This is why service charges are taxed in Illinois

Q: Recently we contacted a couple of event centers as we searched for a venue to celebrate our 50th wedding anniversary. We asked for a cost analysis, including food, drinks, set-up, room rental, gratuities, taxes and any other fees. We were very surprised that in addition to the 8.85 percent to 10.35 percent sales tax on the food and drinks (depending on the locale ) that their service charge of 23% is also taxed! In addition, the room rental, set-up fees and bartender fee are taxed. I thought a service charge was a gratuity. Since when do you pay taxes on gratuities, or for that matter, on space rental?

A: People still chuckle derisively when reminded of what former President Bill Clinton said while trying to explain his affair with Monica Lewinsky: “It depends upon what the meaning of the word ‘is’ is.”

Well, your query prompts a similar painful word-parsing: When is a tip not really a tip? The answer: When it’s compulsory, not voluntary, which is why Illinois slaps its sales tax on your service fees.

At least, that’s what the Illinois Department of Revenue has ruled. After Jan. 1, 2014, tips/gratuities have to meet the following criteria to escape the tax, according to the Illinois Restaurant Association: They have to be made free of compulsion; a customer must have the unrestricted right to determine the amount (or offer nothing at all); the payment should not be the subject of negotiation or dictated by employer policy; and you generally have the right to dictate who receives the tip.

Service fees and the common “a 20 percent gratuity will be added to parties larger than eight” fail all four specifications. The fee is set and, whether you want to or not, you are forced to pay it as part of the establishment’s policy. You also have no say in how it is divided. As a result, it is a service fee, not a true gratuity, and subject to sales tax because it is considered part of the cost of the food or whatever. Thus, the same is true of set-up fees and bartender fees.

“Although a service charge on a restaurant bill will most frequently be encountered, restaurants should be cautioned that auto-gratuities paid for catering, banquets, weddings and other amounts mandated by employer policy will be (taxed) as well.”

And in Illinois’ desperate search for revenue, you may remember just last spring state senators began talking about bringing the sales tax to a dry cleaner, landscaper and self-storage facility near you.

Today’s trivia

Who is often credited for offering the world’s first demonstration of color photography?

Answer to Sunday’s trivia: In 2004, Oprah Winfrey wound up part of a Chicago jury that convicted 27-year-old Dion Coleman of murdering Walter Holley during a dispute over a counterfeit $50 bill. “I didn’t feel like, ‘Oh, gee, I put somebody away,’ ” Winfrey later told the Associated Press. “In the end it just felt sad.”

This story was originally published November 12, 2017 at 7:00 AM with the headline "This is why service charges are taxed in Illinois."