Tax Type
Retail Sales and Use Tax
Description
Gratuity charges on meals; Private social club restaurant
Topic
Taxability of Persons and Transactions
Date Issued
09-29-1992
September 29, 1992
Re: §58.1-1821 Application: Retail Sales and Use Tax
Dear***********
This will reply to your letter of November 5, 1991 in which you seek correction of tax assessed to ***************(the Taxpayer), as the result of an audit for the period August, 1988 through July, 1991.
FACTS
The Taxpayer is a private social club which provides restaurant, bar and meeting services to its members. The Taxpayer protests the assessment of tax on gratuity charges automatically added to its members' food and beverage checks, which were subsequently billed to the member's account and appear on a statement issued monthly. The Taxpayer asserts that the automatic addition of a 20% gratuity charge is a convenience to its membership and that the member may increase, decrease or delete the gratuity charge upon receipt of the monthly statement. All gratuity charges are distributed to employees.
DETERMINATION
Virginia Regulation (VR) 630-10-64(D) provides that "[i]f a customer tips a dealer's employee, and the amount is wholly at the discretion or judgment of the customer, the tip is not subject to the sales tax." The section further states that "[i]f the dealer adds an amount or flat percentage to the meal price, whether the amount is designated as a tip or as a service charge, the addition is a part of the sales price and is subject to the tax..."
The Taxpayer, in this case, imposes a recommended service charge in connection with the sale of food and beverages. Based on the department's regulation, such charges generally be fully taxable. The only exception to this rule would be where an individual has the ability to change or delete the charge.
The issue of recommended service charges where a customer may elect to increase, decrease or delete the amount was addressed by the Circuit Court for Chesterfield County in Salisbury Club v. Commonwealth. In that case a club member, when presented with the check at the conclusion of a meal, could elect to increase, decrease or delete a 15% gratuity charge. The club's policy was clearly defined in its by-laws, as well as stated on the actual check. As such, the members were fully cognizant of their option to provide the standard gratuity or change the gratuity to any amount they deemed proper. The court opined that the amount added as a gratuity charge was voluntary in nature and done wholly at the discretion of the member.
The instant case is distinguishable from that of the Salisbury Country Club in that the Taxpayer does not advise its membership, in writing, that they have the option to change or delete the recommended amount of the gratuity. Therefore, the tax is applicable to gratuity charges paid to the Taxpayer under its current policy and the auditor was correct in assessing tax to the bar, restaurant and catered banquet checks.
Accordingly, the department will issue an updated Notice of Assessment, under separate cover, with interest accrued through the date of your letter which should be paid within 30 days to avoid the accrual of additional interest charges.
Sincerely,
W. H. Forst
Tax Commissioner
OTP/5741J
Rulings of the Tax Commissioner