Next time you give employees an edge on income tax, be sure you’re considering the sales tax ramifications. Allina, a healthcare facility in Minnesota, allows employees to pay for parking as a pre-tax compensation reduction. Instead of paying the cost of parking plus sales tax after paying income tax on their earnings, Allina allows their employees to pay for parking by taking it out of their pay before income tax. They weren’t charging sales tax on this reduction, however, and now have a $2.6 million tax bill to pay.
So what did they miss? Allina’s argument centered around the opinion that employees weren’t paying for parking: Allina’s employees who elect to participate in a compensation reduction arrangement do not actually pay for parking. Allina does not pay the reduction amount to them by check, bank deposit, cash, cash equivalent, or otherwise. Thus, the employees literally do not pay $10.00 (in the above example) for parking. Literally, the employees receive parking at no charge.
We have a hard time seeing that employees don’t view the compensation reduction as a literal payment to their employer in exchange for the right to park their vehicles. That’s not “free” parking in our book either. The judge didn’t buy it either and ruled that Allina has to pay up for sales tax. But Allina won’t pay the full amount. Instead, they’ll pay $718,340.03, the amount after credits for prepayments and refunds from overpayments Allian negotiated with. Just goes to show that if you can self-audit when you’re being audited, you’ll be in a better position to negotiate for a better sales tax back payment deal.
The lesson to learn from this story is that if you’re charging sales tax to the general public, you probably need to charge sales tax to your employees who buy at a reduced price unless there’s a specific law stating otherwise. A sale is a sale, after all. If you’re being audited and need quick self-audit help be sure to check our RecoveryLINK. It’s our automated sales tax recovery solution that audits past sales tax filings for errors.