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Effective January 1, 2015, California has amended a sales and use tax regulation regarding taxable sales of food products to make the regulation’s treatment of  tips, gratuities, and service charges consistent with the records retailers keep for reporting such payments as tip wages or non-tip wages for Internal Revenue Service purposes. The amendments add a new presumption regarding whether a tip, gratuity, or service charge is subject to tax based on such records. An optional payment designated as a tip, gratuity, or service charge is not subject to sales tax. A mandatory payment designated as a tip, gratuity, or service charge is included in taxable gross receipts, even if it is subsequently paid by the retailer to employees. Per the updated agreement, for optional payments, when a retailer keeps records consistent with reporting amounts as tip wages for IRS purposes, such amounts are presumed to be optional and not subject to tax. When a retailer does not maintain such records, this presumption does not apply and the amounts may be mandatory and included in taxable gross receipts. If an employer misappropriates these amounts, such payments are included in the retailer’s taxable gross receipts.  Per the updated agreement, for mandatory payments, when a retailer’s records reflect that amounts are required to be reported to the IRS as non-tip wages, the amount is deemed to be mandatory. When a retailer does not maintain records for purposes of reporting the amounts to the IRS:


  • An amount negotiated between the retailer and the customer in advance of a meal, food, or drinks, or an event that includes a meal, food, or drinks is mandatory.
  • 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.


An amount will be considered “automatically added” when the retailer adds the amount to the bill without first conferring with the customer after service of the meal. Nonetheless, any amount added by the retailer is presumed to be automatically added and mandatory. It is presumed that an amount added as a tip by the retailer to the bill or invoice presented to the customer is automatically added and mandatory. A statement on the bill or invoice that the amount added by the retailer is a “suggested tip,” “optional gratuity,” or that the amount “may be increased, decreased, or removed” by the customer does not change the mandatory nature of the charge. This presumption may be controverted by documentary evidence showing that the customer specifically requested and authorized the amount be added to the bill. The retailer must retain the guest checks and any additional separate documents to show that the payment is optional. (Reg. 1603, California State Board of Equalization, effective January 1, 2015)


On July 17, 2014, the California State Board of Equalization (BOE) adopted a regulation to implement the partial sales and use tax exemption for manufacturing and research and development (R&D) equipmentwhich was effective July 1, 2014. The regulation implements, interprets, and makes specific the partial sales and use tax exemption and prescribes the form of the partial exemption certificate that must be furnished to the retailer. The partial exemption reduces the state tax rate to 3.3125% plus applicable district taxes and applies to the state general fund portion of the sales and use tax rate, but does not apply to any local, city, county or district taxes. To see our previous news item on this topic, see California Enacts Manufacturing and R&D Exemption. (News Release 106-14-G, California State Board of Equalization, July 18, 2014)


President Barack Obama has signed federal legislation extending the Internet Tax Freedom Act (ITFA) through December 11, 2014 as part of the joint resolution which made continuing appropriations for fiscal year 2015. The ITFA was previously set to expire on November 1, 2014. The ITFA bars state and local governments from imposing multiple or discriminatory taxes on electronic commerce and taxes on Internet access.


For an update to this news item, see Internet Tax Freedom Act Extended Until October 1, 2015, Permanent Extension Introduced.


(P.L. 113-164 (H.J. Res. 124), 113th Congress, 2nd Session, Laws 2014)


The California State Board of Equalization (BOE) has issued a notice that discusses the sales and use tax applicability for transactions in which virtual currencies (e.g. Bitcoin) are accepted as payment for sales of goods and services in the same manner as transactions paid using traditional payment methods. The IRS has issued a notice stating that virtual currencies do not have legal tender status in any jurisdiction and should not be treated as United States currency or foreign currency, but instead, as property. The same holds for purposes of the California Sales and Use Tax Law. Tax applies to sales of tangible personal property in exchange for virtual currency in the same manner as with any other sale of tangible personal property for consideration. The measure of tax is the total amount of the sale or lease, whether received in money or other consideration. California tax law provides that the measure of tax from a barter or exchange transaction includes any amount allowed by a retailer to the customer for property or services of any kind. As a result, if a retailer enters into a contract in which the consideration is virtual currency, the measure of tax from the sale of the product is the amount allowed by the retailer in exchange for the virtual currency. Retailers who accept virtual currency as payment are instructed to retain documentation on the amount for which they regularly sell the same or similar property to their customers when payment is made in U.S. dollars. Retailers transacting business using virtual currency will need to insure their billing and receivables processes have the ability to value the virtual currency and to add the sales tax due to the transaction.  If they accept the virtual currency as consideration of the sales tax amount due, they will need to have access to traditional US currency to remit the tax as the BOE does not accept virtual currencies as a payment method for any tax or fee program. (Special Notice L-382, California State Board of Equalization, June 2014)


Implementation of California’s Medi-Cal managed care sales tax program has been delayed pending federal approval. The implementation date has not yet been determined. The California Board of Equalization (BOE) will notify taxpayers once the program is approved. Medi-Cal managed care plan sellers will not be required to pay the taxes until they receive the capitation payments from the Department of Health Care Services (DHCS). The tax will be retroactive to the effective date of July 1, 2013. Anyone who has already registered as a retailer with the BOE under this program does not need to register again. For more information on this tax see our prior news item here. (Special Notice L-367, California State Board of Equalization, October 2013)



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