At a restaurant, which tips are subject to Colorado sales tax — pooled tips, a mandatory gratuity the customer can't remove, and prepopulated tips the customer can remove at checkout?

Plain-English summary

A dining establishment asked the Colorado Department of Revenue when tips are subject to sales tax. Colorado charges sales tax on the amount paid for food and drink at restaurants — but that "amount paid" excludes gratuities (cash tips, charge tips, banquet tips, and tips separately stated and added to the check by the vendor) when the full amount goes to the people who actually render the service. The letter works through three common situations.

1. Pooled tips. Tips in a tip-pooling arrangement are not subject to sales tax — but only if the entire gratuity is distributed to the employees who actually serve customers (wait staff, bartenders, or, at a counter-service place, the person who prepares and serves the food). If any portion is kept by the employer or paid to an employee who doesn't render service to customers, the whole tip pool becomes taxable. Separately, an employer that pools tips must tell customers in writing — on a menu, table tent, or receipt — that gratuities are shared.

2. Mandatory tips the customer can't remove. If the vendor automatically adds a charge — even one labeled "tip" or "gratuity" — and the customer cannot remove or amend it, then under the rule it isn't really a tip at all. It's part of the price, and it is subject to sales tax. (A restaurant is allowed to auto-add a flat gratuity, e.g., 15%; the deciding factor is whether the customer can take it off.)

3. Prepopulated tips the customer can remove. A suggested/prepopulated tip that the customer can remove or change at the point of sale is not taxed — provided it's a genuine gratuity (cash, charge, banquet, or separately stated) that the vendor distributes to the staff who render the service.

The common thread: a charge is a tax-free "gratuity" only when it is truly voluntary (the customer can decline it) and it is fully passed through to the service staff. Fail either test and it's taxable.

What this means for you

Restaurant and bar owners

Two levers decide whether a tip is taxable: can the customer remove it, and does 100% of it reach service staff. An optional, prepopulated tip the customer can edit, fully paid out to servers, stays out of the sales tax base. A mandatory, non-removable service charge is part of the taxable price — collect sales tax on it. And be careful with tip pools: skimming any portion for the house, or sharing with back-of-house staff who don't render service to customers, can make the entire pool taxable. If you pool tips, post the written notice (menu, table tent, or receipt) that gratuities are shared.

Bookkeepers and accountants for hospitality clients

Review how each "gratuity" line is configured in the POS. Reclassify any mandatory, non-removable charge as taxable. Confirm tip-pool distributions go only to service-rendering employees, since a single misdirected pool can flip a whole category into taxability. Note the written-notice requirement comes from labor law (§ 8-4-103(6), C.R.S.), not the tax statute.

Diners

A suggested tip you can decline isn't taxed. A mandatory service charge you can't remove may have sales tax applied to it, because the state treats it as part of the price rather than a gratuity.

Common questions

Q: Are tips taxed at Colorado restaurants?
A: Genuine, voluntary gratuities that are fully distributed to the staff who render the service are not subject to sales tax. Charges that aren't truly voluntary, or tips not fully passed through to service staff, can be taxable.

Q: Is an automatic 18% gratuity taxable?
A: If the customer cannot remove or amend it, it isn't a "tip" under the rule and is subject to sales tax as part of the amount paid. A vendor can auto-add a gratuity, but the customer's ability to remove it is what keeps it tax-free.

Q: What about the suggested tip buttons on the card screen?
A: Prepopulated tips the customer can remove or change at the point of sale aren't taxed, as long as they're real gratuities distributed to the staff who render the service.

Q: We pool tips — does that change anything?
A: Pooled tips aren't taxed only if the full amount goes to employees who actually serve customers. If the employer keeps any of it, or it's shared with non-service employees, the entire pool becomes taxable. You must also notify customers in writing that gratuities are shared.

Q: Can I rely on this letter?
A: Treat it as guidance, not a guarantee. A General Information Letter is not binding on the Department and makes no determination for any specific taxpayer.

Q: Does this cover home-rule city sales tax?
A: No. The Department administers state and state-administered local sales and use taxes only. Self-collected home-rule cities set their own rules — check with each city.

Citations and references

Statutes and rules:
- § 39-26-104(1)(e), C.R.S. (sales tax on the amount paid for food or drink at dining establishments)
- § 8-4-103(6), C.R.S. (an employer that pools tips must give customers written notice — by menu, table tent, or receipt — that gratuities are shared)
- 1 CCR 201-4, Rule 39-26-104-6 (gratuities excluded from the taxable amount paid)
- 1 CCR 201-5, Special Rule 13 (tips/gratuities and the requirement that they be distributed to staff who render the service)
- 1 CCR 201-1, Rule 24-35-103.5 (general information letter and private letter ruling procedure)

Also referenced in the letter:
- 29 C.F.R. § 531.56(f)(2)(ii) (who counts as service-rendering staff)
- Colorado Department of Labor and Employment, Division of Labor Standards and Statistics, INFO #3 (Tips & Tipped Employees), revised Feb. 10, 2023

