Chuck Muth recently interviewed Jeff Ecker, general manager of Paymon’s Mediterranean Café in Las Vegas about doing business in Nevada.
Chuck: Jeff, thanks for being with us today.
Jeff: Thanks for having me, Chuck.
Chuck: Now the main issue facing the restaurant industry in particular here in Nevada is this food tax that the Tax Commission has decided to levy against restaurants who give away food, I guess gifts or benefits to customers, as well as meals that you provide to employees that the employees don’t have to pay for. Tell me a little bit about the background and the history of that tax and bring us up to speed on that.
Jeff: Well, originally this was a special use tax that was levied on businesses and it was struck down a few years back. Presently there’s some litigation going on between some of the larger hotels, casinos in Las Vegas. And what they are asking for is to be paid back all the taxes that they had actually paid to the state when they did provide the employee meals and comps for customers. So now [the Tax Commission has decided] that this is no longer valid as a special use tax but it’s valid as a sales tax.
Under this new code, the businesses that are providing free meals to their employees will have to assess the cost of the meals, and they will be taxed based on that. And any business that comping meals will also be subject to the same type of tax.
Chuck: So we’re talking about two different things here. Let’s start with the employee meals. That’s kind of a benefit in the restaurant industry. If I remember, your employees come in and they’re going to work the dinner shift that starts at say 5:00. The employees have to come in and get ready for the evening shift, around 3:00, 3:30. And when they come in, the kitchen usually provides a meal for the employees for that day. And the meal is given to the employees for free. So there’s no sale of any meal.
I don’t quite understand. How is it that the Tax Commission is charging you the restaurant owner a sales tax on a sale that isn’t being made. That’s really an expense of doing business isn’t it?
Jeff: Yes, that’s a really good question, Chuck. I think back to my days in running the restaurant at Cornell University Statler Hotel, when I was in charge of actually the employee meals program. Much of the food that was offered to our employees for meals was going to be discarded. This was food prepped or cooked in the three restaurants that were within the Statler Hotel. And likewise, many of the hotels and larger restaurants, even the smaller restaurants, sometimes over prep. Sometimes we have leftovers. It’s all good. It’s healthy. It’s in good shape and it’s provided to employees free of charge. And, unfortunately, now businesses have to make the decision whether to continue with offering these meals or pay the price or pass it on to the end user, which would be employees.
Chuck: And, in this case, they’re assessing you. The tax will be assessed on the cost of the meal, not the retail price as if you were selling it to a customer, is that correct?
Jeff: Yes, that’s correct. It’s actually based on the food cost. And in attempting to tally that, it will probably be more time consuming and just as costly as selling it at the retail price, to be honest.
Chuck: On the other side of this coin are meals that the restaurant gives away to its customers. It could be a promotion. It could be an inducement to get people to come into the restaurant - buy one dinner, get one dinner free - which the restaurant industry has done for years in order to get new customers to come into the restaurant. According to the Tax Commission ruling now, you didn’t pay sales tax on meals that you gave away. Now you have to pay the sales tax on the retail value of those meals. Is it the full meal or any menu item that is given away?
Jeff: It’s my understanding that it’s any menu item that’s given away because it’s considered a comp, it’s free. And that really is really confusing to me as well because in the restaurant industry, we use those types of enticements as advertising. It’s not much different than spending your entire budget for one year, which could be 3% or 4% of your typical gross sales on advertising. You know, it’s just another method of advertising to get people to come in to either try your food or to let them know we really appreciate their business.
We incur the costs of the food, so we’re already paying for the food, and we’re taking a loss on that because we’re giving it away. But we’re doing that as a goodwill measure to make sure that people come back and so we can sustain ourselves with all the competition that’s out there. So, yes, it’s quite a measure that I can’t really understand.
Chuck: Back to the example you were giving before with employees… At the end of the night you’ve got food that wasn’t sold and I know restaurants donate that to shelters ad food kitchen that sort of thing. Are you under the understanding that now you’re going to have pay tax on food that you might donate to a homeless shelter or food kitchen?
