Tax on Reception Service Charge

I've started doing some research. Caveat: Although I am an accountant and have a JD, I am not a tax accountant or tax attorney. I have also only looked at NY State law; not NYC or LI although they are usually in sync with NYS. The information below may be helpful when/if you're having a discussion with your catering hall.

The NYS sales tax publication I looked at does state that 'sales of food and drink when sold by caterers' are taxed. I don't think anyone has an issue with that.

The law also lists of the various services that are subject to sales tax. Serving of food is not one of those services. Gratuities are also not listed as subject to sales tax. My assumption is that the service charge/gratuity we are paying is for food service.

The above may be useful if you're going to have a dialogue with your BM. I hope this helps some one. From what I've read on previous posts about this topic, my hall does not charge sales tax on the service charge.

If you need the actual websites for the publication or the law, just let me know.

Maybe, I'll do some work now.

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Posted by newbie

I've started doing some research. Caveat: Although I am an accountant and have a JD, I am not a tax accountant or tax attorney. I have also only looked at NY State law; not NYC or LI although they are usually in sync with NYS. The information below may be helpful when/if you're having a discussion with your catering hall.

The NYS sales tax publication I looked at does state that 'sales of food and drink when sold by caterers' are taxed. I don't think anyone has an issue with that.

The law also lists of the various services that are subject to sales tax. Serving of food is not one of those services. Gratuities are also not listed as subject to sales tax. My assumption is that the service charge/gratuity we are paying is for food service.

The above may be useful if you're going to have a dialogue with your BM. I hope this helps some one. From what I've read on previous posts about this topic, my hall does not charge sales tax on the service charge.

If you need the actual websites for the publication or the law, just let me know.

Maybe, I'll do some work now.

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WOW, this is really helpful. Can you post the links?
I checked the difference between them charging us tax on the gratuity and not doing so, and I save $187.85. Compared to the $17000 that I am spending on my hall, it doesn't sound like much, but I could put that money towards a pianist for the cocktail hour.

Here are the links:

This publication is basically the actual law, but in a format that is easier to read. The relevant section for services is on page 15.

NYS Publication 750: 'A Guide to Sales Tax in New York State'


And, here is the actual law. The relevant section for services is sect. 1105(c).

NYS Con Law, Chapter 60, Art. 28, Part 2

I was told that they tax the gratuity because it's a fixed amount (18%). Unlike at a restaurant where the gratuity amount is determined by the diner.

Still seems wrong.

Regardless of whether they call it a gratuity or a service charge, this is not subject to sales tax. It may just be about $200 for each of us and not a lot of money, but when you multiply $200 by the number of functions per year, it comes to a lot of money.

I really hate being taken advantage of, but I will be. My place is taxing the 'service charge', and I'm too afraid to call them on it for fear my day will be sabotaged.

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Posted by cluelessbride

I really hate being taken advantage of, but I will be. My place is taxing the 'service charge', and I'm too afraid to call them on it for fear my day will be sabotaged.

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Maybe you or FI can just, innocently, ask them about it? Tell them that you have friends who are getting married and are not paying tax on the service charge. See what they say. It's worth asking about but you have to feel comfortable doing it.

Does anyone know if there is a way to get a 100% definite answer on this? The vote seems to be torn between it is a legal loophole, and it is illegal.

What is a service charge anyway, and what can it be applied to - anything? Is it just the price of the food? Ladies who are getting married at your hall and being charged a ceremony fee, is a service charge applied to that too?

Is it even worth fighting it?

I'm glad you brought this up, I didn't even think about that- I will have to recheck the contract...

THIS IS CRAZY!
I think they were going to tax mine too. I don't have a total bill yet, just what they wrote on the contract... but I THINK they were goin to tax it!

WE NEED DEFINATE answer on this. We should all take on our caterers and see what happens!

If anyone has gotten a DEF. answer, please let us konw!

I've been doing some searching and found this on the NYS Dept. of Taxation and Finance website: service charge

Here's the important part of the article:

'Section 527.8(1) of the Sales and Use Tax Regulations states:
Gratuities and service charges. Any charge, made to a customer, is taxable as a receipt from the sale of food or drink, unless:

(1) the charge is separately stated on the bill or invoice given to the customer;
TSB-A-92 (63) S Sales Tax August 18, 1992
(2) the charge is specifically designated as a gratuity; and
(3) all such monies received are paid over in total to employees.

Section 1101(b)(3) of the Tax Law defines receipt as: 'The amount of the sale price of any property and the charge for any service taxable under this article .... without any deduction for expenses ...'

In order to be exempt as a gratuity, the charge for same such must meet all three of the conditions set forth in Section 527.8(1) of the Sales and Use Tax Regulations.'

Sooo, it looks like it IS a legal loophole, unless I'm understanding it incorrectly.

'Service Charges' are taxable, 'Gratuity' is not.

More research: this is from the CPA Journal Online, it's the definition of Tip vs Service Charge. I'll post it here too:

'TIP VERSUS SERVICE CHARGE

A clear distinction should be made between a tip and a service charge, as there is a significant difference in an employer's reporting requirements for each.

A tip is a gratuity payment made by a customer to a waiter or waitress. The customer has the right to determine the amount given and is free from compulsion. The absence of any of these factors creates a doubt to whether the payment is a tip or a service charge.

A service charge is an amount added to a customer's check by management. IRS regulations state that a service charge is considered a part of the enterprise's gross receipts. In the case of catered affairs and banquets, the amount so charged is agreed upon in advance by the customer and management. Because the service charge is considered a part of gross recipts, many state tax authorities have argued that it should be subject to a sales tax. However, a discussion of that issue is beyond the scope of this article.'

So, it seems like it's up to each individual state whether 'service charge' can be taxed or not, and, of course, NY says it can be taxed (according to the first link I posted.)

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Posted by kazee525

my sister-in-law told me that it is ILLEGAL for them to charge tax on gratuity..tax percentage should be based on the price per person times number of people ONLY...gratuity is SEPARATE!!! If you are being charged tax on the service charge, you should definitely say something to your hall.

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ditto.....there is no way you should pay tax on the Grat/serv fee..... JMO

They get around it by calling it a service charge, even though all the paper work says gratuity. My Father worked out the numbers and called to argued with the East Wind- needless to say he did not win. We ended up pay tax on the gratuity. Oh well - hope this helps - good luck!

Oh - if you are getting any kind of discount - (we payed cash so they took $$$ off) watch that they dont tax the original price - that fight we did win and got back $200.