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Utah: Mandatory Tips Subject to Sales Tax

  • Mar 13, 2014 | Gail Cole

 Mandatory tips are subject to sales tax in Utah.

Mandatory tips are subject to sales tax in Utah.

The owner of a restaurant (taxpayer) in Utah discovered this during an audit, when the Auditing Division of the Utah State Tax Commission determined “that the taxpayer was required to collect sales and use taxes and restaurant taxes on mandatory tips added to customers’ bills and that the taxpayer had not done so.”

As soon as the taxpayer was alerted of this requirement, it began applying the requisite taxes to mandatory tips. The taxpayer contends that it had been unaware mandatory tips were subject to sales tax. It points out that “the Commission changed its method of notifying businesses of changes in Utah law… and that the taxpayer did not receive notice of the change concerning mandatory tips either by email or by U.S. post mail.” Notification of such changes “used to be mailed to taxpayers on gold-colored paper so that it was easy for taxpayers to recognize the importance of these notices….”

The taxpayer’s confusion is understandable. Mandatory tips have been taxable in Utah since 2004, when the Utah Legislature “amended the definition of ‘purchase price’ and ‘sales price’ to include ‘a charge by the seller for any service necessary to complete the sale.’” [Utah Code Ann. §59-12-102(94) (2012)]. However until August 8, 2008, an administrative rule “provided that mandatory tips passed on to a server or servers were not subject to taxation.” [Utah Admin. Rule R861-1A-94(1)].

Since the taxpayer’s audit period runs from July 1, 2009 through January 31, 2012, that confusion is a moot point. Mandatory tips were subject to taxation throughout the audit period.

Furthermore, the Utah Tax Commission changed its notification policy “around 2006,” and since that time, “these notices have been available through the Internet.” It is the responsibility of the taxpayer to keep current on all applicable tax laws.

Utah isn't the only state that subjects mandatory tips to sales tax. Wisconsin does, as the Wisconsin Department of Revenue recently reminded taxpayers. So does California.

Keeping track of state and local sales tax rates, rules and regulations is challenging for all businesses, even those that sell at only one location. Businesses selling into multiple jurisdictions face an even greater challenge. An automated sales tax solution helps.

Read the full decision by the Utah State Tax Commission.

photo credit: Thomas Geiregger via photopin cc

Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
Gail Cole
Avalara Author
Gail Cole
Gail Cole
Avalara Author Gail Cole
Gail began researching and writing about sales tax in 2012 and has been fascinated with it ever since. She has a penchant for uncovering unusual tax facts, and endeavors to make complex sales tax laws more digestible for both experts and laypeople.