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On initial review, the Department
determined that Taxpayer failed to collect and remit the correct amount of
sales tax in its catering transactions, and assessed Taxpayer additional sales
tax on the transactions. Taxpayer's billings included a separately stated,
mandatory charge for gratuities, and Taxpayer did not collect sales tax on the
charges for gratuities. Taxpayer maintains that these amounts for gratuities
are excluded from sales tax and, therefore, it was not responsible for
collecting and remitting the sales tax. Taxpayer explains that the gratuities,
at issue, are receipts that represent "charges for serving or delivery
food," which are excluded from sales tax under IC § 6-2.5-4-1(g).
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When a gratuity is voluntarily
provided to a server who retains the gratuity, there is no question that the
charge is a separate stated charge given for the serving of food. However, when
a gratuity is mandatory, further analysis needs to be made. The mandatory
gratuity would need to meet the tests of representing actual charges "for
the serving or delivery of food," and being "separately stated"
for the costs of providing the food.
If any of the mandatory gratuities
are retained by the employer, the charge would be a charge to cover an overhead
cost of providing the food and would not represent a bona fide charge for
serving the food. Likewise, if the employees were not receiving wages from the
employees, the gratuity would represent a "wage replacement," which
is the equivalent of a charge for the overhead cost of the employer providing
the food. Therefore, for a mandatory gratuity, to meet these tests the gratuity
must be entirely distributed to the employees serving the food and must not
represent the employee's wages, salaries, or other compensation.
During the hearing, Taxpayer
presented additional documentation, including customer contracts, employee
compensation records, and gratuity distribution records. In the instant case,
the mandatory gratuity is separately stated on the bill to the customer meeting
the first test. Also, the gratuities are entirely distributed to the employees
and are not, in any part, retained by Taxpayer. Lastly, Taxpayer's employees
receive wages of $8.50 an hour from Taxpayer for the time worked, and thus, the
gratuities do not represent a wage, salary, or other compensation. Accordingly,
Taxpayer has demonstrated that the mandatory gratuities qualify as
"charges for the serving of food" that are excluded from sales tax.
