Are You Charging Sales Tax on Cover Charges at Your Business?
The State of Texas’ Comptroller’s Office wants you to!
Cover charges are any flat fee type of charge that is levied as an entrance fee. This normally relates to businesses such as bars, restaurants, and clubs. Think of this like an amusement tax, as it will be subject to a door-fee, entry-fee, or admission-fee.
How This Affects Your Business
Our firm is currently representing a client who is the owner of a hookah bar. Although the audit started off as a tobacco tax audit, it quickly changed shape to include cover charges.
Most would think that this does not apply to bars or restaurants, but the rules can change very quickly. These charges are related to something more than just walking in and buying food or drinks.
By charging a cover charge, you have essentially created a new layer of business — essentially, paying a fee to socialize.
Additional Considerations: Mandatory Gratuities
The same applies to mandatory gratuities. If a mandatory gratuity exceeds 20% of the charge, the entire gratuity becomes taxable regardless of how it is disbursed.
Need Help with a Texas Sales Tax Audit?
Facing a sales tax audit in Texas?
Contact our attorney for a consultation.
Frequently Asked Questions
What is considered a cover charge in Texas?
A cover charge is any flat-fee entrance payment required for admission into a business, typically bars, restaurants, or clubs. In Texas, it is viewed similarly to an amusement tax and is taxable under state sales tax laws.
Why are cover charges subject to Texas sales tax?
The Texas Comptroller treats cover charges as a fee for admission, making them taxable. Even if the primary business is selling food or drinks, charging for entry establishes a separate taxable transaction.
Does this sales tax rule apply to all types of businesses?
Not all, but it applies broadly to any business charging a door, entry, or admission fee, particularly nightlife venues like hookah bars, clubs, and bars. The taxability can even be revealed during audits originally focused on unrelated matters.
Are mandatory gratuities taxable in Texas?
Yes, if a mandatory gratuity exceeds 20% of the charge, the entire gratuity becomes taxable, no matter how the gratuity is distributed among staff or recorded.
What should I do if I’m facing a Texas sales tax audit?
If your business is under audit, especially concerning cover charges or gratuities, it’s best to consult a tax attorney familiar with Texas sales tax law to ensure compliance and avoid penalties.