CA – Are tips/gratuities taxable? Well, it depends…
Posted by salestax on March 31, 2009
According to this special notice from the CA BOE tips may be taxable if the restaurant doesn’t allow you to make your own choice. Meaning:
If what you’re purchasing is taxable then: If the tip is up to you – no tax; but, if the tip is required, the tip is added to your bill and then tax is calculated.
If it’s an exempt service you’re buying – tips are exempt too.
So, for you small business owners, if you automatically add a gratuity to the customer’s bill, then you need to make sure that tax is being calculated on it just like another line item of goods being sold. This could make customer’s shy away from your business if it’s something the public feels strongly about. Be sure to weigh the options, because now it can be adding to the customer’s overall bill.
Example: Dinner service for a party of 8.
CA Tax: 9.25% (example)
Total Tab: $200
Tax: $18.50
Discretionary Tip (20%): $40
Total Bill: $258.50
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Total Tab: $200.00
Required gratuity (20%): 40.00
Tax: $22.20
Total Bill: 262.20
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Difference: $3.70 – could make a difference to some on where they choose to eat in large parties.
NY – Gratuities & Sales Tax; To Charge or Not to Charge, that is the question. « The Sales Tax Connection said
[...] And, if you’d like to brush up on what California says about the sales tax implications on gratuities, click here. [...]