Was a mandatory three-cent service charge in lieu of a tip included in the taxable price of a country club drink?

Plain-English summary

A country club proposed charging 55 cents for a drink: 50 cents for the beverage, three cents as a mandatory service charge in lieu of a tip, and two cents for sales tax. The service-charge collections would be distributed among waitresses and other employees.

The letter included the required three cents in the tax measure because a customer had to pay it to obtain the drink. Under the cited rule, only tips or service charges left voluntary for the customer were exempt.

Tax applied to the full 55-cent price less the tax-included deduction. The club also had to tell customers that sales-tax reimbursement was included, using a posted notice, menu notice, or price breakdown; otherwise the sale would not be treated as tax included.

The official index, URL, and PDF title metadata identify this as 550.0740. The PDF's first text line instead says 557.0740, even though its date, service-charge subject, and holding match the official 550.0740 entry. This page preserves and discloses that inconsistency.

Common questions

Did paying the service charge to employees remove it from gross receipts?

No. Its mandatory nature controlled the stated result.

What distinguished an exempt tip?

The customer had to be free not to pay it.

Was the price automatically treated as tax included?

No. The club had to notify customers that sales-tax reimbursement was part of the price.

Citations and references

• Sales and use tax Ruling 53(C) (enclosed and 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/550-0740.pdf

Original ruling text

557.0740

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
September 22, 1953
Your letter of July 1, 1953
Attention:

Mr. REDACTED TEXT

Gentlemen:
Your client, a country club, proposes to sell alcoholic beverages at its bar at a price of 55¢ per drink. This price breaks down to 50¢ for the drink, 3¢ for a service charge in lieu of a tip, and 2¢ for sales tax. All service charges collected will be divided among the waitresses and other employees each month. The sales tax applies to the entire price the purchaser is required to pay in order to obtain the drink. Since the 3¢ service charge is required to be paid, it is part of the measure of tax. Tups and services charges are exempt from the tax only if the payment is voluntary on the part of the customer. See Section C of Sales and Use Tax Ruling 53 (copy enclosed). Accordingly, tax applies to the entire 55¢ charge, less the deduction for “tax included”. Your client must in some manner indicate to customers that the customer is paying sales tax reimbursement. This may be done by a posted notice or notice on the menu that sales tax reimbursement will be added. It may also be done, as you have suggested, by showing either on the menu or on a posted notice a breakdown of the total price. Otherwise, the sale will not be regarded as tax included. Very truly yours, Bill Holden Junior Counsel BH:ph cc:

San Jose – Tax Administrator