Tax on Tip?

[halland]

So some friends were out to dinner the other night at Carmelita and were part of a large group. Because they were a party of 8, their tip was included with the bill. Someone noticed that the tip was taxed, whereas usually when one leaves a tip it is included in the total after the tax is charged for the food, drinks, etc.

When the server was questioned they replied that the billing system does it that way automatically and that it wasn't a big deal since it was only a difference of $7 or $8. They made the server go back and change the bill, but still, what gives?

Anyone else have experience with this?

Hal

[glenn]

I don't know about the rest of the country, but in NY, a service charge (as opposed to a tip) is subject to sales tax and an establishment is required to pay the tax to the state. I won't pretend to understand the logic, but I would guess it has something to do with tips are THEORETICALLY voluntary while a service charge is not.

[nightscotsman]

But in the State of Washington, it is my understanding that services are not subject to a sales tax - only hard goods. This is why at my old business (a graphic design firm) we never charged sales tax on design fees, but the printer had to charge tax on printing brochures we designed.

[Blue Heron]

Some services in Washington State are taxed. I pay sales tax to Washington Tree Service when they come out 4 times a year to spray our trees & shrubs. I've never heard of having to pay sales tax on a restaurant service charge or tips though. That's a new one to me.

[scrat68]

Having worked in the biz for many years in WA - the truth is as follows:

If it is a service charge or an automatic "tip," then you must pay sales tax on it.

If it is truly a tip and is completely voluntary, you do not need to pay tax.

I unfortunately cannot recite the tax code, but I have reviewed the appropriate documents at one point in my career. It seems to me that a service charge tax is a real case of triple taxation - you pay the tax on the dollar, the restaurant pays the tax on this dollar and the servers who earn the "tip" pay tax on this dollar. It makes me dizzy to think about all of these taxes. How much of our dollar goes towards the real goods? Or tip to these poor waitpeople?

[glenn]

you pay the tax on the dollar, the restaurant pays the tax on this dollar and the servers who earn the "tip" pay tax on this dollar.  It makes me dizzy to think about all of these taxes.  How much of our dollar goes towards the real goods? Or tip to these poor waitpeople?  

Perhaps I'm misunderstanding... how is the restaurant paying tax on the service charge? Of course, they're passing along the tax they collected from the customer, but there's no inocme tax paid by the restaurant on service charges. Or do you mean the payroll taxes that the restaurant pays?

Edited after light bulb went lit up.

Edited March 17, 2003 by glenn (log)

[MsRamsey]

Imagine my surprise when I saw this topic. I do not know Hal, the person who started the thread, yet he described my experience at Carmelita on Saturday night. (It turns out that he knows some of my dining companions.)

We did contest the tax on the bill, but it turns out that we were incorrect, as scrat has indicated above. As stated in the Washington Department of Revenue's "Restaurant Guide":

"Tips or gratuities received under circumstances that are clearly voluntary are not part of the selling price and, therefore, are not subject to sales tax. However, if the tip or gratuity is added to the bill, such that it is a mandatory charge, the charge becomes part of the selling price subject to tax.

A gratuity is not voluntary when the amount is agreed upon and the contract document states that a gratuity 'will be added.' For example, a restaurant may have a policy of adding a 15% charge to the bill for groups of five or more customers. When a gratuity is applied in this manner, the entire charge is subject to retail sales tax and the retailing classification of the B&O tax.

References: WAC 458-20-119, WAC 458-20-124."

The waitress at Carmelita was as uninformed as we were. She merely stated that it shouldn't be a big deal to us because "it's just a few dollars," and "that's the way the computer totals it."

The menu does not state a required gratuity for parties of a certain size, but of course I assumed there would be such a gratuity. The tax code seems to state that this must be mentioned somewhere.

Tax on tip does seem excessive to me in any case, but the law as it stands is on their side. I'd bet that most people aren't aware of this tax/tip oddity, and I wonder what the reasoning was behind it. Powerful restaurant lobby?

Edited March 17, 2003 by MsRamsey (log)