95-039
Response
July 11, 1995
Request
XXXXX
Dear
XXXXX:
Thank
you for your inquire regarding sales tax on tips, gratuities and cover charges. I believe that I understand your concern
regarding our policy. Hopefully the
material and explanation that I providing in this letter will help you to
better understand our position.
Enclosed
you find the copies of:
1) the state statute 59-12-103(e)
2) administrative rule R865-19S-94;
and
3) tax bulletin 5-92.
Section
59-12-103(e) provides that legal basis for taxing meals. The question is what is included in the cost
of a meal. The Tax Commission has over
the years taken the position that all the charges associated with the meal are
subject to the sales tax. An argument
could be made that only the meal is subject to the tax and therefore the rental
of the table and chairs are not taxable.
The Tax Commission rejects this argument and on a transaction basic
taxes the charges made to the customer for the meal, which include all the
costs and the profit of the restaurant.
Administrative
Rule R865-19S-94 requires the business to “collect sales tax on tips or
gratuities included on a patron’s bill and which are required to be paid,
unless the total amount of the gratuity or tip is passed on to the waiter or
waitress who served the customer.....Voluntary tips left on the table or added
to a credit charge slip are not subject to sales tax.”
Tax
Bulletin 5-92 states, “As a rule, tips given to the server, left on the table
or added to a credit card charge slip by the patron are not subject to sales
tax, as long as they are passed on to the server. If the tip or gratuity is added to the patron’s bill as a matter
of policy by management or a private club membership board, the tip or gratuity
is exempt from taxation so long as the total amount of the gratuity or tip is
passed on to the waiter or waitress who served the patron.”
It
is clear from the above cited references that the management of a business can
control the imposition of the tax and avoid the tax on tips and gratuities by
assuring that the tip or gratuity is passed on to the waiter or waitress and
that records are maintained to verify that fact. If management requires pooling of tips or maintains control over
dispersal of polled tips to the service team, the Tax Commission considers the
distributions as compensation as wages and therefore subject to the tax.
The
Tax Commission can not assure complete compliance with the law and our policies
and procedures. We audit businesses on
a random basic and to the extent that we would discover noncompliance we would
assess the business the tax deficiency. If you are aware of situation where a
business is not following the law, we would you be pleased to have you provide
specific information and we will follow.
If
I can provide you additional information, please ask.
Sincerely,
W.
Val Oveson
Chairman