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Understanding New York State Sales Tax on Gratuities and Service Charges


On February 23, 2012, New York State issued Tax Bulletin TB-ST-320, which explains how state and local sales tax applies to gratuities and service charges. For sales tax purposes, the state differentiates between "voluntary" and "mandatory" gratuities. In this regard, voluntary gratuities left by customers (for example, "tips") are not subject to sales tax; however, mandatory gratuities that are automatically added to a bill given to a customer must satisfy all of the following three conditions in order to not be deemed subject to sales tax:

1.The charge is shown separately on the bill;

2.The charge is identified as a gratuity; and

3.The business gives the entire separately stated gratuity amount to its employees.

If these requirements are not met, the entire amount of the mandatory gratuity will be subject to sales tax.

Service charges or other charges not specifically depicted as gratuities on a bill or invoice given to a customer are subject to sales tax. For example, a caterer charges its customers an 8 percent service charge and a 15 percent gratuity, both of which are separately stated and designated as a service charge and gratuity on the invoice. Both are entirely turned over to the servers. The 15 percent gratuity is not subject to sales tax; however, the 8 percent service charge is subject to sales tax since it was not specifically designated as a gratuity.

Needless to say, to the extent you charge your customers mandatory gratuities and/or service charges on invoices, a review of your sales tax protocols is warranted to ensure that the appropriate procedures and designations are utilized to avoid being subject to New York sales tax.

For more information on the sale tax implications of gratuities and service charges, please contact Gary Levy, CPA, partner and director of J.H. Cohn's Hospitality Industry Practice, at glevy@jhcohn.com or 646-254-7403, or Corey L. Rosenthal, JD, a J.H. Cohn director and member of the Firm's State and Local Tax Practice, at crosenthal@jhcohn.com or 646-625-5729.

Download the full PDF.

Circular 230 Notice: In compliance with U.S. Treasury Regulations, the information included herein (or in any attachment) is not intended or written to be used, and it cannot be used, by any taxpayer for the purpose of i) avoiding penalties the IRS and others may impose on the taxpayer or ii) promoting, marketing, or recommending to another party any tax related matters. This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and J.H. Cohn LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

Published date: 2/29/2012

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