The owner of a string of Subway sandwich shops has found out the hard way that there’s no free lunch. Not when the tax man gets involved, anyway.
Loren Goodridge learned during a routine audit that he owed back taxes to the state for all of those free sandwiches he provided to employees at his 14 Subway shops in Maine. The news has left a bad taste in the mouths of restaurateurs across the state.
”You can’t give something away for free without being taxed. It’s one of those things that seems absurd,” said Dick Grotton of the Maine Restaurant Association.
The issue of free meals is an old one that resurfaces from time to time. Many states like Arizona, Florida, Virginia and Texas specifically exempt free meals given to restaurant workers. Others, like Utah and Washington State, tax the meals.
In Maine, prepared meals are subject to a 7 percent tax. Technically, a free meal represents a product that was taken out of inventory. That means it’s subject to the state’s 5 percent ”use tax,” which has been on the books since the 1950s.
Even though the law is on the books, some restaurant owners say the Maine Revenue Services has never gone after free meals — until now.
The change of heart, they suspect, has something to do with the state’s finances. Despite being one of the most heavily taxed states, Maine’s budget remains tight and the governor wants to increase the cigarette tax by $1-a-pack to make ends meet.
”If it wiggles and walks and smells like money, then it’s available for taxation,” Grotton said last week. ”They are desperate.”
For Goodridge, the tax was not an issue the last time he was audited three years ago. But it came up during his most recent audit.
”Right away, they asked, ’How do you handle employee meals?”’ Goodridge said. ”I said well, we give our employees a free meal for every shift they work.” He put the value of the meals — a six-inch sub and a fountain drink — at roughly $5 apiece.
Over three years, Goodridge’s goodwill added up to thousands of free meals, and thousands of dollars in unpaid taxes, at his 14 sandwich shops in Maine. He also owns three restaurants in New Hampshire, where there’s no tax on free meals.
In the end, Goodridge, who already pays about $20,000 to $25,000 per week in Maine sales taxes, was told he owed another $2,500 in taxes, and $500 in interest, for the free meals. That’s based on the value of the ingredients in each meal.
Goodridge was told he could charge anything for a meal. If he loses his appeal, he plans to charge his workers 25 cents for a meal, with two pennies going to the state.
But he plans to fight the tax.
Two legislators, Reps. Seth Berry of Bowdoinham and Rick Burns of Berwick, have championed his cause. They hope to learn this week whether they can introduce their bill to exempt free meals for restaurant workers this session.
Berry and Burns think the bill would be approved overwhelmingly if lawmakers were allowed to debate the proposal. The deadline for new bills already passed. That means legislative leaders would have to agree to make an exception for the bill.
”I found it hard to believe that Maine Revenues Services would go after the free lunch. I mean, here’s a guy who, it’s my understanding, is doing the right thing,” Burns said.
Berry said the issue is one of ”fairness and common sense.”
”Maine Revenue Services is correct to be concerned about tax avoidance. Rep. Burns and I just want to make sure that that doesn’t go so far as to take away a business owner’s right to treat employees well and give them a sandwich,” he said.
Berry and Burns tend to agree with critics who contend Maine Revenue Services is under pressure to be sticklers because of the tight budget.
But tax officials bristle at the notion. ”They say the state needs money so it’s digging deeper. That’s just not true,” said Peter Beaulieu, director of sales, fuel and special tax division of Maine Revenue Services.
Now that the tax agency is aware of the issue, free meals will be raised whenever restaurants are audited — unless the Legislature acts, Beaulieu said.
”We’re applying the statute the way it reads. If the industry feels that’s not the right approach, it’s their right to address it legislatively,” he said.
In Portland, at one of Goodridge’s Subway restaurants, the workers who’re paid $8 to $10 an hour are appreciative of the free meals.
As it stands, the free lunches save each worker about $100 a month. But word has spread among the workers that the deal might end.
”It seems ridiculous that the owner is going to get charged for all of the sandwiches we’ve had,” said Assistant Manager Andrew Rosenberg. ”It’s kind of a ’thank you’ to the workers. We all work our butts off around here.”