Were separately stated service charges taxable when the club kept part for payroll costs?

Subject

Gratuities

Plain-English summary

The monthly service fee distributed in full to employees was not taxable, but the two mandatory meal charges from which the club retained part were taxable. The club received a monetary benefit when it used about 10% of the charge for its share of federal payroll taxes or for payroll taxes and management base salary.

Florida treated a separately stated gratuity as outside the taxable sales price only when the dealer received no direct or indirect monetary benefit from it.

What this means for you

Calling a charge a gratuity or service fee did not control. The result turned on whether it was separately stated, timely distributed, and passed through completely rather than funding an employer obligation or compensation cost.

Common questions

Q: Was the monthly service fee taxable? No. The entire separately itemized amount was timely paid to employees, and the club kept no benefit.

Q: Were the 20% mandatory meal charges taxable? Yes. The club distributed about 90% and retained the rest for payroll-related costs.

Q: Did distribution to management employees itself make the charge taxable? The ruling focused on the club's retained monetary benefit, not merely on management employees sharing in the distributed amount.

Citations and references

• Fla. Stat. § 212.02(15)(d) — sales of prepared or served tangible personal property
• Fla. Stat. § 212.02(16) — sales price includes services that are part of the sale
• Fla. Stat. § 212.05 — sales tax
• Fla. Admin. Code r. 12A-1.061(3)(c) — separately stated gratuities and dealer monetary benefit
• Green v. Surf Club, Inc., 136 So. 2d 354 (Fla. 3d DCA 1961) — dealer benefit controls gratuity treatment
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 00A-026

Original ruling text

SUMMARY

QUESTION: Are separately itemized gratuities billed by a
private club and restaurant to its members and guests
taxable when 10% of the gratuity is retained by the dealer
to offset its federal payroll taxes?

ANSWER - Based on the facts Below: Separately itemized
gratuities are subject to sales tax when the dealer does
not distribute the gratuities, in full, to its employees.
The percentage used by the dealer to offset its portion of
the federal payroll taxes is a monetary benefit to the
Taxpayer, and the criteria for excluding the gratuities
from sales tax as outlined in Rule 12A-1.061, F.A.C., has
not been met.

May 23, 2000

Re: Technical Assistance Advisement 00A-026
Sales and Use Tax - Gratuities
XXX ("Taxpayer")
Sales Tax Number: XX
Sections 212.02 and 212.05, F.S.
Rule 12A-1.061, F.A.C.

Dear :

This response is in reply to your letter dated July 29, 1999,
requesting the Department's issuance of a Technical Assistance
Advisement ("TAA") pursuant to s. 213.22, F.S., and Chapter
12-11, F.A.C., regarding the referenced matter and parties. An
examination of your petition has established that you have
complied with the statutory and regulatory requirements for
issuance of a TAA. Therefore, the Department is hereby granting
your request for issuance of a TAA.

ISSUE

Whether in the factual situations presented, separately itemized
service charges billed by a private club and restaurant to its
members and guests are subject to sales tax.

FACTS

The Taxpayer operates a private club and restaurant. You have
presented three separate scenarios involving service charges for
which you seek guidance concerning the taxability of the service
charges.

Scenario One. In this situation, the private club charges
members a monthly service fee instead of billing a service
charge on each meal consumed. The entire amount is paid out in
a timely manner to the employees of the club, including servers,
chefs, hosts, hostesses, buspersons, bartenders, and management
staff.

Scenario Two. In this instance, the Taxpayer adds a 20%
mandatory service charge to all guest checks at the time a meal
is consumed. As stated in our telephone conversation,
approximately 90% of the service charge is paid out in a timely
manner to the employees, including management staff. The
remainder is offset against the company portion of the federal
payroll taxes.

Scenario Three. In this instance, the Taxpayer adds a 20%
mandatory service charge to all guest checks at the time a meal
is consumed. Approximately 90% of the service charge is paid out
in a timely manner to the employees, including management staff.
The remainder is applied to the payroll taxes and to the base
salary of management staff.

LAW

As provided in Section 212.02(15)(d), F.S., a sale includes the
furnishing, preparing, or serving for a consideration of any
tangible personal property for consumption on or off the
premises of the person furnishing, preparing, or serving such
tangible personal property. Pursuant to Section 212.05, F.S.,
the sales tax is imposed on the sales price of tangible personal

property. Section 212.02(16), F.S., defines the term sales price
to mean "... the total amount paid for tangible personal
property, including any services that are a part of the sale,
valued in money, whether paid in money or otherwise...."

The case law that exists on the subject of whether a gratuity is
part of the sales price of a taxable item, holds that it is the
value of the transaction to the dealer that controls the
taxability of the transaction. The case of Green v. Surf Club,
Inc., 136 So.2d 354 (Fla.3rd DCA 1961), cert.den. 139 So.2d 694
(Fla. 1962), involved a situation where employees who served
food and drink to members of a club received a share of the
mandatory service charge imposed by the club, instead of
receiving gratuities from the specific patrons they served. The
court in Green stated that the determinative question should be
whether or not the dealer receives a benefit from the charge.

Rule 12A-1.061, F.A.C., regarding transient rental
accommodations provides specific guidance concerning gratuities,
tips, and similar charges. Rule 12A-1.061(3)(c), F.A.C.,
provides that gratuities, tips, and similar charges are taxable
except when the charge is separately stated as a gratuity, tip,
or similar charge on a guest's or tenant's bill, invoice, or
other tangible evidence of sale; and the owner or owner's
representative does not receive, either directly or indirectly,
any monetary benefit from the charge.

In scenario one, the gratuities are not subject to sales tax
since they are separately itemized on the customer's invoice,
are paid out in full to the Taxpayer's employees, and the
Taxpayer does not receive a monetary benefit from the charge.

In scenarios two and three, the gratuities are taxable since
they are not fully distributed to the employees. The percentage
used by the Taxpayer to offset its portion of the employee
payroll taxes is a monetary benefit to the Taxpayer and
therefore, the criteria for excluding the gratuities from sales
tax as outlined in Green v. Surf Club, Inc., and Rule 12A-1.061,
F.A.C., has not been met.

This response constitutes a Technical Assistance Advisement

under s. 213.22, F.S., which is binding on the Department only
under the facts and circumstances described in the request for
this advice as specified in s. 213.22, F.S. Our response is
predicated on those facts and the specific situation summarized
above. You are advised that subsequent statutory and
administrative rule changes or that judicial interpretations of
the statutes or rules upon which this advice is based may
subject similar future transactions to a different treatment
than expressed in this response.

You are further advised that this response, your request and
related backup documents are public records under Chapter 119,
F.S., and are subject to disclosure to the public under the
conditions of s. 213.22, F.S. Confidential information must be
deleted before public disclosure. In an effort to protect
confidentiality, we request you provide the undersigned with an
edited copy of your request for Technical Assistance Advisement,
the backup material and this response, deleting names, addresses
and any other details which might lead to identification of the
taxpayer. Your response should be received by the Department
within 15 days of the date of this letter.

Sincerely,

Richard R. Parsons
Tax Law Specialist
Technical Assistance & Dispute Resolution
(850) 922-4838

Ctrl. No. 38505