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Board of Equalization adopts regulation regarding nontaxable tips

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The regulation is to clarify the way in which a restaurant reports mandatory and/or optional tips. (Thinkstock)

At its Culver City Meeting on August 5, 2014, the Board of Equalization adopted a regulation to clarify the way a restaurant reports mandatory and optional tips. The regulation establishes a presumption that restaurants are correctly reporting the taxable mandatory service charges to the BOE when their records are kept consistent with the Internal Revenue Service (IRS) guidelines.

“By the BOE presuming the reporting to BOE is correct when it is consistent with the method of reporting tips and tip-wages to the IRS, that will make it easier for restaurant operators to report their taxable sales to the BOE and to later verify this information if they are audited,” said Chairman Jerome E. Horton.

When a restaurant applies automatic gratuities (tips) to their customers’ checks, such as for large parties, the tip is considered a mandatory part of the sale of the meal and therefore taxable. Conversely, tips that are not mandatory are not subject to sales tax. When the regulation becomes effective on January 1, 2015, the BOE will presume that a restaurant is properly reporting taxable service charges so long as the books and records are consistent with the way the restaurant reports tip and non-tip wages to the IRS.

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