Source

• Landing page: Colorado Sales & Use Tax Letter Rulings
• Original PDF: GIL-23-001.pdf

Original ruling text

Office of Tax Policy
P.O. Box 17087
Denver, CO 80217-0087
[email protected]

GIL 23-001
June 22, 2023
XXXXXXXXXXXX
XXXXXXXXXXXX
XXXXXXXXXXXX
Via Electronic Mail: XXXXXXXXXXXX
Re: Sales Tax on Tips in a Dining Establishment
Dear XXXXXXXX:
You submitted a request for a general information letter regarding sales tax on tips in a dining
establishment. The Colorado Department of Revenue (“Department”) issues general information letters
and private letter rulings. A general information letter provides a general overview of the relevant tax
issues but is not binding on the Department. A private letter ruling provides a specific determination for
a specific set of facts, is binding on the Department, and requires payment of a fee. For more
information about general information letters and private letter rulings, please see 1 CCR 201-1, Rule
24-35-103.5.
Issues
1. Whether tips in a tip pooling arrangement are subject to sales tax as part of the amount paid at a
dining establishment.
2. Whether mandatory tips that cannot be removed by the customer are subject to sales tax as part of
the amount paid at a dining establishment.
3. Whether prepopulated tips that can be removed by the customer at the point of sale are subject to
sales tax as part of the amount paid at a dining establishment.
Discussion
Colorado imposes a sales tax upon the amount paid for food or drink served or furnished in or by dining
establishments and other like places of business at which prepared food or drink is regularly sold.1 The
amount paid does not include gratuities such as cash tips, charge tips, banquet tips, and tips separately
stated and added to the sales check by the vendor when the total amount of the gratuity is distributed to
persons who actually render the service.2

1 Section 39-26-104(1)(e), C.R.S.
2 1 CCR 201-4, Rule 39-26-104–6; 1 CCR 201-5, Special Rule 13.

GIL 23-001
June 22, 2023
Page 2
A Colorado employer who pools tips must inform its customers “in writing, including by a notice on a
menu, table tent, or receipt, that gratuities are shared by employees.”3 Pooled tips at a dining
establishment would not be subject to sales tax if the full amount of the gratuity is distributed to the
persons who actually render the service.4 If any portion of the tips from a tip pooling arrangement at a
dining establishment is retained by the employer or distributed to an employee who is not rendering
service to customers, the entire tip pool is then subject to sales tax. Employees who actually render
service may be wait staff, bartenders, or, in the case of a dining establishment with counter service
only, an employee who prepares and serves the food to the customer.5
Tips at a dining establishment that are added by the vendor, whether described as a tip or gratuity, may
be subject to sales tax as part of the amount paid. Special Rule 13 does not define the terms “gratuity”
or “tip,” which are synonyms. The dictionary definition of “gratuity” is “something given voluntarily or
beyond obligation usually for some service, especially: tip.”6 A vendor may automatically add a tip at a
flat rate to a customer’s check.7 However, if a customer cannot remove or amend the charge, then the
charge is not a “tip” or a “gratuity” within the meaning of the rule, and it is subject to sales tax.8
Prepopulated tips that can be removed by the customer at the point of sale at a dining establishment
are not subject to sales tax, if the prepopulated tip is a cash tip, a charge tip, a banquet tip, or a tip
separately stated and added to the sales check by the vendor. As discussed above, the amount must
be distributed by the vendor to the persons who actually render the service.9
Miscellaneous
This letter represents the good-faith opinion of Department personnel who are knowledgeable on state
taxes issues. However, the Department does not make a specific determination on any of the issues
raised and the Department is not bound by this general information letter.
The Department administers state and state-administered local sales and use taxes. This letter does
not address sales and use taxes administered by self-collected home-rule cities. You may wish to
consult with those local governments that administer their own sales or use taxes about the applicability
of those taxes. Visit our website at tax.colorado.gov for more information about state and local sales
taxes.
Thank you for your request.
Sincerely,
Office of Tax Policy
Colorado Department of Revenue
3 Section 8-4-103(6), C.R.S. See also Colorado Department of Labor and Employment, Division of Labor Standards and

Practices, Interpretive Notice & Formal Opinion (“INFO”) #3, revised February 10, 2023:
https://cdle.colorado.gov/sites/cdle/files/INFO%20%233%20Tips%20%26%20Tipped%20Employees%20Revised%20Fe
b%2010%202023.pdf
4 1 CCR 201-5, Special Rule 13.
5 29 C.F.R. §531.56(f)(2)(ii).
6 Merriam-Webster.com Dictionary, https://www.merriam-webster.com/dictionary/gratuity (last visited Jun. 12, 2023).
7 1 CCR 201-4, Rule 39-26-104–6; 1 CCR 201-5, Special Rule 13. For example, a restaurant may add an automatic 15%
gratuity.
8 1 CCR 201-4, Rule 39-26-104–6; 1 CCR 201-5, Special Rule 13.
9 Id.