Jeff: Yes, I don’t see any difference between an employee and a homeless person, honestly. I don’t see the difference. We’re giving the food away. We’re giving it away as a measure of goodwill. And the fact of the matter is, if that food is going to be taxed to the homeless shelters and such, I doubt very highly that businesses would consider engaging in that anymore. Businesses are doing this while at the same time barely hanging on because of the economy. So to be penalized for giving something away to those that maybe can’t afford food or are less fortunate, I think that’s going to devastate the homeless shelters.
Chuck: Just to be clear on this, if a customer buys a meal and is charged sales tax, the customer pays the tax. What we’re talking about now is a customer who doesn’t buy the meal is still going to be charged a sales tax. So either the restaurant has to eat the sales tax and pay that out of the restaurant’s own pocket, or you have to give away a free meal but still give the customer a check for the sales tax that’s owed on it. Is that correct?
Jeff: That’s correct. And I can pretty much guarantee you that the restaurants are not going to insult the customer by doing that. If they felt that it was worth giving the food away in the first place, then they’re going to wind up paying the tax themselves. But I have to tell you that when it comes to the larger operations, maybe the casinos, the hotels, and they’re giving away much more than the smaller businesses, then it becomes much more difficult to assess and to continue doing business in that way.
Chuck: Aside from the fact that this will actually be a direct tax on the business, unless the business opts to insult its customers and hand them a check just for the sales tax on their free desert, from a regulatory standpoint and a compliance standpoint, how difficult is this going to be? Or is it fairly easy to track free meals and calculate the sales tax owed and remit it? Is this going to be a nightmare for businesses or is this something that is not going to be that difficult really to comply with?
Jeff: The method of compliance is actually not that difficult. That is fairly easily tracked through any point of sales system that’s of a leading nature like your Micros, InfoGenesis, Squirrel, those types of systems. Although the employee meals is a whole another situation. That’s much more complicated and much more time consuming.
Chuck: To bring us up to speed again on the legislative aspect of this, for the meals that were given to employees and free meals, complimentary meals to the customers, the hotels and restaurants were charging a use tax or were being charged a use tax and remitting that to that state. I believe it was the Nugget Casino in Sparks that challenged this practice and said they shouldn’t be paying a use tax on the comps. And the court kind of split the baby here and said that’s correct. This is not a use tax; however, it could be construed as a sales tax. But the legislature, and again correct me if I’m wrong on this, Jeff, the legislature did not address that court ruling and left it open rather than defining whether or not it was the sales tax that was due. And absent legislative action, the Tax Commission has now ruled unilaterally, without legislative approval, that this is something that you guys have to do. Is that correct?
Jeff: That’s exactly what’s happened. And you know they pretty much rushed into this without getting the legislative ruling on it and, from what I understand, their stance is to remit any back monies that were assessed if the legislature strikes it down. But many of the operators feel that once that money is given to the state, they’re never going to see it. It’s never going to come back to them. And what the operators can’t understand is why they would have rushed into something like this without getting legislative approval.
I have to tell you, Chuck, there’s something that hasn’t really been brought up by other people but our hotel industry, the casino industry in Las Vegas, when you think about this, and being taxed for comping players who are gambling. Las Vegas and Nevada, we are in competition with so many other jurisdictions around the country and globally for the gaming dollar. And when operators are taking on these heavy burdens of taxation, and they no longer can comp in the way that they were used to, to bring the people into Nevada, then other jurisdictions lined up are better situated because they’re comping away items without any repercussions tax-wise. So this is not a good situation for Nevada.
Chuck: And as far as the Tax Commission is concerned, they have begun assessing you the tax as of this past I think, middle of February.
Jeff: That’s right.
Chuck: So the meter is running like a taxi cab. You’re being assessed, that tax is being accumulated and they’re saying this is what you owe. But you don’t actually have to remit it until, from what I understand, either the legislature acts or a definitive court case either upholds or strikes down this tax. Is that correct?
Jeff: Well, that’s my understanding. But you know we just went through an audit from the Department of Taxation. And the person that was doing the auditing said that some of the larger businesses, such as casinos, were already complying and remitting payments. So I’m honestly not sure who to believe on that. From what I understand, we have until the middle of, I believe, July or August, but from what the auditor said, the big companies were already complying. So I’m honestly not sure.
