Laws, Regulations & Annotations
Business Taxes Law Guide – Revision 2016
Sales and Use Tax Annotations
550.0000 TAXABLE SALES OF FOOD PRODUCTS—Regulation 1603
(d) TIPS, SERVICE AND COVER CHARGES
550.0695 Banquet Tips. To help customers plan banquets, the taxpayer employs convention coordinators and caterer coordinators. These employees meet with the customers, give them written policy information and enter into agreements for the parties or meetings, in addition to the banquets. The standard policy information and the standard agreement both state that "the suggested gratuity is 15%" for food and beverage. Before the banquet, the parties sign a prospectus and specify, among other things, the details of the food and beverage service and the agreed upon gratuity. The prospectus, the policy information, and the standard agreement collectively constitute the contract for the banquet.
A sample of the prospectus showed that all gratuities were 15% except for one at 11.93%. The prospectus for the one exception was signed (approved) by the president of the corporation, while all the other prospectuses were signed by the coordinators.
Considering the sample, it appears that a gratuity of less than the suggested amount requires the final approval of an officer or a supervisor. While the suggested gratuity of 15% is not mandatory, the fact remains that some gratuity negotiated in advance between the taxpayer and its customers is mandatory. Customers do not have the option to enter into contracts for the sale of food and beverages, and not specify an amount for the gratuity. For sales and use tax purposes, when a retailer asks one price for the sale of merchandise, but accepts a lower price following negotiations with the buyer, the amount ultimately received remains subject to the sales or use tax. The result is not different merely because the negotiated amount is for services that are a part of the sale. Therefore, the taxpayer's gratuities are considered mandatory and subject to sales tax. 3/21/95.