As if you didn’t have enough on your plate, you now need to worry about state sales tax. The Minnesota Tax Court has slammed an employer with $2.6 million in unpaid sales taxes on the value of parking employees paid for with pretax deductions. (Allina Health System v. Commissioner of Revenue, No. 8564-R, Minn. Tax Court, 2014)
Whose expense is it? The employer, a hospital, charged the public, including employees, to park on its premises. Employees authorized pretax deductions from their pay to pay for parking at a discounted rate. The state tax commissioner concluded that the parking was provided “for a consideration,” and assessed the employer $2.6 million in unpaid sales taxes and interest for parking provided between January 2005 and May 2008.
WHAT’S CONSIDERATION? “Consideration” is legalese for a legally enforceable promise or bargain. Here, the bargain was that employees would have pretax deductions made from their pay and the employer would provide parking.
In disputing the assessment, the hospital argued that no sales tax was owed, because the parking wasn’t provided for a consideration. Employer: Under the general tax accounting rules, pretax deductions are considered an employer expense, so employees didn’t actually pay for parking.
Pretax deductions = paid parking. The court acknowledged the IRS’ tax accounting rules, but rejected the employer’s argument. Court: The hospital provided employees with parking for a consideration—it assumed the obligation to provide parking and employees agreed to have their pay reduced to pay for it. The employer, however, was liable for sales taxes that related to the discounted parking rate.
THE TAKEAWAY: This court didn’t go out on a limb. If, say, you allow employees to buy company merchandise at a discount, you must collect sales tax on those transactions. If employees pay for parking and sales tax is charged, you must collect the tax.