The taxability of gratuities depends on whether the gratuity is part of the sale of the good or service. The answer is not a simple yes or no, it’s more situational. Let’s look at two different situations. First, you go out for dinner at your favorite local restaurant and the service was excellent, so you tip the waiter very well. In this situation the gratuity is not subject to Florida sales tax because it was not mandatory. On the other hand, if you are with a large group of people and the restaurant applied a mandatory gratuity charge, then the gratuity is a part of the total sale, which renders the entire transaction as taxable. The difference? Whether the gratuity is optional.
According to Section 212.02(16), Florida Statutes, “sales price” is defined as:
“the total amount paid for tangible personal property, including any services that are a part of the sale, valued in money, whether paid in money or otherwise, and includes any amount for which credit is given to the purchaser by the seller.”
The Department of Revenue has issued guidance on this topic as well through Rule 12A-1.0115(7)(a), Florida Administrative Code (FAC) by stating:
“Any charge made by a dealer to a customer for gratuities, tips, or similar charges is a part of the taxable sales price of the food or drinks except when . . . the charge is separately stated as a gratuity, tip, or other charge on the customer’s receipt or other tangible evidence of sale.”
An optional tip made by a customer is not a charge by a dealer to a customer, therefor not subject to Florida sales tax. It is important for businesses to understand when gratuities are taxable in the event their business may be subjected to an audit.
Many businesses are including “COVID Fees” in the form of mandatory service charges to help bridge the gap for struggling restaurants to implement safety measures within their business. Some businesses have not been charging sales tax on the COVID Fees. However, the businesses should be charging it because the fee is mandatory and is therefore considered part of the sales price of the food or service. Failure to understand the rules will make the restaurant liable for the sales tax on the COVID Fees that could have been charged to their customers. And don’t expect any sympathy from a sales tax auditor on how much your business struggled during forced shut downs during the pandemic.
Additionally, it is important for restaurants to keep good records of gratuities as Florida Department of Revenue auditors can assess tax on gross sales from Taxpayer’s income tax returns in relation to their sales tax returns. The auditor will take the difference between the Federally reported gross sales versus the sales tax returns and assess tax on the difference. It will then be up to the Taxpayer to prove the gross sales on your Federal income tax return included gratuities. The auditor also has access to your company’s credit card sales because the credit card companies are required to report your credit card sales to the IRS and the Florida Department of Revenue has direct access to that information.
The easiest way to remember this rule is to look at the charge and ask yourself if this is optional to the customer or if it is a mandatory charge. If the charge is optional to the customer, then it is not included in the taxable sales price. If the charge is mandatory to the customer, then the tip is included in the total taxable sales price.
If you think you may have a gratuities issue or have any questions or concerns on anything contained within this article or on Florida sales and use tax audits in general, then feel free to contact our firm at your convenience.
About the author: Michael Moffa is an associate attorney with Moffa, Sutton, & Donnini, P.A. His primary practice areas are Florida sales and use tax as well as multistate sales tax controversy. Michael received a B.S. in Finance from University of Central Florida in 2015. He received his Juris Doctor from Barry University in 2018. You can read his BIO HERE.
About the firm: At the Law Office of Moffa, Sutton, & Donnini, PA, our primary practice area is Florida taxes, with a very heavy emphasis in Florida sales and use tax. We have defended Florida businesses against the Florida Department of Revenue since 1991 and have over 100 years of cumulative sales tax experience within our firm. Our partners are both CPAs/Accountants and Attorneys, so we understand both the accounting side of the situation as well as the legal side. We represent taxpayers and business owners from the entire state of Florida. Call our offices today for a FREE INITIAL CONSULTATION to confidentially discuss how we can help put this nightmare behind you.
AUTHORITY
Section 212.02(16), Florida Statutes, Sales of Food Products, Serviced, Prepared or Sold in or by Restaurants
Rule 12A-1.0115(7), Florida Administrative Code, Sales of Food Products Served, Prepared, or Sold in or by Restaurants, Lunch Counters, Cafeterias, Hotels, Taverns, or Other Like Places and by Transportation Companies
ADDITIONAL RESOURCES
Florida Sales Tax Audit Help, published August 24, 2020, by James Sutton, CPA, Esq
Florida – Restaurant Sales and Use Tax Audits, published November 6, 2020, by Paula Savchenko, Esq.
Florida Sales Tax on Concession Sales, published August 27, 2020, by David Brennan, Esq.
Florida Sales Tax Guide for Bakeries, published March 2, 2020, by David Brennan, Esq.
Florida DOR Targets Restaurants for Sales Tax Audits, published December 1, 2019, by Jerry Donnini, Esq.