Was a country club's separately billed prepaid service charge taxable when it funded employees' guaranteed 17% share of food-and-beverage sales?

Plain-English summary

Florida's revised advisement treated the club's prepaid service charge as part of the taxable sales price of food and beverages. Members paid a separately stated charge based on estimated annual food-and-beverage revenue. Employees received 17% of actual sales in addition to hourly wages.

The club made up any shortfall if actual employee payments exceeded collections and paid out excess collections under the described policy. Florida concluded that the club benefited from using the prepaid funds to meet its employee-compensation arrangement and was more than a mere conduit collecting tips for servers.

Billing frequency did not change the answer. The charge was taxable when billed monthly, quarterly, semiannually, or annually.

What this means for you

Restaurants and clubs should analyze who controls and benefits from a mandatory service charge, how employee payments are calculated, and whether the employer guarantees or uses the funds. Separate accounting alone did not make this charge a nontaxable gratuity.

Common questions

Q: Did separate billing make the charge nontaxable?
A: No. Florida included it in the food-and-beverage sales price.

Q: Why was the club more than a conduit?
A: It used collections to fund a guaranteed percentage-of-sales compensation arrangement and covered shortfalls.

Q: Did billing annually instead of quarterly matter?
A: No. The ruling applied across the listed billing frequencies.

Q: Was this the Department's original answer?
A: No. TAA 01A-023R revised the earlier TAA 01A-023.

Citations and references

• Fla. Stat. § 212.02(15)(d) and (16) — food service and sales price
• Fla. Stat. § 212.05 — sales-tax imposition
• Green v. Surf Club, Inc., 136 So. 2d 354 (Fla. 3d DCA 1961)
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Revised advisement: TAA 01A-023R

Original ruling text

SUMMARY

QUESTION: Whether, in the factual situation presented, an
annual service charge billed by a private club and
restaurant to its members guests is subject to sales tax,
when the charge is used salaries of the service staff.

ANSWER - Based on Facts Below: The annual service charge
billed by the Club to its members are services that are a
part of the sales price of the food and beverage sales to
the Club's members. The Club is required to collect sales
tax on the amount of "Prepaid Gratuity" when the gratuity
is charged to the members.

Aug 19, 2003

Re: Technical Assistance Advisement 01A-023R
Sales and Use Tax - Gratuities
XXX ("Club")
Florida Sales Tax Number: XX
Sections 212.02 and 212.05, F.S.

Dear :

In response to your letter dated February 2, 2001, Department
issued to you Technical Assistance Advisement ("TAA") No.
01A-023, dated April 30, 2001, pursuant to s. 213.22, F.S., and
Chapter 12-11, F.A.C., regarding the referenced matter and
party. After further consideration of the issues at hand, the
Department has revised its response to the questions contained
in your petition. This response constitutes Revised Technical
Assistance Advisement No. 01A-023R.

ISSUE

The issue is (sic) this advisement is whether, in the factual
situation presented, separately itemized service charges billed
by a private member-owned country club and restaurant to its

members and guests are subject to sales tax.

FACTS

The Club operates a private member-owned country club organized
under the laws of Florida as a not-for-profit corporation. The
Club maintains two 18-hole golf courses, tennis courts, a
swimming pool, and a main clubhouse with dining facilities for
use by its members. As stated in your Letter of Request for
Technical Advisement:

The Club provides gratuities to its food and beverage
personnel based on a percentage of actual gross food and
beverage revenue. At the beginning of the fiscal year, the
Club estimates the gross food and beverage revenue for the
year. The Club multiplies this estimated revenue by 17
percent to determine the estimated gratuities to be paid to
the food and beverage personnel. This amount is stated
separately on the member's bills as a service charge. The
members are billed quarterly for this service charge.

As the money is billed, an entry is made to record the
receivable and a corresponding liability account for the
estimated amount to be paid to the employees. Each pay
period (every two weeks) the food and beverage employees
are paid 17 percent of the actual sales for that period in
addition to their hourly rate, much as a commissioned
employee would be paid based on a percentage of sales.

