When are Tips and Gratuities Subject to Sales Tax?
The sales price of food and beverages that are served by a restaurant are generally subject to Wisconsin sales or use tax. The taxable sales price of the food and beverages includes charges by the seller for any services necessary to complete the sale. Therefore, if a mandatory tip or gratuity is added to the bill, the mandatory tip or gratuity is also subject to the tax. If the tip or gratuity is discretionary, the tip or gratuity is not subject to tax.
The difference between mandatory and discretionary tips and gratuities is explained below.
Mandatory Tips or Gratuities (Taxable)
A flat amount or flat percentage, whether designated as a tip, gratuity, or service charge, that the seller makes as a mandatory addition to the price of its taxable product or services, is subject to tax. It does not matter if the seller subsequently pays over the amount or flat percentage in whole or in part to employees.
Discretionary Tips or Gratuities (Nontaxable)
A tip or gratuity which is either a) given directly to an employee in cash, or b) added by a customer to a bill and turned over in full (less any withholding) to the employee, is exempt if the following two conditions are met:
- The amount of the tip or gratuity is wholly in the discretion or judgment of the customer, and
- The customer has not made an arrangement with the seller regarding the amount or the percentage of the tip or gratuity.
Example 1: Customer orders food at Restaurant and receives a bill for the food. Restaurant does not add a mandatory gratuity to the bill, and Customer is under no obligation to leave a tip or gratuity for the server. Customer leaves cash on the table as a tip for the server. Since the tip is wholly at the discretion of Customer and an arrangement regarding the tip has not been made with Restaurant (seller), the tip is not subject to sales tax.
Example 2: Customer orders food at Restaurant and receives a bill for the food. An 18% gratuity is added by Restaurant to the bill. Since the gratuity is a mandatory addition to the bill, the gratuity is subject to sales tax as part of Restaurant's sales price of the food and beverages sold.
Example 3: Customer brings a party of six to Restaurant and is informed that a $50 charge will be added to Customer's bill to cover service fees and gratuities. Since the $50 service and gratuity fee is a mandatory addition to the bill, the service and gratuity fee is subject to sales tax as part of Restaurant's sales price of the food and beverages sold.
Last updated February 13, 2014