New York – Gratuities and Service Charges

SALT Report 1433 – The New York Department of Taxation and Finance issued a bulletin that explains how state and local sales tax applies to gratuities and service charges.  The term gratuity is defined as money a customer gives a wait person, server, housekeeper, or other person as an expression of appreciation for service rendered, such as a tip at a restaurant or bar.

The bulletin addresses two types of gratuity, voluntary and mandatory.

Voluntary gratuities that a customer leaves are not taxable. Mandatory gratuities that are automatically added onto a bill and given to the customer are not taxable if all of following conditions are met:
  • The charge is shown separately on the bill
  • The charge is identified as a gratuity, and
  • The business gives the entire separately stated gratuity to their employees
If any of the above conditions are not met, the mandatory gratuity is taxable, along with the rest of the bill.
Service charges or other charges not specifically listed as gratuities on a bill or invoice are subject to sales tax.
The existence of a union contract or other such agreement regarding gratuities does not determine the taxability of mandatory gratuities.  However, in situations involving union contracts, businesses must be careful to establish that the conditions stated above have been met.
For example, an establishment may impose mandatory gratuities, separately state them on the checks as gratuities and, pursuant to a contract or other agreement, give 100% of the gratuities to the union. In this case, the establishment would also have to prove that the union turned over 100% of the gratuities to the employees in order for the gratuities to be exempt from sales tax.
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