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