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Alabama Caterers: Service Charges Are Taxable!

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A successful Alabama caterer learned a difficult sales tax lesson recently when Chief Judge Bill Thompson of the Alabama Tax Tribunal ruled that the separately stated charges for bartending services were taxable receipts for Alabama sales tax purposes. Judge Thompson even expressed his sympathy for the taxpayer because she believed in good faith that the charges were not taxable. Despite her belief, Judge Thompson had to rule in favor of the state for the reasons outlined below.

The facts are not complicated. A successful catering business occasionally hired bartenders and other servers to assist with an event. The customer paid the fees for the servers and theses fees were paid directly to the servers. The catering company did not keep any of the fees and did not directly benefit financially from the payment. These fees were separately stated on the catering company's invoice to the event host. No Alabama sales tax was charged on these service fees.

Upon audit, the Alabama auditor asserted that these separate service fees were taxable because they were part of the total receipts received by the catering company and the catering company received a benefit from the services even if it did not receive a direct financial benefit from customer. Judge Thompson agreed with the state and quoted the 1977 ruling in State v. International Trade Club, Inc., (351 So. 2nd 895) which states "the determinative question is...whether or not the taxpayer receives a benefit from the ...charge." Because the catering company used the money to pay the bartenders and servers it benefited from the charge which made the receipts taxable.

This ruling, though, is not unique to Alabama. A lot of states consider the total charges paid to catering companies to be subject to sales tax, even when these fees are separately stated. There are some exceptions for optional gratuity charges, but fees that are mandatory and are paid to the catering companies are usually taxable.

Ned Lenhart, CPA is the founder and President of Interstate Tax Strategies, P.C. (“ITS”). Ned has over 28 years of varied state tax consulting experience including roles as the Director of Compliance for the Missouri Department of Revenue, SALT Manager for Arthur Andersen in Kansas City, and Director with Deloitte in their Atlanta office from 1994 to 2003. He started ITS in 2003 to assist local and national companies by helping them develop proactive strategies to managing their multi-state sales tax obligations.

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