Chuck: The other big issue that’s come up recently was the United States Supreme Court has ruled that Obamacare is constitutional as a tax for folks who don’t buy insurance. It’s a penalty if you don’t have health insurance. If Congress does not overturn Obamacare, and it is implemented and goes into affect, tell me how that’s going to affect you. And before you do that, explain exactly what size restaurants [will be affected] so people get an understanding of the size of Paymon’s Mediterranean Café and how Obamacare factors into your operations?
Jeff: Paymon’s Mediterranean Café has two locations, and we have about 80 employees total. We’re like many of the other restaurants in town, we all find ourselves in the same position, especially if we have more than one location. If you have more than one location in a casual restaurant, usually you’re looking at having 80-120 employees. And where that puts us with Obamacare is that if we were to offer insurance to our employees, it would cost us about $250,000 a year. If we don’t offer the insurance to our employees, which is Option 2, we would pay roughly $100,000 and the penalty tax. Out of the 80 employees, the first 30 are exempts, which leaves us 50 employees, which would lead to $100,000 tax penalty. Option 3 is to close down, which unfortunately right now as it looks, that’s the option that we would have to choose unless a miracle happens. If it’s not repealed, we don’t have $100,000 per year to pay, especially when one of our locations is at that break-even point and has been for the last seven or eight quarters.
As a small business, it’s not uncommon to have 80 – 120, or even 140 employees and it’s going to be devastating to any of the businesses with multi-locations and franchisees who have several locations. Because now it no longer makes sense to operate more than one location where you get the 30 person rebate exemption.
Chuck: And so none of the employees that Paymon’s now have health insurance. They have to go out and get their own individual policies. But once this Obamacare program kicks in full force, if they don’t have their own personal insurance, then you pay the penalty. I mean what if you hire employees and they have their own personal insurance. Do you still pay a penalty on them?
Jeff: It doesn’t matter.
Chuck: If you provide the insurance?
Jeff: No, from what I understand, it’s that we are assessed the penalty for every employee that’s not insured by us. And sadly, sadly, the scenario is that most of our employees are actually covered by their spouses, or on their parent’s insurance, and we would still have to face this type of a penalty. And at the same time, they would wind up paying and buying the individual mandated insurance as well.
Chuck: So if you don’t provide the insurance, then every employee that you have, you have to pay a penalty for. If that employee does have insurance through a spouse’s health insurance program, then they’re covered anyway. You’re penalized whether they have insurance or not. But if they don’t have any insurance whatsoever, then they’re put into the new national health insurance program that the penalties I guess are supposed to pay for. Is that your understanding of how this going to work?
Jeff: Well my, understanding is that we pay $2,000 per employee that we are not paying the premium on insurance, private insurance premiums for. So even though they have insurance through their spouses, we would still be on responsible for every single employee that we employ.
Chuck: Let’s say you were insuring all of your employees and you were paying $250,000 a year for health insurance. And now all of a sudden, this Obamacare program comes into effect, and you have a choice of either continuing to pay $250,000 a year knowing that it’s going to escalate year after year also. Or be assessed the penalty, which is going to cost you $100,000 a year. Does it make sense for any business to stay in the private health market rather than just except the penalty and not insure any of their employees?
Jeff: For small- to medium-sized businesses, it makes absolutely no sense to continue insuring employees with private health insurance when you can pay the $2,000 penalty. Now for large businesses, it’s a different story because with very, very large businesses, they use insurance and benefits as an attraction because they’re in competition for skilled labor and that type of thing. But when you’re looking at small- to medium-sized businesses, my educated guess is that you would take, you would go ahead and pay the penalty and your employees essentially would still be insured through the national program.
Chuck: Okay, let’s switch to another topic. Talk to me a little bit about unemployment and two other areas I’d like you to address. One is the unemployment tax and I believe it has gone up this year to pay for higher unemployment benefits that the federal government has extended for long term unemployed. And two, just tell me a little about what you may or may not perceive as abuse of the unemployment system and how that impacts businesses.
