December 2007

The Grinch Who Stole . . . my free lunch!

by Amy K. Frantz

Loren Goodridge, the owner of a number of Subway restaurants in Maine and New Hampshire, used to provide a free meal to his employees for each shift they worked.  Unfortunately, as the cliché goes, there is no such thing as a free lunch.  Also, to use another cliché, no good deed goes unpunished, especially when the government gets involved.  During a recent routine audit by the Maine Revenue Service, Mr. Goodridge learned that he owed $2,500 in back taxes plus $500 in interest for all those free meals he has provided over the last three years to the workers in his Maine restaurants.[1]

According to the statutes of Maine, prepared meals are subject to a 7% sales tax.  If a meal is given away free, it “represents a product that was taken out of inventory,” and is subject to a 5% use tax on the value of the meal.[2]  This law has been on the books since the 1950s, but the Maine Revenue Service has not strictly enforced it until now.  In fact, in another routine audit conducted three years ago, Mr. Goodridge indicates that the free meals were not an issue.

Here in Iowa, the state statutes are more favorable toward restaurant owners providing free meals to employees than in Maine.  In our state, “meals provided free of charge by a retail food establishment to its employees are exempt”[3] from taxes.  “However, soda pop, sweetened bottled water, and beverages with 50 % or less juice content that are given away by the restaurant are taxable to the restaurant.”[4]

Many restaurant owners in Maine believe the newly-enforced law is a result of the state government’s tight finances and the need to raise additional revenue.  The Maine Revenue Service (MRS) denies that an overspending state government is the reason for the sudden enforcement of the law.  “Peter Beaulieu, the MRS Director of sales, fuel, and special tax division, said the statute is just being applied the way it reads.”[5]  Interesting, though, that it apparently took five decades for the state’s Revenue Service to get around to reading and enforcing that particular statute.

Mr. Goodridge’s State Representative, Seth Berry (D), introduced Legislative Document (LD) 1823, “An Act to Exempt Certain Meals Provided to Food Service Employees from the Sales and Use Tax” to exempt meals provided to employees while they are working.[6]  The bill set a maximum cost to the employer of $6 per day for the meals given to employees.  Another supporter of the bill, State Representative Rick Burns (D) stated, “I know the saying is that there is no such thing as a free lunch…the State of Maine should prove the saying wrong and allow food service businesses to feed their workers without penalizing the business owner or the workers.”[7]

Despite support for the legislation from both the Maine House of Representatives and the Maine Senate, the bill died when the Legislature adjourned this year. A stumbling block in the approval process was “the bill’s fiscal note, which shows a net loss of revenue to the state of over $250,000 per year if the bill passes.”  The Maine Senate Appropriations Committee members were unable or unwilling to either cut spending or find other sources of revenue to make up for the revenue that would not be collected by the state with the passage of the Act.  This same issue is also plaguing efforts by the U.S. Congress to provide either temporary or permanent relief to the vastly-expanded number of taxpayers who will be hit by the Alternative Minimum Tax (AMT) next year, a tax that was originally enacted by Congress almost 40 years ago to target 155 wealthy Americans using the loopholes in the U.S. Tax Code to eliminate any tax liability.[8]

Following the lack of action by the Maine Legislature, some restaurant owners are doing what they can to provide meals to their workers, while complying with state law. Mr. Goodridge “plans to charge his workers 25 cents for a meal, with two pennies going to the state.”[9]  Other restaurant operators are also charging their workers at reduced rates such as ten percent of the menu prices.  Said Jeff Owen, co-owner of several Subway restaurants in Maine, “It doesn’t hurt the owners at all.  It just hurts the employees.”  Ted Stephens, the manager of one of Owen’s restaurants agrees.  “Jeff [Owen]’s doing the best he can to make sure we’re being taken care of and we’re happy,” Stephens said.  “I think that’s very fair on his end.  But if Jeff is willing to give us a meal, the state shouldn’t tax him for it.”[10]

Amy K. Frantz is Senior Research Analyst at Public Interest Institute. 

The views expressed herein are those of the author and not necessarily those of Public Interest Institute or Tax Education Foundation. They are brought to you in the interest of a better-informed citizenry.

[1] David Sharp, Associated Press, “No free lunch for restaurant workers in Maine,” USA Today, March 11, 2007, <http://www.usatoday.com/money/industries/food/2007-03-11-nofreelunch_N.htm> (March 27, 2007).

[2] Ibid.

[3] “Iowa Sales Tax on Food,” Iowa Department of Revenue, Iowa Sales and Use Tax Information, <http://www.state.ia.us/tax/educate/78516.html> (November 20, 2007).

[4] E-mail from Greg Lee, Taxpayer Services Specialist, Iowa Department of Revenue, November 20, 2007.

[5] Mechele Cooper, “State tax law affirms adage ‘nothing is free’,” Kennebec Journal, May 22, 2007, <http://kennebecjournal.mainetoday.com/news/local/3925489.html> (August 26, 2007).

[6] “‘Free Lunch’ Bill Presented to Taxation Committee,” Maine House Democrats, Office of Majority Leader Hannah Pingree and Majority Whip Sean Faircloth, May 24, 2007, <http://www.maine.gov/tools/whatsnew/index.php?topic=HouseDems+News&id=38276&v=Article> (August 26, 2007).

[7] Ibid.

[8] For more on the AMT, read November’s featured Tax Education Foundation article, “The Alternative Minimum Tax:  A Growing Burden on Middle Class Americans” at www.taxeducationfoundation.org.

[9] Sharp.

[10] Cooper.