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.
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