Are gratuities subject to tax?

Retail sales tax does not apply to tips or gratuities received under circumstances that are clearly voluntary. However, if the gratuity is added to the bill such that it is a mandatory charge, the charge becomes part of the selling price subject to retail sales tax and retailing B&O 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 percent 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 as well as retailing B&O tax.

Example: The total food bill for a group of five is $100. A mandatory tip of 15 percent is added on for a total bill of $115. Retail sales tax should be calculated on $115. Assuming an eight percent tax rate the total with tax is $124.20. Additionally, $115 is the gross sales amount subject to retailing B&O tax.

References: WAC 458-20-119; WAC 458-20-124