As the money is paid to employees, the liability account is
reduced on the books of the Club. It is possible that if
food and beverage sales exceed the budgeted amount, the
Club would pay out more to the employees than it collects.
Likewise, it is possible that if actual food and beverage
sales are less than expected, the Club will have collected
more from the members than what it pays out to employees.
Current policy is that any excess service charge that is
collected is paid out at the end of the fiscal year to
employees....

You contend that the Club receives no benefit from the

aggregated amounts billed as service charges to the members, as
the charges are separately accounted for in the Club's books and
records. Furthermore, the funds are not co-mingled, but are
maintained in a separate payroll bank account for gratuities
only.

You have presented three scenarios involving service charges for
which you seek guidance regarding the taxability of the service
charges. For each of the scenarios presented, you question
whether the taxability of the service charge would be subject to
sales tax if the service charge was billed to the members
annually, semi-annually, or monthly, rather than on a quarterly
basis.

Scenario One. In this situation, the total of the service
charges billed to the Club members is less than or equal to the
amount distributed to employees and, therefore, all of the
service charge is paid out to the food and beverage personnel.

Scenario Two. In this instance, the total of the service charges
billed to the Club members exceeds the amount distributed to
employees and, at the end of the fiscal year, the excess is paid
out on a pro-rata basis to the food and beverage personnel
employed at the fiscal year end.

Scenario Three. In this instance, the excess year-end balance in
the service charge account is carried over to the following
fiscal year to reduce the amount members will have to pay in
service charges for the next year.

LAW AND DISCUSSION

Section 212.02(15)(d), F.S., provides that a sale means and
includes "[T]he 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., 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 ...." (e.s.)

The case of Green v. Surf Club, Inc., 136 So.2d 354 (Fla.3rd DCA
1961), cert.den. 139 So.2d 694 (Fla. 1962), addressed whether a
gratuity is part of the sales price of meals and prepared food
served to members of a private club, the Surf Club. The Surf
Club automatically added a service charge to the price of the
food and beverages sold to its members and patrons in lieu of a
"tip." By agreement, the employees waived their right to
receive gratuities from the patrons whom they served on the
provision that the Surf Club would collect a fixed percentage of
the gross sales of the food and beverage. The service charge
collected by the Surf Club was then remitted monthly to the
employees as part of their wages or as a bonus.

In the Green case, the court determined that the Surf Club acted
as no more than an instrumentality or conduit for the collection
of gratuities for its service personnel. However, the court
also stated:

... There may be situations wherein the collection of a
fixed service charge is taxable, such as where the
assessment and collection thereof has no relationship to
the sums received by the service personnel but is retained
by the employer as a portion of the gross proceeds on the
sale of food and beverage. The determinative question in
each instance should be whether or not the "dealer"
receives a benefit from the involuntary charge. If he does,
he should be taxed. If he does not, no tax should be
levied. Id. at 356.

In the case at hand, the operation of the Club differs from the
operation of the Surf Club in the Green case. The amount of the
service charged collected by the Club from its members is an
estimate that enables the Club to guarantee, in advance of each
fiscal year, the minimum amount of gratuities that will be paid
to the Club's food and beverage personnel during the upcoming
fiscal year. The Club receives funds from the members and uses
those funds to pay food and beverage personnel, in addition to
their hourly wages, seventeen percent (17%) of the Club's actual

gross food and beverage sales for each pay period. The Club
will make up any shortfall when the amounts due to the employees
exceed the service charges collected by the Club. If actual
food and beverage revenue are less than estimated, then the Club
will pay to employees any excess service charge collected from
the members. In this instance, the Club is more than an
"instrumentality or a conduit for collection" when utilizing the
funds collected from the members to pay employees their
percentage of the food and beverage sales for each pay period.
The Club does receive a benefit from the collection of the
prepaid service charges from its members for the services of
furnishing, preparing, and serving food and beverages to the
members.

CONCLUSION

The amounts of service charges billed by the Club to its members
are part of the sales price of the food and beverage sales to
the Club's members. The Club is required to collect sales tax
on the amount of the service charge when it is charged to the
members. When the funds collected from the members are billed
monthly, quarterly, semi-annually, or annually and the funds are
used to pay employees a stated percentage of food and beverage
sales, the Club is utilizing the funds to pay its food and
beverage employees and does receive the benefit of the use of
the funds.

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

Control No. 54791