Free meals can be awfully expensive in Washington’s restaurants.
Plenty of restaurants let kitchen and waitstaff eat without paying. But through a quirk of Washington’s tax code, business owners are supposed to charge sales tax even though workers didn’t buy anything.
Most restaurateurs don’t know about the requirement, so the state is missing out on millions of dollars in revenue. Now those restaurants that do pay the tax are lobbying to end it, costing the state even more money at a time when its collections are already drying up.
Pizzeria owner Joe Fugere said he has no problem paying taxes, except this one. “I’m a progressive Democrat,” he said, but: “This is one that just really seems nonsensical.”
Employers can deduct the tax from paychecks or just eat the cost, as Fugere does. It cost his Seattle-based Tutta Bella $7,800 last year, said Fugere, who fed workers meals that would have been worth $383,000 if ordered by patrons.
Those meals add up: Even though state revenue agents collect just 13 percent of what’s owed, they expect to lose $667,000 over the next two years by canceling the tax, as bills in the Senate and House would do.
Proposed tax breaks are being handled with an eye toward the $4.6 billion budget shortfall, but the price tag on this one might be a smaller hurdle than it seems. Legislators have been incredulous to hear taxes are being collected on free meals.
“This falls in that category of ‘No good deed goes unpunished,’” said Sen. Jim Kastama, D-Puyallup.
Another Puyallup lawmaker, Republican Rep. Bruce Dammeier, wondered aloud in a hearing if by the same logic lawmakers should be taxing themselves on the free coffee they drink during hearings.
In fact, of all the proposed tax breaks competing for the state’s scant money, there might not be one with a better chance. It has bipartisan support and is being steered by the Senate budget chairman, Ed Murray.
The rationale for collecting the tax is easy to understand.
Restaurants are supposed to charge sales tax because the meal isn’t really free; employees are paying for it with their labor.
The state has had a rule that employee meals are considered sales since as far back as 1943, when it was applied to meals provided at logging camps, according to the Department of Revenue.
The department looks for compliance in its audits, which is why many chain restaurants that are audited more frequently know about it. Enforcement of the rule hasn’t increased, said Drew Shirk, the department’s liaison to the Legislature.
The Washington Restaurant Association and some of its members, though, say recent audits have brought the rule to their attention. The revenue department told Mackay Restaurants it owed $10,000 on meals eaten at its establishments, including El Gaucho in Seattle and Tacoma, company president Chad Mackay told lawmakers in a letter.
Others have complied for years. The employees at eight Auntie Anne’s pretzel stands in places including Tacoma Mall and South Hill Mall used to eat Pretzel Dogs free of charge, and sales tax was deducted from their paychecks.
The franchise owner, Bret Stewart, struggled with payroll calculations. Then there was the problem of having to charge employees at every mealtime even though they often ate somewhere else in the food court or brought meals from home.
“My staff can’t live on pretzels alone,” Stewart told lawmakers.
So two years ago, he started charging. But he told lawmakers that with their help, he could go back to giving free pretzels to the people who make them.
Jordan Schrader: 360-786-1826 email@example.com blog.thenewstribune.com/politics