Jeff: Sure. Last November, I was at the unemployment tax hearing and they basically assessed a 2% increase in unemployment taxes for businesses. And that was mainly due to the extension of the federal mandate of extending unemployment in which the states then were forced to borrow money from the federal government. And in order to pay that money back with interest, it put states in a situation where they had to increase the unemployment rate, the unemployment taxes. In the restaurant industry, these costs can be quite expensive because the more turnover you have in your industry, the higher ratios that you actually have to pay. The modifier becomes higher because you’re going to have more unemployment claims as you have higher turnover.
That brings me to the situation of unemployment abuse. And unfortunately in this state, there’s a lack of checks and balances, so much so that it really hurts businesses. You have people who can claim unemployment even though they walk off the job. They can make false allegations of sexual abuse. There’s a multitude of things that happen when people get terminated, walk off the job.
And unemployment’s stance essentially is that if an employee hasn’t done something egregious, if they haven’t broken a law, then in this state they’re going to wind up getting unemployment. And every time a business incurs that situation where their employees are able to get unemployment, their modifier goes up, which means that they’re going to be paying more unemployment tax.
The few times that we’ve had to deal with the unemployment division, it was like an interrogation against us. When we found people doing things [they shouldn't], where they caught red-handed, such as theft and, the system is geared toward the employee in the unemployment process. If the employee doesn’t show up for the first hearing, and the business shows up to represent themselves, then another hearing is set. There’s no penalty for not showing. They can call in, yet we have to be there. If we want information, their statement, we have to physically go down to the unemployment bureau within 24 hours of the hearing, which means you have to go down and gather the information to see what the employee said. And then you have to turn around within 24 hours and go back to the hearing. So it makes it very difficult for businesses. And so I’m sure many businesses during the process of appeal just don’t have the time to deal with it, and they wind up losing the case and then paying higher taxes.
Chuck: Does the business pay that tax directly or is that something that the employee pays through payroll deduction out of their paycheck?
Jeff: As far as the unemployment tax?
Jeff: That’s considered a payroll tax that we have to pay quarterly.
Chuck: Okay, it’s not something that you deduct out of the employee’s paycheck where the employee is actually the one that’s paying the …?
Jeff: No, no, no. The 2% tax hike was on businesses.
Chuck: One more area I’d really like to touch on. Tell me how the government mandated minimum wage and overtime rules and regulations impact. And let’s just stay with the restaurant businesses in particular.
Jeff: In the restaurant industry, it’s common for tipped employees to be paid minimum wage because they make a certain amount of income from the tips. The basic minimum wage is that for service industry employees. Now in the restaurant industry here in Nevada, essentially the only people that get paid minimum wage are tipped employees. We can’t possibly employ people for minimum wage in other positions. We can’t pay dishwashers and cooks and hostesses and busser’s minimum wage. We wouldn’t be able to staff our establishments. So essentially the minimum wage is geared for the tipped employee. They make five to six times the amount of money that non-tipped employees make because of their tips.
As the minimum wage keeps increasing, it simply goes to the people making the most money in the restaurant. What that does to an establishment is that it handcuffs them when they want to give a raise to a hostess or a cook or a non-tipped employee. They no longer have the financial wherewithal to do that. Then it becomes difficult to attract employees, such as cooks and dishwashers, when you don’t have the money to pay them.
Ultimately, what’s going to happen in the restaurant industry is that slowly you’re going to see cooks, hostesses, dishwashers and other staff wages going down to the minimum wage because the minimum wage keeps rising. So there’s really no equity in the race of the rising minimum wage.
It really hurts the youngsters coming out of high school, out of college. Businesses now are looking for more seasoned professionals that we don’t have to train for six months for that same wage. So minimum wage has really put a damper on operations. It’s caused us to have to lay people off. It’s caused us to stop any raises. For instance, since the economy has slowed down in 2007, we haven’t raised the base rates for these positions. They’re completely stagnant. And as minimum wage continues to rise, those positions are going to wind up having to be paid less and coming down to the minimum wage at some point in order for restaurants to survive.
