Multi-State Tax Law Blog
In the United States, tipping at restaurants is never really optional. While customers are the ones who write in a tip on their bills at their discretion, it is generally expected to leave 15-20%. Occasionally when large parties visit a restaurant, a mandatory tip is imposed by the restaurant on the bill. This ensures that servers, who may dedicate a large portion of their shift to a particular party, do not leave empty handed.
But when a tip is mandatory, is it really a tip? Or is it actually part of the food price? This was the question addressed by the Idaho Supreme Court. While tips are generally not taxable, restaurant food is taxable. When a tip becomes requisite payment for restaurant food, it becomes no different in substance than the sales price on the menu. As a result, if mandatory tips are, in fact, part of the sales price, then they too are subject to tax. Yes, that means you have to pay tax on the tip.
While the consequence of paying tax on mandatory tips only adds a small amount to the total bill, the cumulative effect can be substantial on the restaurant. This was the experience of an Idaho restaurant, Chandlers’-Boise LLC, that was found liable for sales tax on the amounts it automatically added to customer checks. The restaurant, which added gratuity to parties of six or more, argued in Chandler’s-Boise, LLC v Idaho State Tax Comm’n. 398 P.3d 180 (Idaho 2017), that such tips were exempt under Idaho law.