Five scenarios about bands playing at a club for door fees, tip-jar money, or free drinks instead of straight cash pay: which payments are taxable, and who -- the band or the club -- owes the tax?

Plain-English summary

This letter carries an official partial-supersession notice on one of its five scenarios — see the flag below.

In 1996, the Comptroller answered five practical questions about how mixed beverage gross receipts tax and sales tax apply to different ways clubs pay bands for live entertainment:

1. Band keeps its own door entry fee, club has no idea how much it collects. [Now superseded — see below] The original answer: the band itself is the entertainment provider and owes sales tax on the door fees it collects.
2. Band "passes the hat" for tips from the audience. This is a voluntary gratuity, not a door entry fee, and it's NOT subject to sales tax.
3. Band performs for unlimited "free drinks" instead of cash. These are complimentary beverages (alcoholic and non-alcoholic), and sales/use tax is due on the cost of the drink INGREDIENTS — not the drinks' retail value.
4. Band performs for a capped/limited number of free drinks. Same result as #3 — still complimentary beverages, tax due on ingredient cost, regardless of the drink limit.
5. Band performs for a set cash wage PLUS free drinks. Same result again — the free drinks portion is still a complimentary beverage taxed on ingredient cost, even though the band is also getting paid in cash.

The consistent thread across scenarios 3-5: however the "free drinks" fit into the band's overall pay package, they're complimentary beverages under Rule 3.1001 (alcoholic) and Rule 3.293 (non-alcoholic), and what gets taxed is the cost of the ingredients that went into them (liquor, wine, olives, cherries, juices, ice, water), not a retail sale price.

Supersession flag: The Comptroller's STAR system marks Scenario 1 (the door-fee scenario) as partially superseded. Current policy under Rule 3.298(a)(4) generally requires there to be an actual contract or agreement between the club owner and the band before the band can be treated as the taxable "amusement service" provider responsible for the door fee — a requirement this 1996 letter's original answer didn't include. The other four scenarios (tip-jar money and the three complimentary-drinks variations) are not flagged as superseded.

What this means for you

Club and bar owners paying bands in free drinks

However you structure the "free drinks" part of a band's compensation — unlimited, capped, or on top of a cash wage — expect to owe sales/use tax on the cost of the ingredients that went into those drinks, not on some retail-equivalent value.

Venues where a band collects its own door fee

Don't rely on this letter's original door-fee holding without checking current Rule 3.298(a)(4) — today, whether the band is treated as the taxable amusement-service provider on a self-collected door fee likely depends on whether there's an actual contract or agreement between the club and the band.

Bands and musicians paid via tip jar or "passing the hat"

Per this letter, voluntary tip-jar/passed-hat money from the audience isn't a taxable door entry fee.

Common questions

Q: If a band plays for free drinks instead of cash, is anything taxable?
A: Yes, per this letter — sales/use tax is due on the cost of the ingredients used in the complimentary drinks, regardless of how the "free drinks" arrangement is structured.

Q: Is money collected by "passing the hat" among the audience taxable?
A: No, per this letter — that's treated as a voluntary gratuity, not a taxable door entry fee.

Q: Is a band automatically liable for tax on a door fee it collects and keeps itself?
A: This letter's original 1996 answer said yes, but that specific point is now flagged as superseded — current policy (Rule 3.298(a)(4)) generally requires a contract or agreement between the club and band before the band is treated as the taxable amusement-service provider.

Citations and references

Rules referenced:

• 34 Tex. Admin. Code Rule 3.1001 (complimentary alcoholic beverage — taxed on ingredient cost)
• 34 Tex. Admin. Code Rule 3.293 (free non-alcoholic beverages — taxable)
• 34 Tex. Admin. Code Rule 3.298(a)(4) (current policy on amusement-service-provider status, referenced re: the superseded door-fee scenario)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9605L1408D09

Original ruling text

STAR SUPERSEDED INFORMATION
Accession No.: 9605L1408D09
Supersede type: Partial
Issue that caused the document to be superseded: A band performing at a club that is collecting
and keeping the door entry fee regarded as amusement service provider.
Reason: Subsequent policy clarification. Generally there must be a contract or agreement between
club owner and band for the band to be regarded as the amusement service provider. For current
policy please refer to Rule 3.298(a)(4) regarding Amusement Services.

May 7, 1996

Dear**:

Larry Koenig of our Audit Division forwarded your questions concerning mixed
beverage gross receipts tax to me for reply. Below are the situations you
described along with your questions.

1) A band performs at the club with the band's personnel collecting a door
entry fee. The band keeps all the door entry fee receipts and the club has
no knowledge of the amount of door entry fees collected. Is the door entry
fee taxable and if so, who is liable for the tax?

• The band is the provider of the entertainment in this situation and liable
  for sales tax on the door entry fees collected.

2) The band collects money from the audience by "passing the hat."Is tax due
on the money collected in this manor?

• "Passing the hat" is a voluntary gratuity and not a door entry fee. The
  money collected by "passing the hat" is not subject to sales tax.

3) A band performs at the club for "free drinks." Is tax due on the drinks
consumed by the band? If the answer is yes, which would be due, sales tax
or mixed beverage gross receipts tax?

• The free drinks (alcoholic and non-alcoholic) are complimentary beverages.
  Sales tax is due on the cost of the ingredients.

4) A band performs for a set dollar amount of drinks. Are these drinks taxable?

• The drinks (alcoholic and non-alcoholic) are complimentary beverages, even
  though the number of free drinks are limited. Sales tax is due on the cost of
  the ingredients.

5) A band performs for a set wage plus "free drinks." Are these free drinks
taxable?

• The drinks (alcoholic and non-alcoholic) are complimentary beverages.
  Sales tax is due on the cost of the ingredients.

The basis for this opinion is Rule 3.1001 (enclosed) which defines a
complimentary alcoholic beverage as one "served without any charge . . . to
the person served" and also provides that the cost of the ingredients of
complimentary beverages are subject to use tax under Chapter 151, Texas Tax
Code. Rule 3.293 (enclosed) states that non-alcoholic beverages provided free
of charge are subject to use [sales] tax under Chapter 151, Texas Tax Code.

This opinion is based on the facts presented. If there are additional or
different facts the opinion may change.

If I can be of further help, please call me at 1-800-252-1383, extension
3-3849, toll free. You may also write me at the Tax Policy Division or FAX
at 512/475-0900.

Sincerely,

Kirk J. Davenport
Tax Policy Division

NOTE: Previous Accession Number 9605155L