What does Virginia Ruling of the Tax Commissioner P.D. 09-23 conclude about Restaurant mandatory gratuity?

Subject

Only the portion of a mandatory restaurant gratuity above 20% was taxable

Plain-English summary

Virginia said a restaurant's mandatory gratuity or service charge was excluded from taxable sales price up to 20% of the meal price. If the charge exceeded 20%, only the excess was added to taxable sales price.

The ruling's example used a $200 meal and a 22% mandatory gratuity. The $44 charge exceeded the 20% ceiling by $4, so the taxable sales price became $204. A 20% charge on the same meal added nothing to taxable sales price.

Virginia acknowledged that 23 VAC 10-210-930 still stated the pre-2006 policy taxing all mandatory gratuities. The Department said that language was no longer effective, its website FAQ reflected current law, and the regulation was being revised.

What this means for you

• Calculate the 20% ceiling from the meal price.
• Exclude the mandatory charge through 20% and tax only the excess.
• Discretionary gratuities were separately excluded under the cited sales-price definition.
• When published regulation and later statute conflict, confirm the current law and Department guidance.

Common questions

Was a 20% mandatory gratuity taxable?

No, under the law explained in this 2009 ruling.

Was a 22% charge entirely taxable?

No. Only the two percentage points above the 20% ceiling entered taxable sales price.

Why did the regulation say otherwise?

It still reflected the pre-2006 rule and had not yet been revised.

Citations and references

• Va. Code § 58.1-602.
• 2006 Va. Acts chs. 568 and 602.
• 23 VAC 10-210-930.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 09-23

Original ruling text

February 13, 2009

Dear *:

Thank you for you letter to the Virginia Department of Taxation ("TAX") in which you requested clarification on the requirement that sales tax be collected on mandatory gratuities assessed by a dealer. You point out the conflicting policies set forth in our regulation, 23 Virginia Administrative Code 10-210-930, Meals, and information contained on TAX's website under Frequently Asked Questions ("FAQs").

Legislation enacted in the 2006 General Assembly (2006 Acts of Assembly, Chapters 568 and 602) amended the Retail Sales and Use Tax definition of "sales price" to exclude any gratuity or service charge added to the price of a meal by a restaurant, provided such gratuity does not exceed 20% of the sales price of the meal. As a result, Va. Code § 58.1-602 now provides the following definition for sales price:

"Sales price shall not include... (iv) that portion of the amount paid by the purchaser as a discretionary gratuity added to the price of a meal; or (v) that portion of the amount paid by the purchaser as a mandatory gratuity or service charge added by a restaurant to the price of a meal, but only to the extent that such mandatory gratuity or service charge does not exceed 20% of the price of the meal.

As an example, a restaurant imposes a mandatory gratuity of 22% on a party of ten's combined $200 bill. The 22% mandatory gratuity is $44.00. The amount by which the gratuity exceeds 20% ($4.00) represents an increment to the sales price. Therefore, the $204.00 price will be subject to the Retail Sales and Use Tax. However, if the same restaurant imposes a 20% gratuity on a customer's $200 meal ticket, there will be no additions to the sales price because the mandatory gratuity does not exceed 20% of the price of the meal.

Prior to the 2006 legislative change, any mandatory gratuity added to the meal price, whether the amount was designated as a tip or a service charge, constituted a part of the sales price and was subject to the Retail Sales and Use Tax. This policy is still contained in 23 VAC10-210-930. TAX is currently revising this regulation to make it consistent with the law change.

The FAQs portion of TAX's website reflects the current policy set forth in Va. Code § 58.1-602, of adding to the sales price any mandatory gratuity charged in excess of 20% of the price of a meal. The conflicting policy stated under 23 Virginia Administrative Code 10-210-930, which adds to the sales price any mandatory gratuity imposed by the dealer, reflects the tax treatment of mandatory gratuities prior to the 2006 legislative change, and is no longer effective.

I hope that this has addressed your questions. I apologize for any confusion that resulted from this outdated regulation. If you have any questions or need further clarification, you may contact * in our Office of Policy and Administration, Policy Development Division at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner