Taxing Service Charge - Looks like it IS a legal loophole
Hi ladies,
I'm reposting this information from the other taxing service charge thread FYI.
From what I can tell, calling the additional percentage charge a 'service charge' instead of a 'gratuity' IS a legal loophole. Service charges are subject to tax according to the NYS Dept. of Taxation and Finance, while gratuity is not.
I found this on the NYS Dept. of Taxation and Finance website: service charge
Here is the important part:
'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.'
So, if your hall is simply calling it a 'service charge' instead of a 'gratuity,' then they do not meet the 2nd requirement. Since they do not meet all 3 requirements, it is not exempt from tax.
This
article is from the CPA Journal Online, and it defines 'service charge' and 'tip' - I'll post the info below:
'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.'
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.)
If I'm misinterpreting this, someone please let me know!
Thanks!
I'm reposting this information from the other taxing service charge thread FYI.
From what I can tell, calling the additional percentage charge a 'service charge' instead of a 'gratuity' IS a legal loophole. Service charges are subject to tax according to the NYS Dept. of Taxation and Finance, while gratuity is not.
I found this on the NYS Dept. of Taxation and Finance website: service charge
Here is the important part:
'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.'
So, if your hall is simply calling it a 'service charge' instead of a 'gratuity,' then they do not meet the 2nd requirement. Since they do not meet all 3 requirements, it is not exempt from tax.
This
article is from the CPA Journal Online, and it defines 'service charge' and 'tip' - I'll post the info below:
'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.'
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.)
If I'm misinterpreting this, someone please let me know!
Thanks!
