Some tips are subject to sales tax by restaurant and bar owners.

Under California Code of Regulations 1603 some tips are taxable to the restaurant or bar owner. In GRMI v. California Department of Tax and Fee Administration, the court reviewed CCR Section 1603 to determine the conditions for when a tip is mandatory and considered part of the owners sales tax obligation. When a tip is a “mandatory payment designated as a tip, gratuity, or service charge” it is subject to sales tax. GRMI tried to argue that large party tips were not mandatory but optional. The Court found that if the price of the bill was negotiated in advance and the gratuity was considered mandatory and subject to sales tax under 1603. When the menu, brochures, advertisements or other printed materials contain statements that notify customers that tips, gratuities, or service charges will or may be added, an amount automatically added by the retailer to the bill or invoice presented to and paid by the customer is a mandatory charge and subject to tax. These amounts are considered negotiated in advance.

If a customer manually adds to the bill by adding an amount to a blank line, or if the customer is given a range of options for the percentage for the gratuity to be filled in by the customer, it is a voluntary tip and the owner is not responsible for paying sales tax on the gratuity.