Was an 18% mandatory banquet gratuity excluded from Virginia's taxable sales price even though 3% was kept as a house gratuity?

Subject

15% gratuity charges are below the taxable 20% mandatory gratuity threshold as set out in Va. Code § 58.1-602.

Plain-English summary

Virginia removed sales tax from the full 18% mandatory banquet gratuity. The lodge paid 15% to employees and retained 3% as a house gratuity, but billed the two portions together. The audit had taxed the entire charge because the house portion was included in the lump sum.

Va. Code § 58.1-602 excluded a restaurant's mandatory gratuity or service charge from sales price to the extent it did not exceed 20% of the meal price. The Department said the statute did not require every dollar of the gratuity to be distributed to employees.

Because the combined charge was 18%, the assessment was erroneous. The audit was to be revised, and the taxpayer was to receive a refund plus interest from the payment date.

What this means for you

• Under the rule applied in this audit, the total mandatory gratuity percentage mattered more than how the seller divided it between employees and the house.
• A combined charge did not lose the exclusion merely because part of it was retained by the business.
• Keep banquet contracts, customer bills, meal-price calculations, gratuity percentages, employee distributions, and sales-tax returns.
• Charges above the statutory threshold or with different facts require a separate analysis.

Common questions

Q: Did retaining 3% make the whole 18% charge taxable?

A: No. The ruling said the statute did not require the full charge to be paid to employees.

Q: Why was the 18% charge excluded?

A: It was a mandatory gratuity that did not exceed 20% of the meal price.

Q: What relief did the taxpayer receive?

A: The Department ordered the audit adjusted and a refund issued with interest from the date of payment.

Citations and references

• Va. Code § 58.1-602.
• P.D. 14-150 (August 27, 2014).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 15-92

Original ruling text

April 30, 2015

Re: § 58.1-1821: Retail Sales and Use Tax

Dear *:

This is in response to your letter in which you request correction of the retail sales and use tax assessment issued to * (the "Taxpayer") as a result of an audit for the period January 2010 through June 2013. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer operates a lodge that provides accommodations, an indoor water park, restaurants, retail shops, and a variety of other amenities for their lodging guests. At issue is the tax assessed to mandatory and house gratuity charges billed in a lump sum to banquet customers. The Taxpayer bills a gratuity or service charge in the amount of 18% to banquet customers. The 18% gratuity amounts are divided and 15% is paid to the employees and 3% is a house gratuity. The Taxpayer reports the 3% house gratuity charge as taxable sales on its monthly retail sales and use tax return. Because the Taxpayer combined the gratuity charges, the auditor held taxable the total 18% gratuity charge and allowed a credit for the 3% gratuity amounts reported to the Department.

The Taxpayer contests the tax assessed on the 15% gratuity charges and claims that such gratuity charges are below the taxable 20% mandatory gratuity threshold as set out in Va. Code § 58.1-602, definition of sales price. The Taxpayer has paid the assessment and requests a refund for the tax assessed on the 15% mandatory gratuity charges.

DETERMINATION

Virginia Code § 58.1-602 defines "sales price", in part, to mean:

the total amount for which tangible personal property or services are sold, including any charges that are a part of the sale . . . "Sales price" shall not include . . . 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.

The Tax Commissioner has recently addressed the mandatory gratuity issue. Public Document (P.D.) 14-150 (8/27/14) addresses the tax assessed on combined mandatory gratuity and house gratuity charges billed to banquet customers. In that case, the taxpayer charged its customers a 20% mandatory gratuity that included a standard 3% house gratuity. The basis for the assessment was that the 3% house gratuity was not distributed as tips or gratuities to employees that worked each banquet event and, therefore, was deemed to be a part of the taxable sales price of the banquet charges billed to customers. Further, because the taxable 3% gratuity was included in the 20% lump sum gratuity amounts, the entire amount was deemed to be taxable. Based on the language of the exemption statute, the Tax Commissioner determined that there is no restriction placed on the exemption for mandatory gratuities that requires the full amount billed to purchasers to be distributed to employees or other personnel performing services on behalf of the seller. Rather, the statute merely limits the exempt amount of the mandatory gratuity charges to 20% of the price of the meal. As such, the audit was adjusted to remove the mandatory gratuity charges.

In this instance, the Taxpayer was assessed the tax on mandatory and house gratuity charges billed in a lump sum to banquet customers. P.D. 14-150 is directly on-point with the mandatory gratuity issue raised in the Taxpayer's appeal. Based on P.D. 14-150, there is no restriction placed on the exemption for mandatory gratuities that requires the full amount billed to purchasers to be distributed to employees or other personnel performing services on behalf of the seller. As such, the audit assessment of retail sales tax on the 18% mandatory gratuity amounts billed to customers by the Taxpayer is erroneous. The audit will be adjusted to remove the tax assessed on the mandatory gratuity charges.

CONCLUSION

Based on the foregoing, the audit will be adjusted to remove the tax assessed on the mandatory gratuity charges and a revised audit report will be mailed to the Taxpayer. A refund of * plus interest from the date of payment, will be issued as soon as practicable.

The Code of Virginia section and public document cited are available on line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site. If you have any questions concerning this determination, please contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns
Tax Commissioner

AR/1-5678863681.T