When were restaurant tips and gratuities excluded from Utah sales tax, and how did mandatory charges and management-controlled tip pools affect the result?

Plain-English summary

Utah Private Letter Ruling 95-039 said a restaurant tip or gratuity could be excluded from sales tax when the entire amount was passed to the server.

Voluntary tips left on a table or added to a credit-card slip were not taxable when passed on.

A mandatory or management-added gratuity could also be excluded when the full amount went to the waiter or waitress who served the customer.

Management control changed the answer. If management required pooling or controlled distribution of pooled tips to a service team, the Commission treated the amount as taxable.

Meal charges generally

Utah Code section 59-12-103(e) supplied the basis for taxing meals.

The Commission said it treated all charges associated with a meal as part of the taxable transaction, including the restaurant's costs and profit.

It rejected attempts to isolate ordinary meal-related components, such as table and chair use, from the taxable meal charge.

Voluntary tips

Utah Admin. Rule R865-19S-94 and Tax Bulletin 5-92 treated voluntary tips as nontaxable when they were passed to the server.

The response identified examples:

• Cash left on the table.
• A tip added voluntarily to a credit-card charge slip.

The business needed to pass the amount to the server rather than keep it.

Mandatory gratuities

A tip or gratuity added to the patron's bill as a management or private-club policy could be excluded from tax when the full amount was passed to the waiter or waitress who served the patron.

The mandatory nature of the charge did not by itself make it taxable under the historical rule.

The handling of the money controlled.

Management-controlled tip pools

The Commission said management could avoid tax by ensuring that the entire gratuity went to the server and maintaining records proving it.

If management required a tip pool or controlled distribution of pooled tips to a service team, the Commission treated the distributions as compensation or wages and the charge as taxable.

Recordkeeping and audits

The business needed records verifying that the tip or gratuity was passed to the server.

The Commission said it used audits to identify noncompliance and would assess tax deficiencies when it found them.

Holding

Under the ruling:

• Voluntary tips passed to the server were not taxable.
• Mandatory gratuities fully passed to the serving waiter or waitress could be nontaxable.
• Records had to verify the pass-through.
• Management-controlled or pooled distributions were treated as taxable.
• Other charges associated with the meal were part of the taxable price.

What this means for you

Restaurants and private clubs

The historical result depended less on whether the gratuity was voluntary or mandatory and more on who received it and who controlled it.

Payroll and point-of-sale teams

Coordinate invoices, tip records, payroll treatment, and actual distributions. The tax result described in the ruling required evidence that the full amount reached the server.

Accountants and tax professionals

Verify current Utah law before applying this treatment to modern service charges, tip pools, delivery platforms, or banquet fees.

Common questions

Q: Were voluntary tips taxable?

A: No, when passed to the server.

Q: Was a mandatory gratuity automatically taxable?

A: No. It could be excluded if the entire amount went to the waiter or waitress who served the patron.

Q: What if management retained or controlled the money?

A: The Commission treated management-controlled pooled distributions as taxable.

Q: Did the business need records?

A: Yes. Records had to verify that the gratuity was passed to the server.

Q: Were ordinary charges associated with the meal taxable?

A: Yes. The Commission included them in the meal transaction.

Key source language

• Voluntary tips: “Voluntary tips left on the table or added to a credit charge slip are not subject to sales tax.”
• Mandatory gratuity condition: “the tip or gratuity is exempt from taxation so long as the total amount of the gratuity or tip is passed on to the waiter or waitress who served the patron.”
• Management control: “If management requires pooling of tips or maintains control over dispersal of polled tips to the service team, the Tax Commission considers the distributions as compensation as wages and therefore subject to the tax.”
• Records: management could avoid tax by ensuring pass-through and “that records are maintained to verify that fact.”

Citations and references

• Utah Code Ann. § 59-12-103(e)
• Utah Admin. Rule R865-19S-94
• Utah Tax Bulletin 5-92

Source

• Landing page: Utah Private Letter Rulings
• Official ruling: Utah PLR 95-039
• Scope note: although the source header mentions cover charges, the response's substantive discussion focuses on meal charges, tips, and gratuities.
• Fetch note: the exact official URL returned HTTP 404 to a direct request and was then retrieved through Sofya.

Original ruling text

95-039

Response July 11, 1995

Request

July 11, 1995

XXXXX

Dear XXXXX:

Thank you for your inquire regarding sales tax on tips, gratuities and cover charges. I believe that I understand your concern regarding our policy. Hopefully the material and explanation that I providing in this letter will help you to better understand our position.

Enclosed you find the copies of:

1) the state statute 59-12-103(e)

2) administrative rule R865-19S-94; and

3) tax bulletin 5-92.

Section 59-12-103(e) provides that legal basis for taxing meals. The question is what is included in the cost of a meal. The Tax Commission has over the years taken the position that all the charges associated with the meal are subject to the sales tax. An argument could be made that only the meal is subject to the tax and therefore the rental of the table and chairs are not taxable. The Tax Commission rejects this argument and on a transaction basic taxes the charges made to the customer for the meal, which include all the costs and the profit of the restaurant.

Administrative Rule R865-19S-94 requires the business to �collect sales tax on tips or gratuities included on a patron�s bill and which are required to be paid, unless the total amount of the gratuity or tip is passed on to the waiter or waitress who served the customer.....Voluntary tips left on the table or added to a credit charge slip are not subject to sales tax.�

Tax Bulletin 5-92 states, �As a rule, tips given to the server, left on the table or added to a credit card charge slip by the patron are not subject to sales tax, as long as they are passed on to the server. If the tip or gratuity is added to the patron�s bill as a matter of policy by management or a private club membership board, the tip or gratuity is exempt from taxation so long as the total amount of the gratuity or tip is passed on to the waiter or waitress who served the patron.�

It is clear from the above cited references that the management of a business can control the imposition of the tax and avoid the tax on tips and gratuities by assuring that the tip or gratuity is passed on to the waiter or waitress and that records are maintained to verify that fact. If management requires pooling of tips or maintains control over dispersal of polled tips to the service team, the Tax Commission considers the distributions as compensation as wages and therefore subject to the tax.

The Tax Commission can not assure complete compliance with the law and our policies and procedures. We audit businesses on a random basic and to the extent that we would discover noncompliance we would assess the business the tax deficiency. If you are aware of situation where a business is not following the law, we would you be pleased to have you provide specific information and we will follow.

If I can provide you additional information, please ask.

Sincerely,

W. Val Oveson

Chairman