99-006
Response May 4, 1999
REQUEST LETTER
January 7, 1999
Dear Ms Rees:
We seek an opinion from your office concerning whether
certain automatic charges imposed by a private club on all food and beverage
transactions are gratuities or service charges.
Our client is a private club which serves food and
beverages to Club members and their guests on its premises. Its annual revenues exceed one million
dollars.
The Club imposes an automatic charge, variously
described on some Club forms either as a "service charge" or a
"gratuity", on all food and beverage transactions. The amount of the
charge is 15% for a la carte service or 20% for banquet service.
The amount of the charge is set by the Club in advance
of the service being rendered and without regard to the quality of the service.
In other words, the member must pay the automatic 15% or 20% whether or not he
or she feels the service merits such an amount.
The amount of these automatic charges is
non-negotiable. The server is not authorized to modify or delete the charge.
The member is normally presented with, and signs, a check or "chit"
when he or she is first seated and before the service is rendered. The chits
come in various forms some of which refer to "service charge" being
added, while others use the word "gratuity". We have
attached copies of these forms.
If a member is dissatisfied with any aspect of his
experience at the Club, the Club may, in its discretion, write off all or any
portion of the member's bill for a particular function. Such write offs could
include the automatic charge.
The automatic charges appear on the member's monthly
statement as "service charges", in contrast to "additional
gratuities", which is how the statements describe tips left by members for
particular servers. A copy of a typical monthly statement is also enclosed.
Normally, the automatic charge is not calculated until
the checks or chits reach the accounting department, which does the calculation
for each food, beverage or banquet transaction. On rare occasions, if a member
asks to see his bill at the time the service is rendered, the server or a
manager will manually calculate the automatic charge and add it to the bill so
that the member can see his entire bill.
There are no cash transactions at the Club other than
cash tips occasionally left by members for particular servers. All charges are
signed for by the members and appear on the statement sent to the members by
the Club each month.
The automatic charges variously described as service
charges or gratuities are billed and collected by the Club under a separate
accounting code. The Club reports the charges as "service charges" to
state revenue authorities and pays sales taxes on the amounts so reported.
At one time the Club distributed a portion of these
automatic charges to its servers. In May of 1993 the servers voted approval of
a change in their own method of compensation so that instead of a low base rate
and a share of the automatic charge, they received a higher flat rate several
dollars in excess of the state and federal minimum wage, but no portion of the
automatic charge.
Our questions are as follows:
1 Do the
amounts collected as automatic charges belong to the Club or the servers?
2. Would
your opinion change if the members who pay the automatic charges believe that
such charges are distributed to the servers?
Thank you very much for your time and thoughtful
opinion. If at all possible, we request
that you provide your opinion at your earliest convenience within the next
ninety days. If you have any questions regarding the above facts, please call
me at 619-285-8181, and I will follow up with a clarifying letter.
Very truly yours,
NAME
COMPANY
RESPONSE
LETTER
May 4, 1999
NAME
COMPANY
RE: Advisory
Opinion - Automatic Gratuity or Service Charge
Dear NAME,
We have received your request for an advisory opinion
concerning the automatic gratuity or service charge your client, the AClub,@ adds to each
meal it serves. You state that a charge
of 15% or 20% is automatically added to all food and beverage transactions. You ask if these automatic service charges
belong to the Club or to the servers employed by the Club and whether the
customers= beliefs concerning the distribution of these charges
is relevant in this decision.
Whether or not the automatic charges belong to the
Club or its employees is a contractual matter between the Club and its
employees and customers that does not directly involve the Commission=s duty to collect taxes and administer Utah=s tax laws.
The Tax Commission=s jurisdiction does not extend to contractual law
under these circumstances, and the Commission is consequently unable to answer
your specific questions as to the ownership of these charges. For income tax purposes, however, based on
the facts outlined, we believe the charges should be included in the taxable
income of the Club, not the servers.
However, we are able to inform you of the sales tax
liabilities that arise because of the automatic charges. You have represented that the Club collects
sales tax on the service charges. That
practice accords with Utah law. Utah
Admin. Code R865-19S-94 (copy enclosed) requires that any business must collect
sales tax on tips and gratuities that are automatically included on a bill
unless the total amount of the gratuity or tip is passed on to the server who
waited on the customer. Tips
voluntarily left by or added to the charge by the customer are not subject to
sales tax. Accordingly, as you indicate
the Club retains the entire automatic charge with no portion distributed to the
servers, the entire automatic service or gratuity charge is subject to sales
tax. This sales tax is due regardless
of any member=s misunderstanding that the charges are distributed to
the servers.
Should you ever wish to distribute the automatic
charges differently, we have enclosed Tax Bulletin 5-92 (Tips, Gratuities, and
Cover Charges) for your review. Please
contact us if you have any other questions.
For the Commission,
R. Bruce Johnson
Commissioner
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