By MECHELE COOPER, Staff Writer Tuesday, May 22, 2007

Milnes, the owner of Subway of Manchester, said her workers handle food all day and the gesture was an easy way to reward them.

But that changed a few months ago after she learned she could be taxed for the free sandwiches.

"That's the reason I don't give free employee meals any longer," Milnes said. "I either have to pay the sales tax or I have to figure out approximately what the value is and pay a use tax or charge them 23 cents for a sandwich, which is what I do."

The "Subway" bill, introduced by Reps. Seth Berry, D-Bowdoinham, and Richard Burns, D-Berwick, would exempt free meals for restaurant workers from the tax. Legislative Document 1823 will be discussed at a Taxation Committee hearing set for 1 p.m. today in Room 127 of the Statehouse.

"It's not about Subway, per se, it's about food service workers," Berry said Monday. "I worked as a dishwasher and a prep chef when I was in college, and I remember very well how difficult and challenging and exhausting that work was. And I appreciated that my employer gave a free meal."

Many states, including Florida and Virginia, don't tax free meals given to restaurant workers. Maine does.

Technically, a free meal represents a product that was taken out of inventory. That means it's subjected to the state's 5 percent "Maine Use Tax," which has been on the books since the 1950s.

Berry said a constituent, Loren Goodridge of Bowdoin, who owns 14 Subways across Maine and New Hampshire, learned during a routine audit by the Maine Revenue Services that he owed back taxes to the state for all the free sandwiches he provided to employees.

Berry said the restaurateur told him he doesn't have to pay tax on free meals in his three New Hampshire Subways, but he was forced to pay $2,500 in taxes, and $500 in interest, for the free meals in Maine.

His bill would exempt the first $6 in wholesale value from any meal provided free of charge to any food service worker.

He said food service workers make little enough as it is, and that generosity should not be taxed.

Berry said the tax law says if you buy something wholesale and turn around and sell it at retail, you're taxed on it at the point of the retail sale. And if you buy something wholesale, but don't use it for retail services, you pay tax at the point of the wholesale service.

"The basic logic of our tax system, right now, is to tax either wholesale or retail, which ever is the highest value," he said. "This is one of the few areas where we think basic fairness really does argue for an exemption."

Even though the law is on the books, some restaurant owners say the Maine Revenue Services has never gone after free meals -- until now.

Berry and Burns said they tend to agree with critics who believe the Maine Revenue Services is under pressure to be sticklers because of the tight state budget.

But tax officials say that isn't the case.

Peter Beaulieu, the MRS director of sales, fuel and special tax division, said the statute is just being applied the way it reads.

"If the industry feels that's not the right approach, it's their right to address it legislatively," Beaulieu said.

Burns said he doesn't want the bill to be misinterpreted.

"It's limited to just restaurant workers," he said.

Jeff Owen, co-owner of the three Subways in Augusta, said that as soon as he and his partners caught wind that they are subject to a tax, they switched their policy to comply with the current law.

They now charge employees 10 percent of the menu prices. For instance, a worker would pay 50 cents on a 6-inch sub and a fountain drink valued at $5.

He said his workers, by-in-large, are some of the lowest wage-earners in the state.

"I just think it hurts the little guy," Owen said Monday. "It doesn't hurt the owners at all. It just hurts the employees who are making quite a bit under the state average income (level)."

He said his employees appreciated the free meals.

Ted Stephens, who managers Subway on Bangor Street, agrees the tax is unfair.

"Jeff (Owen's) doing the best he can to make sure we're being taken care of and we're happy," Stephens said. "I think that's very fair on his end. But if Jeff is willing to give us a meal, the state shouldn't tax him for it."

Mechele Cooper -- 623-3811, Ext. 408

mcooper@centralmaine.com