Is a caterer's separately stated 18% 'service charge' taxable, or is it an exempt gratuity?

Plain-English summary

John Piccolo Catering charges an 18% "service charge" on its banquet and catering invoices. The charge is separately stated, disclosed to customers in advance, and paid out to the event staff (waitstaff, bartenders, bus persons) who are hired only for the event and earn nothing if there's no event. The catering menu describes it: "An 18% charge is added to your invoice for service … This is not a gratuity but encompasses all service costs." The caterer asked whether this service charge is subject to sales tax.

The Department said it is taxable. Under Reg. § 527.8(l), any charge to a customer is taxable as a receipt from the sale of food or drink unless all three conditions are met: (1) it's separately stated; (2) it's specifically designated as a gratuity; and (3) all of it is paid over to employees. Piccolo's charge fails condition (2) — it is not designated a gratuity, and the caterer's own menu says "This is not a gratuity." On top of that, because the staff receive no pay other than the service charge, the charge is really the employees' wages, and Tax Law § 1101(b)(3) does not allow a deduction for wages (or any expenses) in computing the taxable receipt. So the 18% service charge is part of the caterer's taxable receipts.

What this means for you

Caterers, banquet halls, and restaurants

A mandatory service charge is taxable unless it clears all three gratuity conditions — separately stated, specifically designated as a gratuity, and paid over in full to employees. Calling it a "service charge," or (worse) stating that it "is not a gratuity," keeps it in the taxable receipt, even if you separately state it and pass it to staff. If you intend a charge to be a tax-free gratuity, label it exactly that and make sure 100% goes to employees.

Why "these are just wages" doesn't help

Even though the charge funds the event staff's pay, § 1101(b)(3) forbids deducting wages or expenses from the taxable receipt. So a charge that's really compensation for labor is fully taxable as part of the food/drink receipt.

Accountants and tax professionals

Apply the three-part gratuity test of Reg. § 527.8(l); failing any prong makes the charge taxable. Here the charge failed the "designated as a gratuity" prong (the menu expressly disclaimed gratuity status) and independently was employee wages non-deductible under § 1101(b)(3).

Common questions

Q: Is a mandatory service charge taxable in New York?
A: Yes, unless it meets all three gratuity conditions: separately stated, specifically designated as a gratuity, and paid over in full to employees. A charge that isn't labeled a gratuity is taxable.

Q: The charge was separately stated and went to the staff — why is it still taxed?
A: Because it wasn't designated a gratuity — the menu even said it isn't one — so it fails the second condition. It was also, in substance, the staff's wages, which can't be deducted from the taxable receipt.

Q: How do I make a charge a tax-free gratuity?
A: Meet all three conditions: separately state it, specifically designate it as a gratuity, and pay all of it to employees.

Q: Can another taxpayer rely on this opinion?
A: No. An advisory opinion binds the Department only as to the petitioner and the facts described; another taxpayer with different facts cannot rely on it.

Citations and references

Statutes and authorities:

• Tax Law § 1101(b)(3) (definition of "receipt"; no deduction for expenses such as wages)
• Sales and Use Tax Regulations § 527.8(l) (gratuities and service charges — three-part test for exemption)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1992.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a92_63s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-92 (63) S
Sales Tax
August 18, 1992

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S920529A

On May 29, 1992 a Petition for Advisory Opinion was received from John Piccolo Catering,
Inc., P.O. Box 379, Saratoga, New York 12866.
The issue raised by Petitioner, John Piccolo Catering, Inc., is whether the "service charge"
imposed by it in connection with its banquet and catering business is subject to sales tax.
Petitioner operates a banquet and catering business in Saratoga Springs, New York.
Petitioner's service charges are clearly and separately stated on each invoice. The customer
is informed prior to the event of such charges.
Petitioner's service policy is to recoup the service cost for an event. It is not its intention to
make any profit on the stated service charge. The amount collected is paid to the statutory employees
hired specifically for the event. These employees include waitstaff, bartenders, bus persons and other
support staff who are hired for the event. No one included in the above group is salaried. If there is
no event, the people earn no wages.
Occasionally Petitioner has an event which is a station type event. This requires cooks to
prepare the food outside the kitchen and to serve it directly to guests attending the event. Wages of
salaried cooks, as well as other salaried personnel, are not considered in computing the stated service
charge.
Petitioner does not include on the invoice any designation relating to gratuities. Any gratuity
received by an employee and reported, is recorded for Social Security purposes only.
Petitioner's banquet and catering menu describes its service charge as follows:
"2. Service Charge: An 18% charge is added to your invoice for service. This charge
covers set up and breakdown service, kitchen service, floor personnel and
supervision. This is not a gratuity but encompasses all service costs." (Emphasis
supplied)
Section 527.8(1) of the Sales and Use Tax Regulations states:
Gratuities and service charges. Any charge, made to a customer, is taxable
as a receipt from the sale of food or drink, unless:
(1) the charge is separately stated on the bill or invoice given to the
customer;

-2­
TSB-A-92 (63) S
Sales Tax
August 18, 1992
(2) the charge is specifically designated as a gratuity; and
(3) all such monies received are paid over in total to employees.
Section 1101(b)(3) of the Tax Law defines receipt as: "The amount of the sale price of any
property and the charge for any service taxable under this article .... without any deduction for
expenses ..."
In order to be exempt as a gratuity, the charge for same such must meet all three of the
conditions set forth in Section 527.8(1) of the Sales and Use Tax Regulations. Petitioner's charge is
not specifically designated a gratuity and thus fails to meet the second condition. This is evidenced
by the fact that petitioner's own menu states that the "service charge" is not a gratuity. In addition,
Petitioner's employees receive no remuneration other than the service charge and therefore the
service charge is actually the employees' wages and not gratuities. Section 1101(b)(3) of the Tax
Law does not allow a deduction for wages when calculating the receipt subject to tax. Accordingly,
Petitioner's "service charge" is a part of its receipts subject to sales tax.

DATED: August 18, 1992

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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