Despite warnings two years ago from the inspector general, hundreds of state transportation department employees and retirees continued to drive toll-free on the state’s highways, with taxpayers footing the bill.
The perk, enjoyed by current and former Massachusetts Department of Transportation employees since at least 2009, and likely costing taxpayers at least $1 million, was discontinued this week following inquiries by the Globe. The agency said 467 people were using the EZ-Pass transponders for free.
MassDOT declined to say whether it had paid taxes on the benefit or reported it to the IRS, saying only that the matter is under review.
The issue of state employee perks has taken on new urgency amid a state comptroller investigation into the untold number of untaxed benefits given to public employees across the Commonwealth.
The probe follows recent revelations the state had failed for decades to pay taxes on tens of millions of dollars in commuting perks for State Police troopers. The failure of public agencies to pay taxes on fringe benefits puts the agencies at risk for a substantial bill for back taxes. Tax specialists have told the Globe that employers are the ones typically held responsible.
“How widespread is this problem?’’ said Eileen McAnneny, president of the Massachusetts Taxpayers Foundation, a business-backed watchdog group.
McAnneny said her organization isn’t keen on the state using taxpayer money to pay delinquent charges on employee perks, which should typically be reported as employee income, with employees shouldering their share of taxes.
“It’s essentially a transfer of tax liability from individual employees to taxpayers,’’ McAnneny said. “Is that a fair or best use of taxpayer money?’’
Following questions from the Globe, MassDOT officials said they will take “steps to deactivate these nonrevenue transponders.’’
In 2016, Glenn A. Cunha, the state’s inspector general, criticized the transportation agency for forfeiting more than $980,000 in toll revenue between 2009 and 2015 because of free transponders and passes. Cunha said he could find no business need or collective bargaining agreement that required MassDOT to provide the benefit. It said MassDOT discontinued the passes while the inspector general was investigating, but nonetheless allowed free transponders to continue.
MassDOT spokeswoman Jacquelyn Goddard was unable to say why the agency had not scrapped free transponders after the inspector general’s 2016 warning. The department was also unable to determine whether it had reported the perk to tax authorities and paid appropriate taxes.
MassDOT said the practice of doling out free transponders and passes to employees started under the old Massachusetts Turnpike Authority. For years, Turnpike Authority workers were allowed to keep transponders and passes that allowed them to drive through toll plazas for free after retirement.
MassDOT then allowed the practice to continue, after the department was created by merging the Turnpike Authority and other agencies in 2009. MassDOT said it had closed nearly 300 of the free transponder accounts since 2016, but did not explain why more than 450 others remained open.
A decade ago, the state faced similar scrutiny following revelations that state lawmakers for years had received a per diem for mileage, meals, and other expenses. The state didn’t report those payments to the IRS as employee income and did not pay taxes on the money.
When that error was discovered, the state worked out an agreement with the IRS and used taxpayer money to pay roughly $1.6 million in taxes from 2005 through 2008.
MassDOT is not the only transportation agency with employee perks that raise questions about the tax implications. The Massachusetts Bay Transportation Authority provides free parking to some employees at a number of T stations where no public parking is available at the facilities, including the Airport Station on the Blue Line, and the Ruggles and Back Bay stations on the Orange Line, according to T spokesman Joe Pesaturo.
“Some MBTA stations have designated spaces for the employees who require them in order to report to duty,’’ Pesaturo said. Pesaturo was unable to say whether employees and the agency pay taxes on the perk. He said in a statement that when the agency’s payroll was transferred to the state’s system last year, the state comptroller “determined the T was in full compliance with IRS standards.’’
Not so, said comptroller Thomas Shack, whose office is now probing employee perks across all state agencies. Shack said that his office offers guidance to payroll directors at the state’s 151 departments, but that payroll directors are responsible for signing off on the accuracy of their accounts.
Shack said his office would never give advice to any agency that it is in total compliance with IRS standards, because its impossible for his office to determine without knowing all the facts.
IRS rules allow employers to provide workers free parking, as long as the benefit is not worth more than $260 monthly. Any value above that is taxed, under IRS rules. The IRS determines the value of employer-provided parking based on the amount someone would have to pay for the parking on the open market.
McAnneny, of the Taxpayers Foundation, said employers commonly face such questions about parking, and tax rules can be confusing.
“If the guidance is not clear cut, and if there is gray area, employers try to make their best guess,’’ she said. “But if an auditor disagrees, then there are tax penalties, and getting it right is pretty important for [taxpayers] that have to pay the liabilities.’’
Kay Lazar can be reached at firstname.lastname@example.org