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Freebie and the Bund

What happened to all those free-PCs-for-employees programs launched last year? You'd be surprised.
John Goff, eCFO
April 15, 2001

In September, executives at German media giant Bertelsmann AG (www.bertelsmann.com) joined the growing ranks of companies offering employees free computers and low-cost Internet access for home use. Bertelsmann's plan, dubbed PC/Web Offer for All, pretty much mirrored schemes launched earlier by Ford Motor Co. (www.ford.com), Delta Air Lines (www.delta.com), and Intel (www.intel.com), among others.

Each Bertelsmann employee who signed up for the program would receive a PC plus Net access for next to nothing. This philanthropy netted Bertelsmann tons of goodwill from its 75,000 global workers. There was only one problem: Company executives apparently forgot about rendering unto Caesar. Says Adolf Grossmann, an HR manager who oversees the project at Bertelsmann: "In some countries in Europe, the program created a high tax burden for employees."

He's not kidding. In France and Germany, PC/Web Offer for All could have been dubbed Taxes for All. In Germany, a free PC would have cost an employee $700 in taxes and "social contributions." Given that bill, Bertelsmann put the program on hold in the homeland.

Other corporate PC-givers ran into similar problems. "Each country in Europe has its own tax laws," reports Kathleen Vokes, a public affairs manager at Ford. "We want to ensure that the program isn't a tax burden for employees. So it's taken some time."

In Bertelsmann's case, part of that time involved arm-twisting. In December, after months of talks, the Bundesrat and Bundestag (Germany's governing bodies) amended the tax law, affixing a reduced 25 percent flat tax on PCs. The new rules also allow corporates to lend computers to workers for 32 months, free of tax. Soon after, Bertelsmann relaunched the free PC program in Germany.

Whether the free home PCs are taxable in the US ... well, that's hard to pin down. eCFO contacted tax advisors at several Big Five consultancies, but none would talk on the record. When we contacted the IRS (www.irs.treas.gov), spokesman Ken Hubenak said the agency is "very aware of the situation." But, he added, "there has been no ruling on this topic."

Maybe there should be. Executives at Intel concluded that the PCs are taxable. "It'll show up as income," spokesman Tom Potts said in an interview in January. "So it's taxable." Potts noted that Intel would pay the IRS. But BMG, a division of Bertelsmann, required employees to cover the tax bill on the imputed value of their free home computers.

Conversely, a Delta spokesman says the airline didn't assess taxes on the free PCs-- except for workers living in California. And Ford's Vokes claims there is no tax consequence for the 135,000 US workers who signed up for free PCs. A source at the United Auto Workers wouldn't confirm that, however, saying only, "There was some discussion on this, but I don't know how it turned out."

How it turned out at Intel wasn't so hot. Worried about the slumping economy, the chipmaker suspended its free PC program in February. Says Potts: "This will save us several hundreds of millions of dollars."




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