Were a country club's mandatory restaurant and banquet service charges subject to Florida sales tax?

Subject

Sales Tax on Mandatory Gratuities and Service Charges

Plain-English summary

The country club's mandatory 17% restaurant service charge was not subject to Florida sales tax when it was separately stated and paid in full to the servers. The club distributed those amounts within a week, which was earlier than the fiscal-year deadline the Department applied.

Although the administrative rule said an exempt gratuity had to be voluntary, the Department concluded that controlling case law focused on whether the dealer benefited from the charge. Because the full 17% went to employees, its mandatory character did not make it taxable.

The 20% banquet charge was different. The club distributed only 7% to 15% to servers and kept the balance. Because the club benefited from the retained portion, the Department ruled that the entire 20% charge was subject to sales tax.

What this means for you

Under this historical ruling, separately stating a charge was not enough. The decisive practical question was whether the business kept any of the money or paid it all to employees within the allowed time.

Partial retention exposed the whole service charge to tax in this case, not merely the portion the club kept. Businesses should verify the current rule and document both billing and employee distributions.

Common questions

Q: Was the 17% charge voluntary? The club rules made it automatic, although members could object and have it reduced or removed. The Department treated it as involuntary but still exempt because it was separately stated and fully distributed to servers.

Q: How quickly did the 17% charge have to be distributed? The ruling allowed distribution by the end of the club's fiscal year; the club paid it within one week.

Q: Why was the 20% banquet charge taxable? The club kept part of it, so the dealer received a benefit from the charge.

Q: Was only the retained banquet portion taxable? No. The Department said the entire 20% service charge was taxable.

Q: Can another restaurant or club rely on this ruling? No. The advisement binds the Department only for the requester and the facts described.

Citations and references

• Fla. Stat. §§ 212.05, 212.02(16) — sales tax and the definition of sales price
• Fla. Admin. Code r. 12A-1.011(13) — gratuity and service-charge requirements
• Green v. Surf Club, Inc., 136 So. 2d 354 (Fla. 3d DCA 1961), review denied, 139 So. 2d 694 (Fla. 1962) — dealer-benefit analysis applied by the Department
• Green v. Riviera Country Club, 156 So. 2d 524 (Fla. 3d DCA 1963) — additional gratuity authority cited in the ruling
• Fla. Stat. § 120.52(8) — limits on agency rules
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 98A-008

Original ruling text

SUMMARY

A country club requested a ruling during an audit of whether the gratuities it collected were exempt from sales tax. The club rules require that the members pay the gratuities. Since Rule 12A-1.011(13) requires that the gratuity be separately stated on the member's bill, voluntarily given, and distributed to the employees before the end of the club's fiscal year, the gratuity appeared to be involuntary and taxable. However, Green v. Surf Club, Inc., 136 So.2d 354 (Fla. 3rd D.C.A. 1961) cert. den. 139 So.2d 694 (Fla. 1962) conflicts with the rule by leaving out the voluntary requirement and basing the taxability of the gratuity on the benefit derived by the dealer. In addition, the rule has impermissibly broadened the scope of the statutes it interprets. As a result, in this advisement, the gratuity which met the two other criteria was exempt but another gratuity, a portion of which was not distributed to the servers, was termed wholly taxable because the dealer derived a benefit from the portion retained.

Mar 05, 1998

Re: TAA 98A-008
Sales Tax - Gratuities
Rules: 12-11.003(7); 12A-1.011(13), F.A.C.

Dear :

This is in response to your letter dated November 20, 1997, requesting the issuance of a Technical Assistance Advisement, pursuant to Section 213.22, F.S., and Chapter 12-11, F.A.C., regarding whether gratuities charged by your establishment to its members and distributed to service personnel are subject to sales tax.

Facts

You state that you are a private country club offering, among other amenities, a grill restaurant, main dining restaurant, lounge, and banquet hall. Since you are presently being audited, you request a determination of an issue you dispute in the audit concerning tax liability for gratuities. You have complied with the provisions of Rule 12-11.003(7), F.A.C. by providing a copy of your request for advisement to the auditor, who has responded in writing.

You charge your members a 17% gratuity on all purchases in the grill restaurant and main dining restaurant. Your position is that the 17% gratuity is voluntary, separately stated on the member's bill, and distributed within one week of receipt by the club to the servers who receive W2 statements showing the distribution as "tips."

When a member purchases a meal or a beverage in the grill or the main dining room, they are charged a 17% gratuity. If the member objects to the assessment of the gratuity or is dissatisfied with the percentage of the gratuity, an adjustment is made to satisfy the member, either by eliminating the gratuity from the bill or adjusting the amount according to the wishes of the member.

The club charges a 20% gratuity on all banquets, of which between 7% and 15% is distributed to the server and the balance is retained by the club. It appears from your letter that sales tax is charged, collected, and remitted on the entire 20% gratuity, including both the portion retained by the club and the portion distributed to the servers.

Your club's members' Rule Book states under "Clubhouse Rules," Page 6, that the 17% gratuity will be automatically added to all food and beverage checks. No mention is made of the member having any choice about paying the gratuity.

Applicable Law

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..." (emphasis supplied)

Rule 12A-1.011(13), F.A.C., which operates as the directions for carrying out the provisions of the statute cited above, indicates that a gratuity charge made to a customer for the service of taxable food or drinks is considered part of the sales price of the items sold, and thereby subject to tax unless it is: (1) voluntarily given; (2) separately stated on the customer's bill; and (3) distributed in full to the employees within six (6) months, with no part accruing to the benefit or advantage of the seller.

