Was the mandatory amount labeled as a tip in a riverboat cruise-and-meal package included in taxable gross receipts?

Plain-English summary

A riverboat operator charged $50 for a cruise with a meal and alcoholic beverages. Its breakdown assigned $23.75 to the meal, $1.72 to tax, $18.75 to the cruise, and $6.28 to a tip. The operator said the tip covered both cruise and meal activities.

The memorandum said mandatory service charges imposed with meals and drinks were included in taxable gross receipts. The label "tip" did not by itself make the amount nontaxable.

An allocation was possible, but only with evidence. If the operator could prove that a specific percentage of the amount was actually paid to ship personnel who did not prepare or serve meals or drinks, that percentage should be excluded from taxable gross receipts. The reviewer was instructed to obtain the fixed charge for a cruise without meals or drinks and compare its tip allocation with the $6.28 allocation in the combined package.

Common questions

Was the full $6.28 automatically taxable?

The memorandum treated the mandatory food-and-drink service portion as taxable but allowed a substantiated percentage paid to non-food-service ship personnel to be excluded.

Was calling the charge a tip enough to exclude it?

No. The source required proof of who received the allocated amount and what work they performed.

Did the memorandum set the allowable allocation percentage?

No. It directed the reviewer to gather and compare the operator's cruise-only pricing information before determining the allocation.

Citations and references

• California Sales and Use Tax Annotations 550.0740 and 550.0760 (as cited)

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/550-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/550-0688.pdf

Original ruling text

State of California

Board of Equalization
Legal Division

550.0688

Memorandum

To:

Mr. Timothy Raboy
Return Review Section - MIC:35

From:

Thomas J. Cooke
Tax Counsel

Subject:

Taxable Allocation of Tips

Date:

May 11, 1993

This office has received a memorandum from you dated March 22, 1993, in which you requested an opinion as to the tax application of a sum allocated to tips. You state in your memorandum that the taxpayer operates a riverboat company in --County. Along with cruises of the --- River, the taxpayer offers meals and alcoholic beverages. When the customer desires a cruise and meal, a lump-sum charge of $50.00 is made. The $50.00 charge is broken down as: Meal Tax Cruise Tip

$23.75
l.72
18.75
6.28

The taxpayer has advised the Board that the tip is for cruise and meal. You requested that this office advise you on the tax application of the tip amount. Where service charges are mandatorily imposed upon the purchase of meals and drinks, these charges are included in taxable gross receipts (Sales and Use Tax Annotations 550.0740, 9/22/53; 550.0760, 9/24/65). If the taxpayer can show that a specific percentage of the sum allocated to tips is, in fact, paid to ship personnel who do not prepare and serve meals or drinks, that percentage should not be includible in taxable gross receipts. The taxpayer should be asked for a breakdown of the fixed charge imposed on a passenger who does not request a meal or drinks. The sum allocated in that case to tips should be compared to the $6.28 sum allocated tips in the charge for a cruise with meals.

TJC:sr