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Monday, April 8, 2013

WSJ: Taxing Lunch at Google and Facebook?

GoogleWall Street Journal:  Silicon Valley's Tax-Free Free Lunch, by Mark Maremont:

Debate Emerges Over Whether Daily Fringe-Benefit Meals Are Taxable; Issue Is Now on IRS's Radar

When outsiders visit Silicon Valley, the first thing they often notice is the food: Cafeterias brimming with free gourmet meals and snacks offered to employees of Google, Facebook, and other technology firms.

But not all is as it seems in the buffet line. There is growing controversy among tax experts about how to treat these coveted freebies. The IRS also has been focusing on the topic, according to attorneys who practice in the area, examining whether the free food is a fringe benefit on which employees should pay additional tax.

Tax rules around fringe benefits are complex, but in general they categorize meals regularly provided by an employer as a taxable perk, similar to personal use of a company car. That leads several tax experts to wonder if some companies providing free food may be skirting the rules.

"I clearly think it ought to be taxable income," said Martin J. McMahon, Jr., a tax-law professor at the University of Florida, who argues that in most cases the meals are really part of a compensation package. 

Other lawyers point to an exception that allows meals to remain untaxed if they are served for a "noncompensatory" reason for the "convenience of the employer." The exception generally has been applied to workers in remote locations or in professions where reasonable lunch breaks aren't feasible. But these lawyers argue that some technology firms could qualify, in part because free food encourages longer work hours and is a crucial part of Silicon Valley's collaborative culture. ...

Google has more than 120 cafes world-wide serving over 50,000 meals a day, according to its website, which says the aim is to foster collaboration and healthy eating. A spokeswoman declined to comment on the tax treatment of employee meals. Several former employees who recently left Google said the company didn't include the value of the meals in their paystubs or in W-2 tax statements. ...

"I buy my lunch with after-tax dollars," said Mr. McMahon, the University of Florida professor. "And I have to pay taxes to support free meals for those Google employees."

Still, an IRS crackdown could raise hackles in the influential technology industry, and generate concerns that the federal government is interfering—for relative pocket change—with a culture that has made Silicon Valley a world leader. "There are real benefits for knowledge workers in having unplanned, face to face interaction," and free food helps facilitate that, said Victor Fleischer, a tax-law professor at the University of Colorado, who argues that aggressive enforcement of tax laws might be poor public policy in this case....

What would a food tax on Google's meals look like for the average employee? Assuming a fair-market value of between $8 and $10 per meal, a Googler chowing down two squares a day could get dinged for taxes on an extra $4,000 to $5,000 a year.

Wall Street Journal:  Is Your Lunch a Taxable Event?, by Mark Maremont:

The legal debate over whether employers can provide tax-free meals centers on a long-standing exception allowing the practice if the food is served for the "convenience of the employer."

In written materials, the IRS defines that as an unusual circumstance that generally applies only when employees can't reasonably buy outside food. Among the examples the agency has given: Workers at an offshore oil rig; hospital emergency personnel; and bank tellers with a short window for lunch during the busiest time of day. Meals provided primarily for a compensatory reason, such as to promote morale or attract prospective employees, are taxable, the IRS has said. ...

[T]he government conceded a court dispute involving sharply discounted meals provided to employees at a New Jersey office campus. The employer argued that traffic and other factors made it impractical for staffers to get outside lunches, according to attorneys involved in the case.

Some lawyers say today's Silicon Valley firms also could qualify for the exception. They argue that there are insufficient nearby eating spots given the number of employees, and that many staffers lack cars, limiting choices to those within walking distance. It is also for the convenience of the employer, they argue, if workers collaborate more, take less time to eat, and consume healthy food rather than the surrounding fast-food options.

"My sense is, for someplace located on an isolated campus, you could make the argument with respect to lunch," said Lawrence A. Zelenak, a tax-law professor at Duke University. He said employers taking that position are "being pretty aggressive, but the law isn't as clear as it should be." Mr. Zelenak added that meals provided outside normal work hours, such as free breakfasts and dinners, probably should be subject to tax

(Hat Tip: Gregg Polsky.)

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Comments

This is a no brainer. Giving Google employees free food to encourage longer work hours and facilitate a collaborative work culture is no different than providing employees with cash incentives to the same ends. Torturing the "convenience of the employer" language of section 119(a), so as to recast these free meals as "noncompensatory," exalts form over substance.

