Is a banquet gratuity charge subject to sales tax when the operator keeps part of it instead of paying the entire gratuity to the banquet employees?

Plain-English summary

MHC Airport Inn Inc./Rochester Holiday Inn adds a 16% banquet gratuity to its guests' bills. Under a stated policy, it keeps 4.5% for itself and pays 11.5% over to the banquet employees. It asked whether the full gratuity is subject to sales tax when the whole amount is not passed on to the employees.

The Department's answer: yes, the entire 16% is taxable. Under 20 NYCRR § 527.8(l), any charge made to a customer is a taxable receipt from the sale of food and drink unless all three of these conditions are met:

1. the charge is separately stated on the customer's bill;
2. the charge is specifically designated as a gratuity; and
3. all the money collected is paid over in total to the employees.

Because Rochester Holiday Inn keeps 4.5% and does not pay the entire gratuity over to its employees, condition (3) fails — so the exemption is lost and the full charge is taxable, not just the part the house keeps. The Department relied on Park Country Club of Buffalo, Inc., TSB-A-85(38)S, which held a gratuity taxable on the same reasoning even though it was separately stated and labeled a gratuity.

What this means for you

A gratuity is tax-free only if 100% of it reaches employees

For a mandatory gratuity or service charge to stay out of the sales tax base, a restaurant, caterer, hotel, or banquet hall must clear all three tests: separately stated, called a gratuity, and paid over in full to the staff. Keeping even a small slice for the house breaks the third test.

Keeping any portion taxes the whole charge

This is an all-or-nothing rule. Retaining 4.5% of a 16% gratuity does not make just that 4.5% taxable — it makes the entire 16% a taxable food-and-drink receipt. If the house needs to keep an administrative or house portion, treating that entire charge as taxable (and collecting tax on it) is the safe course.

Labeling alone is not enough

Calling the line a "gratuity" and stating it separately does not save it. The decisive fact is whether every dollar collected is actually turned over to the employees.

Common questions

Q: We add an automatic 18% gratuity but keep a few points for administration. Is it taxable?
A: Yes. Because you don't pay the entire charge over to employees, the whole gratuity is a taxable receipt from the sale of food and drink (20 NYCRR § 527.8(l)).

Q: What if we clearly print "gratuity" and list it separately?
A: That satisfies two of the three conditions, but not the third. Unless 100% goes to the employees, the charge is still fully taxable.

Q: How can a mandatory gratuity be tax-free?
A: Only if it is separately stated, designated as a gratuity, AND paid over in total to the employees — all three at once.

Citations and references

Regulation:

• 20 NYCRR § 527.8(l) — a charge to a customer is a taxable receipt from the sale of food and drink unless it is (i) separately stated, (ii) specifically designated as a gratuity, and (iii) paid over in total to employees.

Prior opinion applied:

• Park Country Club of Buffalo, Inc., TSB-A-85(38)S — gratuities did not qualify for exemption where the entire amount received was not paid over to employees, even though separately stated and designated as a gratuity.

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1991.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a91_59s.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-91 (59)S
Sales Tax
August 20, 1991

Taxpayer Services Division
Technical Services Bureau

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S910620A

On June 20, 1991, a Petition for Advisory Opinion was received from MHC Airport Inn
Inc./Rochester Holiday Inn, 8401 Connecticut Avenue, Chevy Chase, Maryland 20815.
The issue raised by Petitioner, MHC Airport Inn Inc./Rochester Holiday Inn, is whether the
full amount of a banquet gratuity is subject to sales tax when the entire gratuity is not passed on to
the banquet employees.
Petitioner has a stated policy whereby a 16% banquet gratuity is charged to its guests. The
banquet gratuity is apportioned in a consistent and stated manner with 4.5% being retained by the
Petitioner and 11.5% being paid over to banquet employees.
Section 527.8(1) of the Sales and Use Tax Regulations states as follows:
(1) Gratuities and services charges. Any charge, made to a customer, is taxable as
a receipt from the sale of food and drink unless:
(i)

the charge is separately stated on the bill or invoice given to the customer; and

(ii)

the charge is specifically designated as a gratuity, and

(iii)

all such monies received are paid over in total to employees. (emphasis
added)

In Park Country Club of Buffalo. Inc., Adv Op St Tx Comm. August 12, 1985, TSB-A­
85(38)S, the State Tax Commission advised that gratuities received by a Petitioner did not satisfy
the criteria for exemption from sales tax stated in Section 527.8(1) of the Sales and Use Tax
Regulations even though charges were separately stated on the bill and specifically designated as a
gratuity, since the entire gratuity received by Petitioner was not paid over in total to its employees.
Accordingly, pursuant to Section 527.8(1) of the Sales and Use Tax Regulations and TSB-A­
85(38)S since Petitioner does not pay over in total to its banquet employees all monies received as
gratuities, the receipts received by Petitioner for such charges are subject to sales tax.

DATED: August 20, 1991

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.