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Revising Silicon Valley’s Tasty Tax Exemptions?

Competition amongst the high-tech players in Silicon Valley for top engineering talent has been fierce for some time. In addition to six-figure salaries and generous stock options, companies have gone to extraordinary lengths in developing perk programs to recruit and retain employees.1 In an environment filled with helicopter rides, arcades, and concierge services, it might be easy to overlook one seemingly plain perk – employer-provided meals.2 The Internal Revenue Service, however, has not failed to take notice.

In July 2015, the IRS released its 2015-2016 Priority Guidance Plan containing “277 projects that are priorities . . . during the twelve-month period from July 2015 through June 2016.”3 The plan includes projects spanning “a variety of issues important to individuals and businesses, including international taxation, health care and implementation of legislative changes.”4. Of the 277 projects, one of particular interest was to “explore modifying sections of the Tax Code concerning employer-provided meals that it felt was problematic.”5 In particular, the IRS will look to promulgate regulations regarding Sections 119 and 132 of the Internal Revenue Code to revise the current tax-exempt status of employer-provided meals. While fringe benefits are generally taxable6 Section 119 carves out an exemption for free meals for employees if such meals are provided on the employer’s work premises and for “employer convenience.”7 In addition, Section 132(e) states that “an employee entitled under Section 119 to exclude the value of a meal provided on the premises is treated as having paid an amount for such meal equal to the direct cost of the meal.”8

While the exclusion of employer-provided meals under Section 119 turns on whether the meals are provided for the “convenience of the employer,” commentators have generally failed to reach a consensus on the subject.9 At the heart of the discussion lies a difficult question – can meals justifiably be categorized as benefiting the employer instead of compensation?10 If meals are justifiably categorized as benefiting the employer, then the federal tax may allow for exemptions.11 The compensation proponents argue that meals would otherwise be paid out-of-pocket and from employee salaries, and thus heavily subsidized meals allow employees to spend their income on other items.12 Furthermore, lavish Silicon Valley employee perks function like salary and options as a way to recruit and retain top talent.13 By providing access to heavily-subsidized gourmet food, Silicon Valley companies distinguish employment at their facilities from the average corporation that might compete in the same employee pool.14 However, commentators have also argued that employer-provided meals are simply tools for the employer’s benefit.15 By providing meals on campus, employers incentivize employees to stay late and spend less time going out for quality food, especially when campuses are located in remote locations.16 Some have also argued that meals “helps strengthen employee trust and retain people” by providing for the employee’s psychological needs in a way that is not easily comparable to compensation.17 Such arguments seem to cut in favor of “employer benefit” and make meals less relatable to compensation.

While the IRS has announced its interest in revising the rules around employer-provided meals, the timing and extent of the change remains uncertain.18 One potential, perhaps overly simplistic, way to reconcile the current understandings of Section 119 may be to create a value baseline for employer-provided meals that would qualify for tax exemption. Using said baseline, the IRS can then tax meals valued above and beyond that standard after adjusting for regional differences in pricing. Creating a baseline will retain tax exemption status for meals that truly benefit the employer by keeping employees at the campus and focused on work, while taxing anything over the baseline would limit the use of perks as an additional form of compensation.


  1. See Claire C. Miller & Jenna Wortham, Silicon Valley Hiring Perks: Meals, iPads and a Cubicle for Spot, N.Y. Times (Mar. 25, 2011) http://www.nytimes.com/2011/03/26/technology/26recruit.html?_r=0. 

  2. Victor Luckerson, 10 Most Lavish Job Perks in Silicon Valley, Time (Oct. 14, 2014), http://time.com/3506815/10-best-job-perks/. 

  3. Mark J. Mazure et al., 2015-2016 Priority Guidance Plan, U.S. Dep’t of the Treasury (Jul. 31, 2015), https://www.irs.gov/pub/irs-utl/2015-2016_pgp_initial.pdf. 

  4. Id. 

  5. Angela Swartz, Exclusive: No More Free Meals for Tech Workers? IRS Advances Project That Could Tax On-Site Food Perks, Silicon Valley Bus. J. (Aug. 14, 2015, 2:57 PM), http://www.bizjournals.com/sanjose/news/2015/08/14/exclusiveno-more-free-meals-for-tech-workers-irs.html. 

  6. See Publication 15-B (2016), Employer’s Tax Guide to Fringe Benefits, IRS (2016), https://www.irs.gov/pub/irs-pdf/p15b.pdf . 

  7. Swartz, supra note 5. 

  8. Id. ; see 26 I.R.C § 132(e). 

  9. Yehonatan Givati, Googling A Free Lunch: The Taxation of Fringe Benefits, 69 Tax L. Rev. 4 (forthcoming 2016), http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2601293; see 26 I.R.C § 119. 

  10. See id

  11. Id. 

  12. See Mark Maremont, Silicon Valley’s Mouthwatering Tax Break, Wall St. J. (Apr. 7, 2013), http://www.wsj.com/articles/SB10001424127887324050304578408461566171752. 

  13. Id

  14. Madeline Stone, RANKED: The top 10 restaurants on tech campuses, where employees chow down for free, Bus. Insider (Apr. 16, 2015), http://www.businessinsider.com/these-tech-companies-have-the-best-food-2015-4?op=1. 

  15. Leo Mirani, Why the IRS Will Have A Tough Time Taxing Google’s Free Meals, Quartz (Sep. 3, 2014), http://qz.com/259397/why-the-irs-will-have-a-tough-time-taxing-googles-free-meals. 

  16. Id. 

  17. Id

  18. Swartz, supra note 5. 

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Yifu Chen