D.C. Provides Guidance on Taxability of Mandatory Service Charges

Initiative 82 – passed by District of Columbia voters in November 2022 – eliminated the tipped minimum wage for servers, bartenders and tipped workers. To reach D.C.’s minimum wage, the difference is made up with gratuities, whether voluntarily given by customers or required to be paid by customers. This gratuity is referred to as the “tip credit.” Beginning May 1, 2023, employers are required to supplement workers’ pay if the worker did not earn enough in tips to reach the D.C. minimum wage. As businesses have begun to comply with Initiative 82, the D.C. Office of Tax and Revenue (OTR) has received inquiries from individuals who have seen an additional line item for a mandatory charge on their bills from restaurants and other establishments. The OTR has provided guidance reminding businesses and customers that if tangible personal property or taxable services being sold are subject to D.C. sales tax, the business must collect and remit sales tax on the total sales price. Therefore, if a business adds a mandatory service charge, fee or similar item to the total sales price, D.C. sales tax is due on the total sales price including the mandatory service charge or fee. D.C. restaurants and other affected establishments should take note so they can properly apply sales tax and are able to respond to customer questions on mandatory service charges.

(OTR Tax Notice 2023-03, March 27, 2023, D.C. Office of Tax and Revenue)

Posted on May 2, 2023