In 1999, Google’s forty employees hosted a cook off to see who would be the future first chef of their company’s kitchen. ((Jillian D’Onfro, Here’s The Decadent Meal That Won Over Google’s Early Employees And Persuaded Them To Hire Their First Chef, Business Insider (Oct. 9, 2014), http://www.businessinsider.com/chef-charlie-googles-first-chef-menu-2014-10.)) After sampling 25 different cooks, the office ultimately named Charlie Ayers the winner of the competition after trying his eclectic and worldly selection. ((See Id.)) Google’s early employees and Ayers could hardly imagine the gourmet food arms race that would ensue in the start-up world following this cook off.
By the time Ayers left his role as Google’s Executive Chef in 2005, he was overseeing five other chefs and 150 other kitchen workers. ((Id.)) As of 2016, at the Mountain View Googleplex headquarters, Google was serving employees lobster, poké bowls, banana cheesecake, and other gourmet dishes throughout its 180 cafes and visiting food trucks. ((Avery Hartmans, 21 photos of the most impressive free food at Google, Business Insider (Aug. 26, 2016), http://www.businessinsider.com/photos-of-googles-free-food-2016-8.)) Importantly, all of these meals were, and still are today, free. ((Id.))
In an attempt to keep up with Google, other companies in Silicon Valley have followed suit, and now churn out free, gourmet meals for employees. Within the last year and a half, LinkedIn has built five new cafes, and some of their rotating food options include Korean style wings, artisan tacos, and mocha emoji. ((Mark Niu, Silicon Valley offers up gourmet cafeteria food, CGTN America (Oct. 9, 2017), https://america.cgtn.com/2017/10/06/silicon-valley-offers-up-gourmet-cafeteria-food.)) As of 2013, Facebook’s Café Epic was whipping up meals such as grilled steak with chimichurri sauce and she-crab soup, and was serving these spreads from sunrise through sunset. ((Mark Maremont, Silicon Valley’s Mouthwatering Tax Break, The Wall Street Journal (Apr. 7, 2013), https://www.wsj.com/articles/SB10001424127887324050304578408461566171752.)) Furthermore, at that same time, Twitter was offering three free meals a day to its employees at their San Francisco office. ((Id.)) While this all might seem extravagant and excessive, Ayers explained that this cuisine has a purpose: “If you feed [employees] the very best, you’ll get the biggest return.” ((Jillian D’Onfro, Google’s First-Ever Executive Chef Explains Why Serving Good Food Is So Important For Startups, Business Insider (Oct. 11, 2014), http://www.businessinsider.com/google-chef-charlie-ayers-on-startup-food-culture-2014-10.))
However, there’s a growing controversy within the tax world concerning how to treat these trendy perks. ((See Maremont, supra note 7.)) There are whispers of internal debate within the IRS, and the in-house discussion centers on whether this free food should be taxed as a fringe benefit. ((See Id.)) Fringe benefits are defined roughly as any additional compensation employees receive beyond their agreed-upon salary. ((See Fringe Benefits, Investopedia, https://www.investopedia.com/terms/f/fringe-benefits.asp.))
Under the Internal Revenue Code, gross income is defined as, “[A]ll income from whatever source derived.” ((I.R.C. § 61(a))), and this definition makes no distinction between cash and noncash compensation. Likewise, the Code explains that, “[G]ross income includes income realized in any form, whether in money, property, or services.” ((Reg. § 1.61–2(d)(1).)) Plainly, free food given by an employer to an employee is a form of noncash income. Therefore, it seems straightforward that Silicon Valley employees should be taxed on this fringe benefit.
The Internal Revenue Code, however, provides some tax exclusions for fringe benefits. Under the Code, meals furnished by an employer to an employee may be excluded from the employee’s gross income if two conditions are met: 1) the meals are furnished on the business premises of the employer, and 2) the meals are furnished for the convenience of the employer. ((I.R.C. § 119(a).))
Clearly, the first prong of this test is met, as the numerous gourmet cafes in Silicon Valley are located within offices and on company campuses. To meet the second requirement, the companies that offer this perk argue, like Ayers, that feeding employees good food results in monetary yields. This defense has merit for a few reasons. First, if employees stay in their office for a long time, they are more likely to familiarize and collaborate with their co-workers. This, tech companies surely maintain, is a necessary recipe for success in Silicon Valley. Additionally, if employees stay at the office to eat instead of dining elsewhere for breakfast, lunch, or dinner, then they’re simply more likely to work. Lastly, there are physical and cognitive health benefits to eating healthy foods (the types of foods largely offered by these kitchens), and healthy and clear thinking employees could result in increased productivity. This is not an exhaustive list of employer benefits of offering free, gourmet food, but it certainly illustrates on its face that there’s a legitimate foundation against the taxation of this perk. And, taxing these meals could be seen as government interference—for relatively small tax revenues—into the practices that made these companies the most innovative in the world. ((Maremont, supra note 7.))
Still, allowing this practice to become widespread is perhaps a dangerous precedent to set. If free food became a perk provided to employees throughout the United States, then overall consumption would decrease because commercial transactions involving food would decline. Not only would consumption taxes then drop, but also income tax revenue would decrease, as income taxes contains within them an inherent tax on consumption ((Henry C. Simmons, Personal Income Taxation: The Definition of Income As a Problem of Fiscal Policy, 50 (The University of Chicago Press, 1st ed. (1938).)) The government, as such, would see an overall reduction in tax revenues. Allowing LinkedIn employees to receive free artisan tacos on a daily basis, it seems, creates a slippery slope that carries potentially detrimental tax consequences.
Even if this custom doesn’t become the norm, there is still a question of fairness that persists. If tech employees in California receive free, nontaxed meals, why should the rest of the country’s workers have to pay for their she-crab soup out of their taxed income? This sentiment was shared by at least one anonymous tax professor, who exclaimed, “I buy my lunch with after-tax dollars. And I have to pay taxes to support free meals for those Google employees.” ((Maremont, supra note 7.)) A well-known goal of the U.S. tax system has always been horizontal equity where like situations are taxed similarly. Seemingly, the free, gourmet meals offered by successful start-ups to their employees violate the tax code’s underlying ambitions, and arguably its provisions. But, it’s entirely unclear if the government will take action to bring an end to this bountiful Silicon Valley creation.
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