Retail sales tax and retailing B&O tax do not apply to gratuities (tips) received under circumstances that are clearly voluntary. However, if a gratuity is added by the business to the check, bill, receipt, etc., such that it is not clearly voluntary, the charge becomes part of the selling price subject to retail sales tax and retailing B&O tax.
When gratuities are added to the check, bill, receipt, etc., by the business, the business has the burden to prove that the gratuity is clearly voluntary.
When customers voluntarily put money into a ‘tip’ jar left out by a business, these amounts are clearly voluntary gratuities and exempt of tax.
Cash payments over the total listed on the check, bill, etc.
When customers voluntarily leave a cash payment (on the table, in the check holder, etc.) over the total amount due listed on the check, bill, etc., these amounts are clearly voluntary gratuities and exempt of tax.
Gratuity is a blank amount/line on the check, bill, etc.
When the gratuity amount on a check or bill is a blank amount/line that the customer fills-in after food service is provided, the gratuity is clearly voluntary and exempt from tax.
Gratuity is added by the business to the check, bill, etc.
The Department assumes the gratuity is not clearly voluntary and will be subject to retail sales tax and retailing B&O tax when
- the gratuity amount is agreed upon before the provision of the service and/or
- the check, bill, contract, menu, business’s website or other documents state that a gratuity “will be added,” and that amount is then added to the bill or invoice with no clear means for the customer to modify or delete the charged gratuity.
Example: A restaurant’s policy, which is listed in the menus and on checks, adds an 18 percent gratuity to the bill for groups of five or more customers. The total food bill for a group of five is $100 and a mandatory tip of 18 percent is added for a total bill of $118. Retail sales tax and retailing B&O tax applies on $118.
Auto-generated or suggested gratuity added to an electronic check, bill, etc.
Many restaurants and similar businesses allow customers to pay through electronic means, applications (apps), on their customers’ mobile devices, or through table kiosks, tablet computers, etc. accessed by customers.
Gratuity would be considered clearly voluntary and exempt from tax if the app or device did the following at the time of payment:
- makes clear that gratuity is voluntary by defaulting to a blank line or
- displaying $0 value for the gratuity that the customer can freely adjust after the meal or service is provided and clearly makes the customer aware the gratuity is voluntary.
Otherwise, the Department assumes that any charges automatically added through apps or devices, etc., are mandatory and subject to retail sales tax and retailing B&O tax.