When is a country club's mandatory gratuity charge on meals and food exempt from Texas sales tax, rather than taxed as part of the sales price?

Plain-English summary

A country club asked the Comptroller to confirm its understanding of Rule 3.337 (Gratuities), which sets out when a mandatory gratuity charge on meals and food (including soft drinks and candy) served for immediate consumption escapes Texas sales tax. The Comptroller confirmed the club's four-part summary is accurate. A mandatory gratuity is exempt from sales tax only if ALL of the following are true: (1) the gratuity doesn't exceed 20% of the sales price; (2) it's charged separately from (not folded into) the sales price; (3) it's specifically labeled as a tip or gratuity, not some other fee; and (4) the club keeps records -- even simple spreadsheets are acceptable -- showing either that all mandatory gratuity money collected was actually paid out to qualified employees, or that total direct compensation to qualified employees each reporting period was at least as much as the gratuities collected that period. "Qualified employees" for this purpose are front-of-house service staff -- waiters, waitresses, busboys, service bartenders, wine stewards, and the maitre d'hotel -- but does NOT include janitorial staff, chefs, cashiers, or dishwashers.

What this means for you

Country clubs, restaurants, and hospitality businesses charging mandatory gratuities

Structure your mandatory service charge to meet all four Rule 3.337 conditions if you want it exempt from sales tax: cap it at 20% of the sales price, list it as a separate line item, label it as a tip/gratuity, and keep records tying the collected gratuities to actual payouts to qualifying front-of-house staff (or show total staff compensation meets or exceeds gratuities collected). Missing any one condition can make the charge taxable.

Accountants and tax professionals

Note the specific "qualified employees" list is narrower than "all restaurant staff" -- it's front-of-house service roles (waiters, busboys, bartenders, wine stewards, maitre d'), excluding back-of-house and support roles like chefs, dishwashers, cashiers, and janitorial staff. Getting this distinction right matters for the recordkeeping condition.

Common questions

Q: Is a mandatory gratuity at a country club automatically exempt from sales tax?
A: No, per this letter -- it's exempt only if it meets all four conditions in Rule 3.337 (20% cap, separately stated, labeled as a tip/gratuity, and proper records).

Q: What records satisfy the recordkeeping condition?
A: Per this letter, either records tying all gratuity charges collected to disbursements to qualified employees, or records showing total direct compensation to qualified employees each period equals or exceeds gratuities collected that period -- spreadsheets are acceptable.

Q: Who counts as a "qualified employee" for gratuity distribution purposes?
A: Per this letter, waiters, waitresses, busboys, service bartenders, wine stewards, and the maitre d'hotel -- but NOT janitorial help, chefs, cashiers, or dishwashers.

Citations and references

Statutes and rules:

• 34 Tex. Admin. Code Rule 3.337 (Gratuities)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9703450L

Original ruling text

March 21, 1997

Dear ***:

This is in response to your request for clarification concerning the sales tax
treatment of mandatory tips and gratuities at country clubs. You would like
confirmation that the following is a correct interpretation of the sales tax
Rule 3.337- Gratuities, which was last revised in 1980.

A mandatory gratuity charge required by the country club for the service of
meals and food products, including soft drinks and candy, for immediate
consumption will not be subject to sales tax if it meets all the following
conditions.

1. The mandatory gratuity does not exceed 20% of the sales price;
2. The mandatory gratuity charges is separated from the sales price; and
3. The charge is identified as a tip or gratuity; and
4. The country club has records (spread sheets are ok) which show either:

a. all mandatory gratuity charges collected from customers and the
corresponding disbursements to qualified employees; or

b. that the total direct compensation due all qualified employees during
each sales and use tax reporting period equals or exceeds the total amount
collected as mandatory gratuity charges during the same period. (Qualified
employees include, but are not limited, to waiters, waitresses, busboys,
service bartenders, wine stewards, and maitre d'hotel but excludes janitorial
help, chefs, cashiers, and dishwashers).

Response: The above statement accurately summarizes our policy on gratuities
as set out in Rule 3.337. This opinion is based on the facts presented. Other
facts though similar may provide a different result.

I hope this information answers your questions. If you need additional
information, please
call me toll-free at 1-800-531-5441, extension 3-4502. The direct line is
512/463-4502. You may also write to Tax Policy Division, Comptroller of Public
Accounts. My Internet address is: [email protected].

Sincerely,

Gilbert Zamora
Tax Policy Division