Are hostess personal-service fees taxable when charged by an establishment that also sells beverages?

Plain-English summary

WHK Restaurant Corporation (in Manhattan) sells alcoholic and non-alcoholic beverages and employs hostesses to provide patrons conversation and companionship. It charges a separately stated personal-service fee based on length of stay, the number of hostesses attending, and the number of patrons attended. It serves only complimentary food, stages no performances, and charges no admission or membership fee. Personal-service fees are about 60%+ of revenue, beverages under 40%. WHK asked whether the hostess fees are taxable.

The Department held that both the beverage sales and the hostess fees are taxable.

• The establishment is within the food-and-drink tax. Tax Law 1105(d)(i) taxes receipts from selling beer, wine, other alcoholic beverages, or any drink, and food and drink of any nature, when sold by restaurants, taverns or other establishments for on-premises consumption — including "any cover, minimum, entertainment or other charge made to patrons or customers." Selling drink to patrons puts WHK squarely in this class.
• The hostess fees are "entertainment or other" charges. The Department read "entertainment" in its ordinary sense — the act of receiving as a host, and that which amuses or diverts, including by conversation. The hostesses' personal services fit that definition, so the fees are "entertainment or other" charges includable in WHK's taxable receipts.
• The revenue ratio is irrelevant. Unlike the cabaret analysis, here the proportion of personal-service revenue to other receipts has no bearing — the charge is taxable because the establishment sells drink and the fee is an entertainment/other charge to its patrons.
• Result. Both the refreshment receipts and the personal-service fees are subject to tax under Tax Law 1105(d)(i).

What this means for you

Once you sell drinks for on-premises consumption, the tax reaches your extra charges too. The 1105(d)(i) tax isn't limited to the food and drink themselves — it expressly sweeps in cover, minimum, entertainment, and "other" charges made to patrons.

"Entertainment" is read broadly. A fee for hostesses providing conversation and companionship is an entertainment/other charge. Calling it a "personal service" fee and stating it separately doesn't take it out of the tax.

Don't rely on the mix of revenue to escape this tax. Unlike the cabaret test, the ratio of service fees to drink sales doesn't matter here. If you sell drink and impose the charge on patrons, the charge is taxable.

Common questions

Q: I run a bar and charge separate hostess/companionship fees. Are those taxable?
A: Yes. Because you sell drink for on-premises consumption, 1105(d)(i) taxes your beverage sales and any cover, minimum, entertainment, or other charge to patrons — and hostess fees are entertainment/other charges.

Q: Most of my revenue is the service fee, not drinks. Does that change things?
A: No. The revenue ratio has no bearing here. The fee is taxable because the establishment sells drink and imposes the charge on patrons.

Q: We only serve complimentary food and stage no shows. Still taxable?
A: Yes. Selling drink for on-premises consumption is enough to bring the establishment within 1105(d)(i), and the hostess fees are taxable entertainment/other charges.

Citations and references

Tax Law:

• 1105(d)(i) — taxes receipts from selling food and drink (including any drink) by restaurants, taverns, or other establishments for on-premises consumption, including any cover, minimum, entertainment or other charge made to patrons

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1985.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a85_37s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-85(37)S
Sales Tax
August 28, 1985

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S841203A

On December 3, 1984 a Petition for Advisory Opinion was received from WHK Restaurant
Corporation, 1013 Second Ave., New York, N.Y. 10022.
The issue raised is whether fees charged for the personal services of hostesses by an
establishment which also sells alcoholic and non-alcoholic beverages are subject to the sales tax.
Petitioner employs several hostesses for the purpose of providing patrons with conversation
and companionship on a personal and individual basis. For these services, Petitioner charges its
customers a personal service fee based on length of stay, number of hostesses attending, and number
of persons attended.
Petitioner states that, on the average, personal service fees account for over 60% of its
revenue while less than 40% derives from the sale of beverages. Each charge is stated separately on
the customer's bill. Petitioner does not stage performances for profit nor charge any admission or
membership fees. Only complimentary food is served on the premises.
Section 1105(d)(i) of the Tax Law imposes a tax on "The receipts from every sale of beer,
wine or other alcoholic beverages or any drink of any nature, or from every sale of food and drink
of any nature, . . . when sold in or by restaurants, taverns or other establishments in this state, . . .
including . . . any cover, minimum, entertainment or other charge made to patrons or customers. . .
(1) in all instances where the sale is for consumption on the premises where sold; . . ."
The business conducted by Petitioner conforms to the classification of a "restaurant, tavern
or other establishment" making sales of food and drink to customers. Receipts attributable to the
services of the hostesses, as described by Petitioner, are deemed charges for "entertainment", a term
defined in Webster's New International Dictionary of the English Language, 2nd Ed., as: "The act
of receiving as a host "and" that which . . . amuses or diverts, whether in private, as by conversation,
. . . or in public".
Therefore, the personal service fees patrons are required to pay represent "entertainment or
other" charges within the meaning and intent of the Tax Law, which are includable in Petitioner's
taxable business receipts. The relative proportion of amounts derived from personal services to other
business receipts has no bearing on the tax consequences.

RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

-2­
TSB-A-85(37)S
Sales Tax
August 28, 1985

Accordingly, both the receipts from refreshments and from personal service fees are subject
to the tax imposed by Tax Law 1105(d)(i).

DATED: August 12, 1985

s/FRANK J. PUCCIA
Director
Technical Services Bureau

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth herein.