Tax commission aims sales tax at comped employee meals
LAS VEGAS — The Nevada Department of Taxation is expected to officially implement a sales tax on comped employee meals on Monday — a tax that restaurant officials say will hurt their employees as much as it will hurt the businesses.
“Restaurants employ a lot of younger, lower-skilled workers and provide complimentary meals to these employees as a simple perk,” said Katherine Jacobi, president and CEO of the Nevada Restaurant Association.
“If [restaurants] suddenly have to pay taxes on these meals, they’ll have to find ways to afford the tax, which means they may have to charge employees or take meal costs out of the employees’ pay checks.”
The department first announced the tax in February 2012, saying a sales tax would be charged for comped meals to gaming patrons in casinos as well as free meals provided to employees. The department also gave businesses a “grace period” through July 31, 2012 to pay the new tax as an effort to assist businesses that “may be incurring administrative burdens.”
Furthermore, the department added it will charge a 25 percent penalty and 9 percent annual interest rate on all taxes not paid by the July 31 deadline.
“The Department of Tax basically admitted this will further burden businesses, so one would think [department officials would] recognize the unintended consequences of this sales tax,” Jacobi said.
The department claimed it notified taxpayers via “its website and through a number of letters,” but Jacobi said many members in her organization received no information regarding the tax.
“The communication was very disappointing,” Jacobi said, “especially since this is an issue that will affect so many businesses in the state.”
The tax relies on the fact that in the 2008 Nevada Supreme Court case Sparks Nugget v. State, Dep’t of Taxation, the court did not specifically addressed the question of a sales tax on complimentary meals. Instead, it focused on the question of a use tax on comped meals, which it ruled unconstitutional.
While the decision did not directly strike down a sales tax — which the tax department had not at that time attempted to apply to comped foods — the court did state that it was confronting “an issue of constitutional importance to Nevada: whether businesses in this state are required to pay sales or use tax on meals that they provide free of charge to patrons and employees.” (Emphasis added.)
The court also said that it agreed with the appellant, the Sparks Nugget, that:
Since no taxable event occurred between the time appellant initially purchased the food used to prepare complimentary meals (in a tax-exempt transaction) and the time appellant gave those meals away, the meals were exempt from sales and use taxation under the plain and unambiguous language of the Nevada Constitution. (Emphasis added.)
Still, the Supreme Court ruling allowed an opening for the state, said Carole Vilardo, president of the Nevada Taxpayers Association, a nonprofit organization promoting reasonable government regulations.
“In a time where government is searching for revenue, [department officials are] using anything they can to try and collect more taxes,” she said.
A use tax would have taxed the cost of the components of the meal, such as food storage and cooking utensils, whereas a sales tax would hit the retail price of the meal. Either tax, industry experts say, would hit employees directly.
“It’s fair to say that if casinos are faced with another expense, such as a tax, the first things they’ll look to cut are comps and labor,” said David Schwartz, director of UNLV’s Center for Gaming Research. “Of course, those [comps and labor cuts] are the first two things guests will notice, which could drive them away.”
Several casino companies, including Boyd Gaming and Caesars Entertainment, are challenging the tax in court. The companies say the department shouldn’t charge them for taxes not paid by the July 31 deadline, since appeals by both companies against the department are being heard in district courts.
“There are several pending cases within the courts and a lot of businesses want to see these legal issues resolved before the department takes further action,” Vilardo said.
The “comps tax” is not the first proposed tax increase this year that could affect Nevada businesses. On June 6, the Nevada State Education Association and AFL-CIO filed a 2 percent margins tax initiative, and in March, Gov. Brian Sandoval announced he would support extending “temporary” sunset taxes through Fiscal Year 2015.
Jacobi said all the additional taxes will just make it more difficult for businesses to operate profitably.
“We [the Nevada Restaurant Association] always try to cooperate with the state, but we can’t support legislation that seems to blatantly hurt our businesses,” said Jacobi. “Our industry has a high turnover rate as is, and if employers need to lay more people off because of higher taxes, that doesn’t do anyone any good.”
The Nevada Tax Commission will meet Monday, June 25, at 9 a.m. in the Legislative building in Carson City. The meeting will also be simulcast to the Grant Sawyer building in Las Vegas.
Kyle Gillis is a reporter for Nevada Journal, a publication of the Nevada Policy Research Institute. For more in-depth reporting, visit http://nevadajournal.com/ and http://npri.org/.