Tax Type
Retail Sales and Use Tax
Description
Food and grocery items; Gratuity charges
Topic
Taxability of Persons and Transactions
Date Issued
03-30-1995
March 30, 1995
Re: §58.1-1821 Application: Retail Sales and Use Tax
Dear***********
This will reply to your letter of August 23, 1994 in which you seek correction of sales and use tax assessed to your client, *********(the "Taxpayer") for the period December 1989 through November 1992.
FACTS
The Taxpayer operates a restaurant/banquet facility in which it automatically adds a 15% gratuity to its customers' banquet charges. The auditor has assessed tax upon the gratuity charges based on Virginia Regulation (VR) 630-10-64(D) which provides for the tax treatment of tips and service charges relating to the provision of meals. The Taxpayer protests the assessment of the tax arguing that it in fact has complied with the requirements set forth in the regulation.
DETERMINATION
VR 630-10-64 (D), adopted in its current form in 1985, specifically 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 tax." The regulation goes on to state 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 asserts that it has complied with the regulation and offers as evidence, after the fact, statements from its banquet customers that they were aware of their option to change or delete the gratuity charged. The Taxpayer does not, however, offer any evidence that there was a written policy in effect during the audit period which would have informed its customers that the gratuity charge was discretionary.
The contested issue is identical to that of a private club in P.D. 92-192 (9129192). The club in that case had failed to apply the tax to gratuity charges to its members food and beverage checks. That taxpayer argued that its members were aware of their option to change or delete any gratuity charge added to their checks for which they received a monthly statement. The Tax Commissioner held that the application of the tax was proper based on a ruling by the Circuit Court for Chesterfield County in Salisbury Club v. Commonwealth. A club member in that case, when presented with the check at the conclusion of a meal, could elect to increase, decrease or delete the gratuity charge. The club's policy was clearly defined in its by-laws, as well as stated on the actual check. Therefore, the Court opined that the members were fully cognizant of their option to pay, increase, decrease or delete the stated gratuity charge.
While the Taxpayer in this case is a restaurant as opposed to a private club, the reasoning is still applicable, particularly in light of the fact that the cited regulation applies to restaurants, hotels, motels, clubs, caterers, cafes and other preparers of food for retail sale. It is my understanding that the Taxpayer has added language to its banquet contracts stating the policy that the gratuity amounts charged are discretionary and subject to change by the customer. While this will resolve the issue for the future, the department must uphold the tax since a written policy was not in place during the audit period.
The decision is entirely consistent with the department's longstanding policy in this area and I am enclosing a 1982 ruling (P.D. 82-16 (311182)) which also addresses this issue.
Accordingly, the Taxpayer will receive an updated "Notice of Assessment" which should be paid within 30 days to avoid the accrual of additional interest charges. Should you have additional questions concerning this issue, you may contact*************.
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- Sincerely,
Danny Payne
Tax Commissioner
- Sincerely,
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OTP/8454J
Rulings of the Tax Commissioner