Chuck: Now on the overtime issue, let me lay this out and tell me if I’m correct or incorrect and let me know how this affects you. Most people understand that there is a 40-hour work week. And if an employee works more than 40 hours, they’re paid time-and-a-half for overtime. A restaurant can be open 24 hours a day. It could serve breakfast, lunch and dinner. Let’s say you have a waiter working an 8-hour dinner shift on Tuesday night. And then the restaurant schedules him to come in and work the breakfast shift the next morning. That is now more than 8 hours in a 24-hour day and rather than calculating the time weekly and you have to pay time-and-a-half on the extra hours worked above 8 hours within a 24-hour time period. Is this correct? Is that the way it works now?
Jeff: Yeah, that’s actually correct. The federal law is 40 hours in a week. The Nevada state law is more than 8 hours in a day. Bu to make matter much worse, it’s not just 8 hours in a day, it’s 8 hours in a 24-hour rolling period, which makes it extremely difficult when you’re talking about restaurants and trying to staff properly because as we all know, business could be slow one day and very busy the next. Sometimes a person would have to work dinner and then they would be called in for lunch the next day. And now instead of employees switching shifts or whatever, it’s automatic overtime.
And speaking with Catherine Jacoby, President of the Nevada Restaurant Association, she made a really good example with last year concerning Burger King and they were supposed to come in and bring in a whole slew of Burger King’s in the town. And that was the one ruling that stood between them coming here and them staying away. So that is a rule that just makes it almost impossible to operate in the restaurant industry.
Chuck: Let’s touch on this – all the politicians that are in office today and all the candidates who are running for office, are running on the number one issue, which is creating jobs, reducing unemployment. What is it that government and these elected officials could do to help you and your type of business to be able to hire more employees? Is there anything that the government can do that it’s not doing, or should do or stop doing to make it easier for you to hire more employees?
Jeff: The government can, first of all, stop their aggressive behavior when it comes to the fees and the taxes and the social programs, because what’s happened is businesses have gone into a stall. They were waiting to see what was going to happen with Obamacare. The private businesses are seeing too many disincentives right now. They need to incentivize business. Potential business men and womenwho would possibly go into business now are faced with these types of fees. And they are a disincentive to go into business.
The other thing is, Chuck, what banks are going to loan money to start-ups now when you can shave $100,000 or $200,000 off your bottom line because of Obamacare? Do you think the banks are going to loan money to these people to get into business now? They’re not loaning now to profitable companies who want to expand. The money has tightened up.
Government and our elected officials need to regress from all of the fees and unnecessary taxes that we’re paying because we’re at a breaking point, and if they don’t recognize that, it’s going to be too late. The private business man can not declare chapter 11 and stay in business. Once his credit is ruined, he is out of the game, and there is nobody to come in behind him or her in this economic situation where money is so tight in the banking industry.
Our elected officials need to get on the ball and come up with ideas to create jobs, not push businesses out of business, and that’s what’s happening right now. Businesses are collapsing as we speak.
Chuck: And how about from a compliance and regulatory perspective, what is it that the government could do to ease the burden? Are there things as a business person you have to comply with the government that is completely unnecessary that they ought to just drop to make things a little easier for businesses to operate and actually start up businesses?
Jeff: Well, the modified business tax is a good example. It’s essentially a gross sales tax, which hampers our ability to stay in business. And the fees that we have to pay to the fire department every year now. We have to draw plans to show what the inner workings of our restaurant and dining rooms on an annual basis now. The Health Department - every time they come in and give you a B or C rating, it costs $450. You’re going to see those C ratings all over the place now. I’m hearing from other operators that for the first time they’re getting hit with C ratings, which is $400 – $450 out of your pocket to be reinspected.
These are the things that have to stop. The fees and regulations and the permits. If you have businesses in multiple jurisdictions within Clark County and Henderson and the City of Las Vegas and the county and North Las Vegas, you have the identical operation. You have to submit plans every single time, identical plans to each jurisdiction, duplicates.
Chuck: And, last question, you mentioned the modified business tax. For those who don’t know what the modified business tax is, explain that and what should be done with that tax if anything at all.
Jeff: Basically, it’s a payroll tax that is levied upon businesses based on their gross sales. And the problem with that is gross sales could be astronomical and a company could still be loosing money. That tax money is coming off of the top. It’s not coming off the bottom after you have your profit and loss statement. Essentially you’re paying it before you’re paying anything else. And it’s just another way of taking money from business.
