Did a banquet tip become a taxable service charge merely because the customer asked the restaurant to include the customer-selected amount in a tax-and-tip price?

Plain-English summary

A restaurant and banquet operator handled gratuities three ways: diners left tips directly, a banquet customer added an amount that the restaurant had not specified, or the customer asked for a tax-and-tip-inclusive quote using a tip percentage selected by the customer. The selected percentage sometimes was below the union's stated 14% minimum.

The audit taxed any banquet tip that passed through the restaurant's hands as a mandatory charge. The hearing officer rejected that approach. Regulation 1603(f), as described, made seller-added service charges taxable even when used instead of tips, but this restaurant did not impose such a charge.

Instead, the customer voluntarily selected the tip amount, the restaurant added that amount to the meal price as requested, and the restaurant distributed it to employees. Evidence also showed the restaurant did not always pay the union minimum, so the collected amounts were not mandatory charges under the union contract.

The recommendation directed deletion of tax measured by $54,799 in disputed banquet tips.

Common questions

Did routing a tip through the restaurant automatically make it taxable?

No. The source focused on whether the seller imposed the amount or the customer offered it voluntarily.

What if the restaurant itself added a mandatory service charge?

The cited regulation treated a seller-added service charge as part of the taxable meal price.

Was the tip percentage always 14%?

No. Customers selected the percentage, and it sometimes was below 14%.

Was the recommendation the final Board action?

The source does not show a later final disposition.

Citations and references

• California Sales and Use Tax Regulation 1603(f) (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/550-0770.pdf

Original ruling text

STATE OF CALIFORNIA
BOARD OF EQUALIZATION

In the Matter of the Petition
)
for Redetermination of State
)
and Local Sales and Use Tax Taxes: )
)
F--- S--- CO.
)
)
)
Petitioner
)

550.0770

DECISION AND RECOMMENDATION

Account No. SR -- XX XXXXXX

The above-entitled matter came on regularly for hearing on April 13, 1977 in Oakland, California. H. L. Cohen, Hearing Officer

Appearing for Petitioner:

Mr. R--- T---, Attorney at Law
Mr. S. K. K---, Assistant Secretary
Mr. A. R---, Maitre d’Hotel

Appearing for the Board

Mr. G. J. Chew, Auditor
Oakland District
Mr. A. Costa, Supervising Auditor
Oakland District

Protest

Petitioner protests the assertion of tax on banquet tips not reported. Tax was asserted pursuant to an audit covering the period from October 1, 1973 through June 30, 1976, and a determination issued December 7, 1976. The amount upon which the protested tax is based is $54,799. Contention Petitioner contends that the banquet tips are voluntary and thus not subject to tax. Summary 1. Petitioner is a corporation engaged in business as a restaurant, fish market, bar and liquor store. The last prior audit was through December 31, 1972.

F--- S--- CO.
SR -- XX XXXXXX

-3-

May 10, 1977
550.0770

2.
Petitioner as part of its business serves banquets. Union rules provide that employees serving banquets be paid a minimum tip of 14%. Petitioner states, and the audit confirms, that petitioner does not adhere to this rule. Tips at banquets are handled in one of three ways: (1) individual diners leave tips directly; (2) a tip in an amount not specified by petitioner is added to the bill for the banquet by the customer; or (3) at the customer’s request, petitioner quotes a price on a tax and tip included basis, with the tip percentage specified by the customer. The percentage is sometimes less than 14%. The position of the auditor is that if the tip for the banquet went through petitioner’s hands it was a mandatory charge subject to tax. Analysis and Conclusions Sales and Use Tax Regulation 1603(f) states that amounts designated as service charges which are added to the price of meals are a part of the taxable selling price of the meals even though such service charges are made in lieu of tips. In this case it is clear that petitioner did not collect a service charge either in lieu of tips or otherwise. Rather, it added to the price of the meals an amount specified by the customer and distributed this amount to its employees. The amount was not a charge made by petitioner but was voluntarily offered by the customer. Petitioner did not pay its employees 14% or more as tips on all banquets, thus its contention is valid that the amounts that it did collect were not collected pursuant to the union contract. The tax should therefore be deleted. Recommendation Delete tax. Petitions Unit to make adjustment.

________
H. L. Cohen, Hearing Officer

May 10, 1977
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Date