factor of 3.61 to compute the contractor's total purchases of
20
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both reported and nonreported purchases (for every dollar of reported
property purchases, there were S3. 61 in total reported and nonreported
purchases).
(5) The six contractors who are shown separately in the table of this
exhibit charged RTF a percentage (indirect cost rate), for each dollar
spent on property sales taxes, to recover their indirect costs. We
multiplied our computation of taxes paid, for each of the six contractors
shown separately in our table, by each contractor's actual indirect
cost rate. We applied an average of these six actual rates to our
computation of taxes paid for all other contractors (last complete
column of our table).
(6) Five of the six contractors who are shown separately in the table of
this exhibit charged RTP a fee percentage for each dollar of property
sales taxes and allocated indirect costs which were billed to RTP. We
multiplied our computation of these sales taxes plus allocated indirect
costs by each contractor's actual fee percentage. We then applied the
average of actual fee percentages for all six contractors to our computation
for all other contractors (last complete column of our table).
7) All of the preceding figures in our table pertain to EPA property in
contractors' possession for which the RTP Property Administrator is
responsible. Additional property is also recorded in EPA inventories
at Cincinnati, Ohio, and Washington, D.C. EPA's Property Administrators
in both of these locations told us they did not know any reason why
the sales tax issue would not be as relevant to their contractors as it
is to the RTP contractors. We estimated that contractors' EPA property
in the RTP inventory accounted for 39 percent of the property in the
inventories at all three locations by averaging the inventories on
July 18, 1985, and December 3, 1986 (past inventories cannot be reproduced;
December 3, 1986, was the date of our computation; July 18, 1985, was
the date of an inventory which we found in a file).
Property Office _ Property Cost _
7-18-85 12-3-86 Total Percent
Cincinnati $13,466,656 $30,012,484 $ 43,479,140 38
Washington, D.C. 16,232,507 9,443,636 25,676,143 23
23,990,000 20.441,159 44,431,159 39
TOTAL $53,689,163 $59,897,279 $113,586,442
100
We divided our computation of sales taxes paid on RTP property ($168,980)
by 39 percent to estimate the sales taxes which were paid on all EPA
property in contractors' possession ($168,980 * .39 = $433,282).
21
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(8)
Our estimate does not include adjustments for several factors which
would have been included If we had been able to quantify them. For
example, since our audit only covered contractors who had reported
acquisitions of EPA property, our estimate does not include any allow-
ance for sales taxes which were paid by contractors who only purchased
nonreportable property. We were unable to develop any method which we
considered reasonable for estimating taxes paid on these purchases.
The exclusion of this factor lowers our estimate.
Aside from this factor, one contractor who assists RTP in meeting its
data processing needs accounted for nearly half (49.2 percent) of the
property in RTP's inventory. Since this contractor did not pay North
Carolina's sales taxes, we excluded this company's inventory from our
computation of the sales taxes which were paid on property in RTP's
inventory. This single exclusion forced us to project that sales
taxes were not paid on nearly half of all EPA property in contractors'
possession which were recorded in EPA's Cincinnati and Washington
inventories. While our methodology is consistent, we believe this
exclusion has resulted in our estimate being significantly lower than
it should be.
On the other hand, our estimate does not include an adjustment for any
property which was purchased and used in a state that does not have a
sales tax. We do not know the net effect of the factors which we have
been unable to include in our computation. However, it is our subjective
evaluation that our estimate of unnecessarily paid sales taxes is
significantly -lower than it should be.
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UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON, D.C. 20460
JUN I 2 1987
OFFICE OF
ADMINISTRATION
AND RESOURCES
MANAGEMENT
MEMORANDUM
SUBJECT:
FROM
TO:
Draft Audit Report E1Z27-11-0027, Review of
Controls Over EPA Property In Contractors'
Possession
.
William Finister, Director
Facilities Management and Servies Division
Kenneth D. Hockman
Divisional Inspector General
Internal Audit Division
for Audits
Thank you for the opportunity to review the Draft
Audit Report, "Review of Controls Over EPA Property In
Contractors' Possession."
Improving the Agency's contractor property control
system is a major goal for this Division and we appreciate
your recommendations to us and the Procurement and Contracts
Management Division on the two issues (i.e., unnecessary
payment of state sales taxes and improving the contractor
property guide) mentioned in this report.
I have attached specific responses to each one of your
recommendations and I invite you to contact Kathi Wilson
(on 382-2144) of my staff should you require any additional
information.
Attachment
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APPENDIX i
Discussion of Recommendations
Contained in Draft Audit Report E1Z27-11-0027
Review of Controls Over EPA Property In
Contractors' Possession
Finding 1 - EPA may be unnecessarily paying sales tax.
1- RECOMMENDATION; Determine the availability of exemptions
from the payment of such taxes.
RESPONSEt Determining the availability of exemptions from
the payments of state sales taxes would require a review
of the tax laws of each of the 50 states, and possibly
an opinion from the Attorney Generals of each state
where the law with respect to the various materials,
supplies and equipment purchased by EPA contractors is
unclear or not addressed. In addition, this procedure
would involve an ongoing process of keeping current and
updating the information as states' laws change. Such
an undertaking by PCMD is not considered practical or
economically feasible.
2. RECOMMENDATION: Providing contractors with guidance on
how to obtain such exemptions.
RESPONSE: It is impracticable to publish general guidance
to contractors on how to obtain tax exemptions. A
determination on eligibility of a tax exemption must be
predicated on an analysis of the pertinent tax laws of
the individual states. Contracting Officers are required
by regulation to consult counsel on matters related to
obtaining exemptions from a tax. The determination must
be based on an analysis of such factors as: the specific
state law involved; the nature of the product to be
purchased; and the place and terms of delivery. PCMD
proposes to develop, and publish for comment, a clause
for inclusion in appropriate solicitations and contracts
to require contractors to determine if they are exempt
from any tax under the laws of the state where purchases
are made.
3. RECOMMENDATION! The Acting Director (PCMD) develop a
procedure for monitoring the payment of sales taxes by
contractors.
RESPONSE; PCMD will develop billing instructions that
require contractors to list state and other sales taxes
as a separate line item on" invoices.
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APPENDIX 1
-2-
Finding 2 - RTF's contractors have not reported all EPA property
purchases which should be reported.
1. RECOMMENDATION; Require contractors to report a property
item's total acquisition cost, including component parts
that may lose their identity, or become part of another
item.
RESPONSE; We concur with your finding and we are in the
process of revising EPA's contractor property guide to state
that component parts should be reported to the Agency's
property administrators.
2. RECOMMENDATION; Require contractors to treat software
purchases like other property items. In particular,
contractors should be directed to (a) not assume that
software purchases have a useful life of less than one
year, and (b) refer the matter to the cognizant EPA
property officer when doubt exists concerning an items
useful life.
RESPONSE; We concur with your finding that additional
guidance on software accountability is needed. The
control of software has a large number of unique questions
associated with it (not the least of which is to clearly
define what software is) that require attention from both
the Office of Information and Resources Management as
well as Agency property officials. Until some definitive
Agency software policy can be developed, however, we
will instruct all contractors to treat software as a.
component part of computer system purchases.
V-;;-
.'.25
' J
v : ,
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APPENDIX 2
DISTRIBUTION
Director, Facilities Management and Services Division (PM-215)
Director, Procurement and Contracts Management Division (PH-214)
Director, Financial Management Division (PM-226)
Comptroller (PM-225)
Associate General Counsel; Grants, Contracts and General Law Division (LE-132G1
Agency Follow-up Official, Attention: Resource Management Staff (PM-208)
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