It’s not much different than what the Water District pulled a couple of months ago when they levied medium- to small-sized businesses with the bulk of the increase. It has collapsed several businesses already.
Chuck: With the modified business tax though, what I’ve heard is that they’ve exempted small businesses. It’s a fee that’s charged per employee that you hire but small businesses don’t have that fee. Is that your understanding?
Jeff: That’s very small business. You’re talking about businesses that are doing $250,000 and over. I mean most businesses are doing more than $250,000 in sales. So what they do is they exempt the first $250,000 in sales is all. And after that, the tax can be quite astronomical depending on what your sales are.
Chuck: So it’s gross revenue, not net.
Jeff: Exactly. Exactly.
Chuck: Anything else you’d like to share with us on how difficult or easy or helpful the government makes it to do business in Nevada these days?
Jeff: Well, it’s very difficult. I just will close by saying that not only are the local businesses severely hurting right now, but other states are looking at us and saying there’s no way I would want to put a location in Nevada. And most of the restaurant operators here in Nevada that have expanded in the last two or three years have done it out of state. They have gone to Arizona. They’ve gone to Texas. They’ve gone to other states that are much more business friendly.
From Nevada News & Views
(Washington DC) – Today U.S. Senator Dean Heller (R-NV) wrote a letter to members of the bicameral Conference Committee requesting that the Committee craft bipartisan, long-term solutions to pending issues such unemployment benefits, the payroll tax holiday, and physician reimbursement under Medicare.
In the letter, Senator Heller urged the Committee to consider extending unemployment insurance and the payroll tax cut holiday for one year. He also asked the Committee to include a long-term update to the Medicare reimbursement schedule in its bill.
A letter was sent to each member of the Committee. The letter sent to Senator Baucus (D-MT) is below.
Text of the letter below:
January 9, 2012
The Honorable Max Baucus
511 Hart Senate Office Building
Washington, D.C. 20510 – 2602
Dear Senator Baucus:
As the Conference Committee begins discussions concerning a legislative package to address unemployment benefits, the payroll tax holiday, and physician reimbursement under Medicare, I urge you to take this opportunity to craft a bipartisan compromise that will provide the long-term solutions our country needs.
While job creation must be our continuing goal and focus, we must recognize that progress on this front is slow. Times are tough for Americans. My state has the unfortunate distinction of having led the nation in unemployment for more than two years. Unemployment in Nevada persists at the unacceptable rate of 13 percent. For this reason, I urge you to fully extend current federal unemployment programs for at least one year in states like Nevada that suffer from high unemployment. As you may know, I have introduced legislation, the Responsible Unemployment Extension Act (S.1885), fully-paid for legislation that would extend this vital safety net for one year. Unemployed Americans and their families should not have to worry about their immediate future being jeopardized by gridlock and political posturing in Washington.
Furthermore, I would also encourage you to include a yearlong extension of the temporary payroll tax holiday in your compromise legislation. The payroll tax holiday has helped lower taxes for millions of Americans and has put more in the pockets of the average working family. I respectfully request that the Conference Committee strongly consider my legislation, S. 1931, which would extend the payroll tax holiday while also protecting Social Security. This Committee has an opportunity to extend the temporary payroll tax holiday in order to help economic growth, and I hope my legislation can help provide a path forward.
Finally, I urge you to include a long-term update to the Medicare reimbursement schedule in your bill. Unstable reimbursement in Medicare threatens seniors’ access to medical care throughout our nation. The flawed Medicare physician payment system is one of the most pressing issues our healthcare system faces today, yet has been largely ignored by Congress except for short-term extensions that ignore the root of the problem.
American businesses and families are desperate for policies that will create certainty and stability. In focusing on areas of agreement on how to create jobs, such as the Keystone XL pipeline, I believe that we can move our economy forward without raising taxes on job creators. I applaud the Committee’s commitment to finding a way forward to extend these vitally important expiring provisions and encourage you to move beyond a discussion of temporary assistance to one of long-term economic growth, fundamental tax reform, and preserving safety net programs for future generations.