Must a restaurant show free employee meals on payroll or W-2s to claim the wages exemption, or can policy and accounting records prove it?

Plain-English summary

Virginia exempts meals a restaurant furnishes to its employees as part of wages (Va. Code Sec. 58.1-609.3 7); 23 VAC 10-210-930 C says meals furnished to employees without charge aren't taxed. The restaurant gives each employee one free meal per shift during breaks, records it in its point-of-sale system, and books an accounting entry reducing cost of goods sold (there's no sale).

The auditor assessed use tax on the cost of those free meals, reasoning the restaurant couldn't prove the meals were 'part of wages' because their value wasn't reflected in the payroll account or on W-2 forms.

The Commissioner reversed. On appeal the restaurant provided its employee handbook policy, showed the meals are part of the compensation package, and explained the accounting method used to record their cost. That was enough:

• The meals are furnished to employees as a form of compensation during their work shifts, so they fit the wages exemption.
• Crucially, the cost of free employee meals is legally excluded from Virginia 'wages' under Va. Code Sec. 58.1-460. So there is no requirement that the meals appear in a payroll account or on W-2 forms to qualify.

Because the restaurant properly recorded and accounted for the meals and showed they are part of employee wages, the meal transactions were removed from the audit.

What this means for you

Restaurants and food-service operators

Free meals you give employees on shift are exempt as part of wages. You do not have to run their value through payroll or report them on W-2s to claim the exemption -- in fact, Va. Code Sec. 58.1-460 excludes that meal value from Virginia wages. What you should keep is documentation of the policy (e.g., an employee handbook) and a consistent accounting method recording the meals' cost.

Contrast with meals to non-employees

This exemption is for employees. Free meals to employees' family members or comped meals to customers can be taxable (see the related P.D. 20-95). Track who receives free meals.

Common questions

Do free employee meals have to be on payroll or W-2s? No. Their cost is legally excluded from Virginia wages by Va. Code Sec. 58.1-460, so payroll/W-2 reporting isn't required for the exemption.

What proof worked here? The employee handbook policy, evidence the meals are part of the compensation package, and the restaurant's accounting method recording the meals' cost.

Are all free meals exempt? No -- only meals furnished to employees as part of wages. Free meals to family members or customer comps are treated differently.

Citations and references

• Va. Code Sec. 58.1-609.3 7 and 23 VAC 10-210-930 -- exemption for employee meals furnished as part of wages.
• Va. Code Sec. 58.1-460 -- 'wages' excludes the value of meals furnished to employees, so no payroll/W-2 reporting is required.
• P.D. 13-235 (12/19/2013) -- cited by the taxpayer on employee-meal treatment.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 20-97

Original ruling text

June 2, 2020

Re: § 58.1-1821 Application: Retail Sales and Use Tax

Dear *:

This is in response to your letter in which you seek correction of the retail sales and use tax assessments issued to *** (the “Taxpayer”) for the period March 2011 through February 2014. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer operates restaurants in Virginia. The Taxpayer provides employees one free meal during a shift while on their break periods. The free employee meals are recorded in the Taxpayer’s point of sale system, and the Taxpayer makes an accounting entry that reduces the cost of goods sold because there is no associated sale in providing the meals. The Department’s audit disclosed that the Taxpayer was not accruing use tax on free meals provided to employees. As a result, the auditor assessed tax on the cost of free employee meals because the Taxpayer was not able to prove that free employee meals were reflected as part of wages.

The Taxpayer disagrees with the auditor’s assessment of the tax based on Title 23 of the Virginia Administrative Code (VAC) 10-210-930 and Public Document 13-235 (12/19/2013).

DETERMINATION

Virginia Code § 58.1-609.3 7 provides an exemption from the retail sales and use tax for "Meals furnished by restaurants or food service operators to employees as a part of wages." Title 23 VAC 10-210-930 C interprets this Code section and states that “Meals and drinks that restaurants and food service operators furnish to their employees without charge are not subject to the tax.”

The tax on free employee meals was assessed because no documentation was provided by the Taxpayer to reflect that the cost of the free meals was included in wages. The Department’s auditor concluded that the Taxpayer was unable to prove that the meals were part of the employee wages because such wages were not reflected in the payroll account or on W-2 forms. In its appeal, the Taxpayer provided information from the employee handbook that outlines the policy regarding free employee meals. In addition, the value of free employee meals is provided to employees in their compensation package. The Taxpayer also uses a specific accounting method to record and account for the cost of the meals.

The Taxpayer has provided sufficient documentation to show that it properly records and accounts for the meals provided to employees. In addition, the Taxpayer has demonstrated that meals provided to employees by the Taxpayer are a part of employee wages because they are provided to employees as a form of compensation during their work shifts. The actual cost of free employee meals is legally excluded from Virginia wages based on the definition of wages in Virginia Code § 58.1-460. Therefore, there is no requirement that the free employee meals be reflected in a payroll account or on W-2 forms. Based on the foregoing, the transactions relating to the cost of the employee meals will be removed from the audit.

The audit will be returned to the appropriate field audit staff to make the adjustments in accordance with this determination. Once the revision is complete, the Taxpayer will be issued revised bills with updated interest to date if any outstanding assessment balances remain. The bills should be paid within 30 days of the bill dates to avoid the accrual of additional interest charges.

The Code of Virginia sections, regulation, and public document cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department’s web site. If you have any questions about this determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1510H

Related Documents

13-235