Posted by: Jake | Apr 8, 2013 2:14:23 PM

A tax that Victor Fleischer is against, what a rarity. But of course it makes perfect sense, since Google and its ilk are reliably progressive companies. Why any concern that government would be interfering with an industry - liberals seem to favor it everywhere else. Now if a big bad oil company gave free lunch to its employees, there would be no question of taxing those meals...

I am a libertarian and believe in minimal taxation, but I also am against special tax breaks for any industry. If Google is giving free lunches to all its employees, then they should get no advantage over their peers in other industries who do not get free lunches - tax away Uncle Sam!

Posted by: Todd | Apr 8, 2013 3:22:52 PM

"I buy my lunch with after-tax dollars," said Mr. McMahon, the University of Florida professor. "And I have to pay taxes to support free meals for those Google employees."

!?!?

Could someone explain how Mr. McMahon's tax dollars pay for the "free" meals? Is Google buying them with foodstamps or something?

Posted by: Ben | Apr 9, 2013 8:33:23 AM

I'd like to see cash distributions the only deductible employee expense. Salary, travel compensation, health care, all of it. It's either provided in the form of cash or the employer can't deduct it.

Posted by: Dan | Apr 9, 2013 9:20:23 AM

How long before the Democrats call for "tax reform " barring meal deductions for hamburgers, french fries, and drinks over sixteen ounces? Deductions only for range free chickens and organically grown fruits.... Might as well go after the President and Congress, too, who get free meals really at the expense of taxpayers. Parties, too. Another Exclusive Party at WH -- at Taxpayer Expense. Yeah, like that would happen, just like Obamacare is for the "little people" but not them.

Posted by: Woody | Apr 9, 2013 10:00:09 AM

"I buy my lunch with after-tax dollars," said Mr. McMahon, the University of Florida professor. "And I have to pay taxes to support free meals for those Google employees."

Yeah, and most universities pay no income taxes and no property taxes, and many of their employees receive free housing in the dormitories, likewise free of income tax and property tax.

On the other hand, the old days of company cars and your employer buying you all sorts of things so you can avoid taxes on them, wasn't really efficient either. At least on-campus housing and on-site free meals are convenient for the employer.

Posted by: DWPittelli | Apr 9, 2013 10:08:02 AM

To encourage them to work long hours...... unless the employee is in a managerial position aren't those companies potentially violating overtime laws?

Posted by: cubanbob | Apr 9, 2013 11:06:08 AM

Large companies have for years established cafeterias for the convenience of their employees, but have required employees to pay. Often the companies subsidize to some extent - covering the cost of equipment and space that a restaurant would need to recover, but it is clear this is for the advantage and benefit of the employee so they don't have to leave the premises. Even when employees leave to eat lunch outside company property, the employer will still require the employee to put in the time for which they are paid. This is a recruiting tool and is viewed by the employee as a "perk", which is just non-cash compensation.

This should be taxable, particularly for large corporations.

Posted by: Bob | Apr 9, 2013 2:50:51 PM

Todd, because democrats seem to conflate any tax deduction as a subsidy. So when google employees don't pay their fair share it has to come from somewhere else. I agree with the position that the meals should be taxed as income.

Posted by: mike | Apr 9, 2013 2:56:01 PM

Software engineers tend to be at the businessplace all hours of the day and night. So you get your choice:

1. Engineers get lost in projects and starve, thus causing mistakes and loss of productivity.

2. Engineers eat whatever crud they manage to grab, and get unhealthy through absentmindedness. There was a guy in my dorm who got scurvy.

3. Engineers bring snacks and food to their work areas and make a big mess, or they go to restaurants to eat and yak about their projects in front of industrial spies.

4. Google fuels the engineers to keep them going, just like Oxford and Cambridge feed their dons and students to keep them alive.

Posted by: Maureen | Apr 9, 2013 10:43:35 PM

@Jake

"I am a libertarian"
"tax away Uncle Sam!"

This is a contradiction if I've ever seen one. Got some bad news Jake, you might not actually be a libertarian...

Posted by: Diashi | Apr 10, 2013 1:39:18 PM

If I got free meals, I'd take them. But if I didn't, I'd bring my own lunch that I made at home. Free meal is worth $8 - $10 at a restaurant. But a lunch I made at home would cost me $1 - $2. So how am I to be taxed? Is the benefit worth $2 or $10?

Posted by: Gustav | Apr 10, 2013 2:31:28 PM