Was a country club's mandatory annual prepaid gratuity subject to Florida sales tax?

Plain-English summary

Florida taxed the club's mandatory annual prepaid gratuity as part of food-and-beverage sales price. The club calculated the charge from estimated revenue and used the pool in compensating service employees. Because the involuntary charge benefited the club's wage obligation, it was taxable when billed.

What this means for you

Calling a mandatory charge a gratuity does not make it nontaxable; actual use and employer benefit matter.

Common questions

Q: Did separate billing make it exempt? No.

Q: Did payment to employees automatically make it voluntary? No.

Citations and references

• Fla. Stat. §§ 212.02 and 212.05 — sales price and tax
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 03A-013

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: 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.

Mar 19, 2003

Re: Technical Assistance Advisement 03A-013
Sales and Use Tax - Gratuities
XXX ("Club")
Florida Sales Tax Number: XX
Sections 212.02 and 212.05, F.S.

Dear:

This response is in reply to your letter received by the
Department on March 4, 2002, 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

The issue in 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, a fitness center, 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 20
percent to arrive at estimated gratuities to be paid to

food and beverage personnel. The total estimated
gratuities are divided by the number of total members to
determine the annual estimated gratuity per member. This

amount is

separately stated on the members' bills as a "Prepaid
Gratuity.". The members are billed annually for this

gratuity.

As the Prepaid Gratuity 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 20 percent of the actual sales for that
period in addition to their hourly rate. Food and beverage
employees are guaranteed a minimum hourly wage per shift.
If the employee's total regular hourly pay earned per shift
plus the calculated gratuity divided by the number of hours
worked in the shift is less than the guaranteed minimum
hourly wage per shift, supplemental pay is awarded to meet
the guaranteed minimum wage. This supplemental pay is also

drawn from the Prepaid Gratuity account.

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 the
employees. The Club's policy is that any excess year-end
balance in the Prepaid Gratuity account is carried over to
the following fiscal year to reduce the amount members will
have to pay in Prepaid Gratuities for the next year.
Conversely, any deficient year-end balance in the Prepaid
Gratuity account increases the amount members will have to

pay in Prepaid Gratuities for the next year.

The amounts collected from the members for the service
charge are separately accounted for in the books of the
Club....

The Club argues that it receives no benefit from the gratuities
paid by the members, as all of the gratuities are paid out to

the employees. However, this is not a statement of fact.

LAW AND DISCUSSION

Section 212.02(15)(d), F.S., provides that a sale means and
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., 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...." (€.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 was 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

"Prepaid Gratuity" collected by the Club from its members is an
estimate done for the convenience of the Club and its members.
The Club receives funds from the members and uses those funds to
pay food and beverage personnel, in addition to their hourly
wages, twenty percent (20%) of the Club's gross food and
beverage sales for each pay period. The Club will make up any
shortfall and credit the members for any overage. The Club also
may utilize the gratuities to make payments towards its
employees’ guaranteed fixed salaries, if the employees’ regular
wages plus the pro-rata share of the gratuity is less than the
guaranteed amount. In this instance, the Club is more than an
"instrumentality or a conduit for collection." The Club does
receive a benefit from the collection of the prepaid gratuity

from its members for the services of furnishing, preparing, and

serving food and beverages to the members.

CONCLUSION

The amounts of "Prepaid Gratuity" 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.

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.: 49081