Comped meals become taxing situation for gaming, government

Since the early '80s, Nevada gaming companies have been paying sales taxes on "comped" meals. The tax was based on the cost of the food. So a $100 meal comped to a customer might be taxed on a $20 cost to the casino.

"It was a good deal for the casinos, and they signed off on it," said Taxation Commissioner David Turner, who reviewed the history for me.

But decades later, a casino in Sparks, John Ascuaga's Nugget, decided to challenge those taxes. The casino argued that the free meals provided to customers and employees are exempt from sales taxes under the Nevada Constitution.

Washoe County Judge Brent Adams, who I've long known is a very smart person, dismissed the case. But on appeal, the Nevada Supreme Court (with Justice Michael Douglas dissenting) ruled in 2008 in favor of the Nugget and said the casino was due a $1.3 million refund.

Well, that opened the floodgates. Now a slew of major casinos say they want their refunds, too. Requests for as much as $250 million in sales tax refunds are pending, said the new Taxation Department Executive Director Chris Nielsen.

Now state and local government entities are in a position where, if that state Supreme Court ruling holds, the state, counties, cities and schools would have to refund gaming companies the amounts these entities were given in sales taxes, Turner explained. That's a tremendous burden on every entity that gets a piece of the sales tax. They'd have to return money they don't have and cut their budgets even further.

But it's a great deal for gaming companies looking to shave their tax bill.

On June 25, the commission passed a regulation saying sales taxes on comped meals and free meals for employees needed to be paid starting July 31 or there would be hell … actually penalties ... to pay.

The regulation not only said the taxes would be due, but that they'd be due at a higher rate. Comped meals for customers, including those in loyalty programs, would now be taxed at the full retail value. Free meals for employees would remain the same as before, taxed at the cost of the food provided.

In hearings before the regulation was passed, the Nevada Taxpayers Association, the Nevada Restaurant Association and multiple gaming businesses objected to the regulation, calling it premature, challenging how the department could demand payment when the conflict is unresolved. There's another pending lawsuit. An administrative law case hasn't been decided. And the 2013 Legislature could well make changes.

In a turnaround July 6, taxation officials decided that while their position remains firm that the taxes are owed, businesses won't have to start paying July 31 after all. That's good news for those paying the taxes, not such a bonus for those hoping to collect them, such as Gov. Brian Sandoval.

It is believed he prodded the Tax Commission to set an earlier date for collection.

Nielsen said he pushed the start date back because the regulation hasn't been approved by the Legislative Commission as the law requires. But for now, "Our position is that it (the tax) is still accruing."

He set a convoluted timetable for when businesses would have to begin making payments. Whichever of these events comes first will trigger a tax payment due date: If the Legislative Commission approves the regulation, if the Nevada Supreme Court reverses itself and rules comped meals are subject to sales tax, if legislation is passed upholding the sale tax on comped meals, or if June 30, 2013, rolls around.

In other words, the Taxation Department wants the money ASAP, but conceded there could be legal changes, and it's easier to postpone payments than refund them.

So casinos, hospitals and other businesses can continue to provide free meals to their employees without paying the sales tax at this time. Restaurant owners and taverns can continue to give leftover food to their workers without paying a sales tax now. The Review-Journal can continue to provide free coffee in the lunch room and pizzas on election nights without paying sales tax.

Carole Vilardo, president of the Nevada Taxpayers Association, suggested the Tax Commission add some language to the regulation allowing a minimum exemption so a business wouldn't have to keep track of minimum items costing businesses less than $3 per person.

Vilardo hopes a legislator puts in a bill eliminating the tax on employees' comped meals.

Commissioner Turner said his position is that "gaming had a good deal for the last 30 years, and now it's going to cost them five times as much because they opened this door."

Now you have small restaurant and tavern owners, including some with no idea they had to pay taxes on leftovers, caught up in the battle between the Tax Department and big gaming companies.

The comped meal issue is going to be another headache for legislators in 2013. They will have to decide between bucking the gamers, their major political donors, or reducing the amount of sales taxes that go to cities, counties, schools and the state, leaving holes in those budgets and creating a necessity for more cuts in areas they represent.

Normally, most readers wouldn't need to understand details of this tax battle. Except this one has the potential to hurt regular folks by forcing cuts in services, mainly to benefit casinos looking to pay fewer tax dollars.

With today's budget problems, handing money back primarily to casinos doesn't seem right.

On the other hand, demanding sales taxes on leftovers at restaurants seems absurd.

File this one under "boring but important." Then watch to see who ends up the ultimate winner.

Gaming or government?

Jane Ann Morrison's column appears Monday, Thursday and Saturday. Email her at Jane@reviewjournal.com or call her at 702-383-0275. She also blogs at lvrj.com/blogs/Morrison.