Service Fees Part of Taxable Receipts from Catering Business in Alabama

Thursday, August 8th, 2013


The Alabama Department of Revenue determined that a taxpayer's "service fees" were part of the taxable proceeds from its catering business.

The taxpayer was a catering business. The business's invoices included service fees and gratuities. The gratuities were not taxable because they went directly to the employees and did not benefit the taxpayer. The taxpayer argued that the service fees were also not taxable because the taxpayer used them to pay its employees part of their wages.

Alabama taxes sales of catering services. Tax applies to the gross proceeds of a sale. "Gross proceeds" means the value proceeding or accruing from a sale, without any deduction for labor or service cost. Tips or gratuities are not part of the gross proceeds. To determine whether a charge is a non-taxable gratuity, Alabama looks at whether the taxpayer benefits from the charge. If the taxpayer benefits from it, the charge is part of the taxable gross proceeds. If the taxpayer does not benefit, the charge is not part of the taxable gross proceeds.

Here, the taxpayer used the service fees to pay its employees part of their wages. The taxpayer had to pay its employees' wages. Because the taxpayer used the service fees to pay for something it was required to pay for, the service fees benefited the taxpayer. The service fees were therefore subject to tax as part of the gross proceeds of a taxable service.

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