APPEAL from the Circuit Court of Peoria County; the Hon.
ROBERT E. HUNT, Judge, presiding.
MR. JUSTICE SCOTT DELIVERED THE OPINION OF THE COURT:
This is an appeal by Hilton Hotel from an order of the Circuit Court of Peoria County which upheld an administrative decision of the Department of Revenue which found that Hilton was liable for a retailers' occupation tax assessment on banquet gratuities collected from customers.
In July of 1976 a Mr. Sievers of the Department of Revenue conducted an audit of the Hilton Hotel in Peoria for the period of July 1, 1973, through June 30, 1976. Subsequent to this audit Hilton was notified that it was liable for unpaid State and municipal retailers' occupation tax in the sum of $20,669.68 including penalty and interest. It was the position of the Department that the tax liability resulted from a deduction claimed by Hilton for gratuities collected from banquet customers.
Evidence adduced during the hearing of this case establishes that the collection of gratuities at banquets was governed by a contract in effect between Hilton and its employees union. Pursuant to the terms of the contract Hilton agreed to seek a 15 percent gratuity on all banquet functions. Of this 15 percent added to the check, 90 percent was paid to service personnel (waitresses); 6 1/2 percent was paid to the executive catering staff; and 3 1/2 percent was retained by Hilton to cover "overhead," i.e., cost of a paymaster issuing checks, cost of personnel to "clock" the employees, and cost to collect the gratuities and to cover bad checks.
It was further established by the evidence that dining customers usually leave a tip with the employee who attends his or her table, and when left in such a manner the gratuities are discretionary and do not become a part of the employer's gross receipts.
It was the testimony of the general manager of Hilton that the union contract provision pertaining to gratuities was not mandatory and further that the 15 percent gratuity charge was not mandatory on customers in that when negotiating for a banquet agreement the customer had the discretion to discuss the amount of gratuity to be paid or could reject the paying of any gratuity. It was the general manager's testimony that a banquet agreement could be entered into where there would be no agreed gratuity and in that event the service personnel would have the choice of passing the plate.
A further recitation as to the Department of Revenue's regulations and the evaluation of its departmental rules concerning the applicability of the retailers' occupation tax to gratuity charges will be noted as we address the issues raised in this appeal.
The first issue raised for determination is Hilton's contention that the gratuities collected were discretionary rather than mandatory payments made by the banquet customers.
We note that both parties are in agreement that the pivotal question to be determined is whether the gratuity charges were mandatory or discretionary. In addressing our attention to a determination of the mandatory or discretionary question it is clear that prior to 1974 it was the policy of the Department to consider gratuity charges as not being a part of a taxpayer's gross receipts and therefore not subject to retailers' occupation tax if two conditions were met: (1) the charge was in fact stated separately on each bill, and (2) all of the proceeds were in fact distributed to the employees who would normally have received the tips or gratuities. This policy of the Department was overruled by the decision in Cohen v. Playboy Clubs International, Inc. (1974), 19 Ill. App.3d 215, 311 N.E.2d 336. In Cohen, the appellate court, First District, held that a mandatory gratuity or service charge made in connection with the selling of food and beverages is includable within and not deductible from the selling price of food and drinks. In Cohen it was argued that the separately stated service charge which specifically states "includes gratuities" is in effect a tip or gratuity. The reviewing court dispelled the "separately stated charge" guideline which had been in effect prior to 1974 by stating:
"This argument is without merit. The service charge, although a fixed percentage of the bill, is mandatory. The customer has no discretion as to the decision to pay or not to pay or the amount of the payment. He may or may not leave an additional amount as a gratuity. If he does, that amount is within his personal discretion. However, the service charge is not in any sense gratuitous." 19 Ill. App.3d 215, 220-21, 311 N.E.2d 336, 340.
Subsequent to the holding in Cohen the test as to whether gratutities were taxable was whether they were of a mandatory or of a discretionary character. This test was recognized and confirmed in Fontana D'Or, Inc. v. Department of Revenue (1976), 44 Ill. App.3d 1064, 358 N.E.2d 1283.
In the instant case it can only be concluded that the 15 percent gratuity collected by Hilton was a mandatory charge payable by banquet customers. Hilton was obligated to seek a 15 percent gratuity, and while it is argued by the hotel that this was a negotiable matter, the record fails to reveal any instance during the three-year period in question when there was any variation from the 15 percent charge or that there was ever a refusal to pay this amount. The individual diners or customers had no control over the amount of the gratuity to be charged or how it was to be disbursed. It was aptly stated by the Supreme Court of Arizona that:
"It is common knowledge that patrons do not as a rule tip caterers, kitchen employees, secretaries and others with whom they do not come into direct contact. A tip is in law, if not always in fact, a voluntary payment. It is not the subject of negotiation or contract, as are the `service charges' here." Beaman v. Westward Ho Hotel Co. (1960), 89 Ariz. 1, 4-5, 357 P.2d 327, 329.
The gratuities in question in the instant case were not dispersed in their entirety to the waitresses, since a portion of the amount paid to Hilton was received by the executive catering staff, a paymaster and a "checker or clocker" of employees. A portion was also used to collect the gratuities and bad debts. A banquet patron had no knowledge as to the distribution of the gratuity which he paid, and we dare say he had no desire to reward or pay anyone other than the waitresses who waited upon him and provided personal service to him in the dispensing of food and libation.
1 The 15 percent gratuity charges by Hilton, being mandatory in nature, were properly determined to be a part of Hilton's gross receipts and hence subject to an ...