Restaurants that are maintaining records consistent with guidance issued in IRS Ruling 2012-18 will be presumed to be correctly reporting taxable mandatory service charges to the BOE when regulatory amendments adopted by the BOE are finalized.
The Ruling provides information on the difference between optional tips (which are not subject to sales tax) and mandatory service charges (which are subject to sales tax) and states that the absence of any of the four following factors indicates that the payment from a customer is a taxable service charge:
Sloppy Joe’s Restaurant does not keep adequate records for purposes of the IRS reporting requirements. Its menu contains the following statement:“For parties of 10 or more, a suggested gratuity of 15% will be included on the bill.”
In this case, the tip is a taxable service charge.
A restaurant check is presented to the customer with options computed by the restaurant and presented to the customer as tip suggestions. The “tip” area is blank so the customer may voluntarily write in the amount:
The regulatory amendments establishing this new bright-line presumption was adopted by the BOE at their August 5, 2014, meeting.
If approved by the Office of Administrative Law, the changes will apply to sales made on or after January 1, 2015.
Sal Censoprano is a Certified Public Accountant (CPA) and tax practice owner for over 40 years. He was born and raised in Brooklyn, New York and earned his master’s degree in taxation.