Youngstown Club v. Porterfield

• Decision Date: 04 February 1970
• Docket Number: No. 69-405,69-405
• Parties: , 50 O.O.2d 198 The YOUNGSTOWN CLUB, Appellant, v. PORTERFIELD, Tax Commr., Appellee.
• Court: Ohio Supreme Court

Page 83

21 Ohio St.2d 83

255 N.E.2d 262, 50 O.O.2d 198

The YOUNGSTOWN CLUB, Appellant, v. PORTERFIELD, Tax Commr., Appellee.

No. 69-405.

Supreme Court of Ohio.

Feb. 4, 1970.

Syllabus by the Court

1. Where a private luncheon and dinner club adopts a policy of adding to all food and drink checks a 15 per cent service charge, which is paid to the club and later is paid to the person serving the food or drinks as compensation, such charge must be included in the total amount of the sale and is subject to the sales tax levied in Section 5739.02, Revised Code.

2. Persons serving food or drinks to consumers are not 'installing or applying the property sold' within the terms of Section 5739.01(H), Revised Code, and the compensation paid for such labor may not be excluded from the determination of the price of the sale.

Appellant, The Youngstown Club (hereinafter referred to as the Club), is a private luncheon and dinner club. Prior to June 1, 1965, any tips to persons serving patrons were voluntarily given. After that date, a mandatory 15 per cent service charge was added to all food and drink checks. The new policy was instituted by the Club in order to increase the amount of compensation for the employees serving food and drinks, without increasing either the dues of the members or the price of food and beverages.

The Club's policy provided that any employee who accepted any form of gratuity other than the 15 per cent sum would be subject to disciplinary action. However, the manager of the Club was advised by its board of trustees not to enforce the policy regarding disciplinary action. In practice, members occasionally increased or decreased the 15 per cent sum, depending upon the quality of service rendered by particular employees. The evidence shows that on most checks no notation was made to vary this charge.

Notice of the 15 per cent charge was printed on a line of each check, but the amount of the charge was not computed or entered on the check when a member signed the check. This charge was added to the check by a clerk after the food and drink charges and the sales tax thereon had been computed. Consequently, the 15 per cent charge was not included in the taxable base upon which the Ohio sales tax was assessed.

The evidence reveals further that the service charge on each check was credited by the Club to the separate account of each waiter involved. At the end of a pay period each waiter was given two pay checks. One pay check was for his salary; the other was for his accumulated earned service charge, less federal and city withholding items. A waiter cannot collect service charges daily or receive an advance against his service charge account.

A sales tax audit was conducted by the Tas Commissioner covering the period from July 1, 1964, to February 29, 1968, and a finding was made that the sales tax base on each check should have included the service charge. Pursuant to this finding, an assessment was made. The Tax Commissioner ruled that the Club's objection to the assessment was without merit. Upon appeal, the Board of Tax Appeals upheld the Tax Commissioner's decision.

The cause is before this court upon appeal as a matter of right.

Mitchell, Mitchell & Reed, George B. Woodman, Manchester, Bennett, Powers & Ullman, and Robert N. Dineen, Youngstown, for appellant.

Paul W. Brown, Atty. Gen., and George M. Hauswirth, Columbus, for appellee.

DUNCAN, Judge.

Appellant here contends that the charges are gratuities not constituting sales as defined in Section 5739.01, Revised Code, and, alternatively, that the service charges are in payment for installing or applying property purchased and are therefore excluded from the term 'price,' or the base upon which the tax is calculated, under Section 5739.01(H), Revised Code. ^* Our inquiry is to determine whether the board's decision was unreasonable or unlawful. Section 5717.04, Revised Code; Smith v. Board of Revision, 138 Ohio St. 564, 37 N.E.2d 386; Board of Edn. of Cleveland Heights City School District v. Evatt, 136 Ohio St. 283, 25 N.E.2d 453; Hercules Galion Products, Inc., v. Bowers, 171 Ohio St. 176, 168 N.E.2d 404.

Section 5739.02, Revised Code, levies a sales tax based upon the price of a retail sale. In defining 'sale,' Section 5739.01(B), Revised Code, states, in part:

"Sale' and 'selling' include * * * the furnishing, preparing, or serving for a consideration of any tangible personal property consumed on the premises of the person furnishing, preparing, or serving such tangible personal property. * * *'

The Club's new policy of a mandatory service charge replaced the custom of voluntary gratuities or tips, the amounts of which were not included and reported in tax returns viewed as taxable portion of sales. Since the new policy was implemented, admittedly to increase the income of waiters and thereby produce better service to members, it is reasonable to find that the charge, categorized as mandatory, is consistent with the purpose of achieving better club service for the members.

Appellant's...