The case law that exists on the subject of when a gratuity is part of the sales price of a taxable item holds that it is the value of the transaction to the dealer which controls what is considered the taxable base of a transaction. The case Green v. Surf Club, Inc., 136 So.2d 354 ( Fla. 3rd DCA 1961), cert. den. 139 So.2d 694 (Fla. 1962), which involved a situation whereby the employees who served food and drink to members of a social club received a share of the mandatory service charge imposed by the club, instead of receiving gratuities from the specific patrons they served. The portion of the mandatory service charge was reported by the employer as wages. In Green, the "voluntary" nature of the tip/gratuity/service charge was not considered in making a determination as to whether or not the charge is subject to sales tax.

Therefore, the "voluntary" requirement in the rule conflicts with the case law which is interpreting the statute. An agency's administrative interpretation of a statute by rule has been accorded great deference by the courts, and will not be overturned unless the agency's interpretation of the statutes is clearly erroneous and the reviewing court will defer to any interpretation within the range of possible interpretation. See Pershing Industries v. Department of Banking, 591 So.2d 991, 993 (Fla. 1 DCA 1991); Eager v. Florida Keys Aqueduct Authority, 580 So.2d 771 (Fla. 3 DCA 1991); Natelson v. Department of Ins., 454 So.2d 31 (Fla. 1 DCA 1984); State ex rel. Szabo Food Serv., Inc.

of N.C. v. Dickinson, 286 So.2d 529 (Fla. 1973), reh. den. Jan. 9, 1974.

However, an agency rule cannot enlarge, modify, or contravene the statute it interprets. See Section 120.52(8), F.S.; Florida Marine Fisheries Commission v. Organized Fishermen of Florida, 610 So.2d 92 (Fla. 1 DCA 1992); State, Bd. of Trustees v. Lost Tree Vill., 600 So.2d 1240, 1244 (Fla. 1 DCA 1992); Cataract Surgery Center v. Health Care, 581 So.2d 1359, 1361 (Fla. 1 DCA 1991), reh. den. July 16, 1991; Adam Smith Ent. v. Dept. of Env. Reg., 533 So.2d 1260, 1266 (Fla. 1 DCA 1989), reh. den. Jan. 10, 1990; U.S. Shoe Corp. v. Dept. of Prof. Reg., 578 So.2d 376, 379 (Fla. 1 DCA 1991).

Administrative agencies entrusted with authority to carry out statutory provisions are prohibited from giving the statute an amendatory construction. Florida Growers Coop. Transport v. Department of Revenue, 273 So.2d 142 (Fla. 1 DCA 1973), cert. denied, 279 So.2d 33 (Fla. 1973).

The court decision in Green effectively corrected the rule and eliminated the voluntary requirement. The two remaining requirements are:

1. The charge is separately stated as a gratuity, service
   charge or similar charge on the bill or invoice given to the customer; and

2. All such monies are paid over in total to the dealer's
   employees no later than the end of the dealer's fiscal year.

If the employer merely pays over the tips/service charges to the employees who rendered the services within a reasonable period of time after the employer receives them, it generally the case that the employer should not be considered as having received those tips/service charges as part of the consideration for food or drink.

Because the Green decision comports more closely to the legislative intent regarding the taxability of transactions

involving gratuities, the guidance provided by Green should serve to provide guidance in resolving the question posed in the current situation.

Discussion, Analysis, and Conclusions of Law

While you consider that the gratuities discussed herein are voluntarily given, the fact that the club rules require the gratuity renders them involuntary and contrary to the existing rule permitting the exemption for gratuities. Rule 12A1.011(13), F.A.C. provides that the exemption applies only to gratuities which are separately stated, voluntarily paid, and fully distributed to the servers within six (6) months of receipt.

Where the rule fails to carry out the provisions of the statute under which it was enacted and conflicts with the case law, the statute and case law control. Providing that the gratuity is separately stated and distributed timely, it will be considered exempt from sales tax, regardless of whether it is mandatory or voluntary. See Green v. Surf Club, Inc., 136 So.2d 354 ( Fla. 3rd DCA 1961), cert. den. 139 So.2d 694 (Fla. 1962), Green v. Riviera Country Club, 156 So.2d 524 (Fla. 3rd DCA 1963).

Requested Advisement

Whether sales tax is due on gratuities charged by your club.

Advisement

In the instant situation, if the service charge of 17% collected by the taxpayer on purchases in the grill restaurant and dining room is separately stated on the customer's bill, and is paid out to the servers within a week of receipt of the gratuity (or at any time on or before the end of the club's fiscal year), such service charge will not be subject to tax.

With respect to the service charge of 20%, since only a part of the gratuity is paid over to the employees, the club is receiving the benefit from the imposition of the charges. As such, the entire 20% service charge is subject to sales tax.

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 or administrative rule changes or 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 and your request are public records under Chapter 119, F.S., which are subject to disclosure to the public under the conditions of s. 213.22, F.S. Your name, address, and any other details which might lead to identification of the taxpayer must be deleted by the Department before disclosure. In an effort to protect the confidentiality of such information, we request you notify the undersigned in writing within 15 days of any deletions you wish made to the request or the response addressed to the Office of the General Counsel, Technical Assistance and Dispute Resolution, Department of Revenue, Post Office Box 7443, Tallahassee, FL 32314-7443.

If you have further questions with regard to this matter and wish to discuss them, you may contact Technical Assistance and Dispute Resolution, (850) 922-4834.

Sincerely,

Karen Kugell
Senior Attorney
Technical Assistance and Dispute Resolution 850-922-4834

cc: Deborah L. MacInnes, Tax Auditor
Control No. 32007