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Date: 03-10-2018

Case Style: GMRI, Inc. v. California Department of Tax and Fee Administration

Case Number: C081471

Judge: Hoch

Court: California Court of Appeals Third Appellate District on appeal from the Superior Court, Sacramento County

Plaintiff's Attorney: Yonatan E. Braude, Craig B. Fields and Nicole L. Johnson

Defendant's Attorney: Kamala D. Harris and Xavier Becerra, Diane S. Shaw, Molly K. Mosley and Debbie J. Vorous

Description: GMRI, Inc. (GMRI or the Company), a restaurant operator, appeals from a
judgment entered in favor of the State Board of Equalization (the Board) after the
2
trial court granted the Board’s summary judgment motion.1
The trial court concluded
a 15 or 18 percent gratuity restaurant managers automatically added to parties of eight
or more without first conferring with the customer (large party gratuity) amounted to a
“mandatory payment designated as a tip, gratuity, or service charge” under California
Code of Regulations, title 18, section 1603, subdivision (g),2 and therefore part of the
Company’s taxable gross receipts, in one circumstance: where the large party
gratuity was added and neither removed nor modified by the customer. We affirm.
BACKGROUND
The facts are stipulated. Between January 1, 2002 and December 31, 2004, the
time period relevant to the tax dispute in this case (period in dispute), GMRI operated
Olive Garden and Red Lobster restaurants in California. Customers of these restaurants
were notified on their menus that an “optional” gratuity of either 15 or 18 percent
(depending on which restaurant and time period within the period in dispute) “will be
added to parties of 8 or more.”3
While not always added to parties of 8 or more, the

1 The Taxpayer Transparency and Fairness Act of 2017, which took effect July 1,
2017, restructured the State Board of Equalization and established the California
Department of Tax and Fee Administration, transferring most powers and duties of the
Board to the newly established department. (See Gov. Code, § 15570.22; Stats. 2017,
ch. 16, § 5.) We granted a motion to substitute that department as the defendant and
respondent in this matter. However, because the relevant entity was the State Board of
Equalization throughout this litigation, we continue to refer to it by that designation in
our recitation of the background facts and during the discussion portion of the opinion
when referring to actions taken by that entity prior to the restructuring.
2 We refer to section 1603, subdivision (g) of title 18 of the California Code of
Regulations as “Regulation 1603(g).”
3 At all times during the period in dispute, the large party gratuity at Red Lobster
restaurants was 15 percent. For Olive Garden restaurants, it was also 15 percent between
January 1, 2002 and February 3, 2003. Between February 4, 2003 and March 31, 2003,
the large party gratuity increased to 18 percent at some Olive Garden locations. And
3
large party gratuity was added nearly 98 percent of the time. When it was added, a
manager was required to swipe his or her manager’s card through the restaurant’s pointof-sale
(POS) system and then manually add the gratuity to the bill. The bill generated
and presented to the customer would then contain the total cost of the meal, the
applicable tax, the amount of the large party gratuity added by the manager, and the
sum of these amounts as the total amount to be paid. In line with the word “optional,”
the Company’s policy was that its restaurant managers would always remove a large
party gratuity if asked by the customer to do so. However, unless such a request was
made, the large party gratuity would remain on the bill as a portion of the total amount.
And where that customer paid with a credit card, the credit card slip would contain the
amount of the meal plus tax, the amount of the large party gratuity, the total amount,
and then a blank line designated, “Add’l Tip,” followed by another blank line designated,
“Final Total.”
There is no dispute that all gratuities, including large party gratuities, were paid by
the Company to the individual servers who provided service to the tables. None of these
gratuities were comingled with the operating cash of any of the restaurants.
In 2007, the Board audited GMRI’s restaurants for the period in dispute and
assessed sales tax on the large party gratuities, determining these gratuities amounted
to a “mandatory payment designated as a tip, gratuity, or service charge” under regulation
1603(g). Because the auditors had difficulty reading the ink on the credit card receipts
from the period in dispute, the Company and the Board agreed to use a one-week period
in 2007 (test period) as representative of the period in dispute and randomly selected 10
Red Lobster locations and 14 Olive Garden locations for which the auditors reviewed
the credit card receipts generated during the test period that included the large party

between April 1, 2003 and December 31, 2004, it was 18 percent at all Olive Garden
locations.
4
gratuity. The auditors concluded two categories of receipts were subject to taxation:
(1) where the customer paid the large party gratuity and did not include an additional
tip; and (2) where the customer paid the large party gratuity and did include an additional
tip, although no sales tax was owed with respect to that additional tip. Thereafter, the
Board issued notices of determination to “GMRI dba Olive Garden” and “GMRI dba
Red Lobster” for the period in dispute. The Company filed timely petitions for
redetermination.
A hearing on the petitions for redetermination was held in 2011. After the
hearing, the Board concluded the large party gratuities were taxable where the 15 or 18
percent gratuity specified in the menu was added to the bill and that amount was paid by
the customer, but not when the amount of the gratuity was altered by the customer either
upward or downward.
In February 2012, the Board issued notices of redetermination to GMRI in line
with the foregoing conclusion. After paying in full the amounts set forth in these notices,
the Company made timely claims for refund. The claims set forth the following grounds
for refund: (1) the large party gratuity is not a “mandatory gratuity” under regulation
1603(g) because the Company presented documentary evidence rebutting the regulation’s
presumption “that an amount added as a tip by the retailer to the bill or invoice presented
to the customer is mandatory”; (2) the large party gratuity is “optional” within the
common understanding of that word as used in the regulation; (3) the large party gratuity
is not part of the Company’s “gross receipts” under Revenue and Taxation Code4
section
6012; and (4) if the large party gratuity is a “mandatory payment” under regulation
1603(g), the regulation must be invalidated because it is in conflict with section 6012.
The following month, the Board denied the refund claims.

4 Undesignated statutory references are to the Revenue and Taxation Code.
5
In 2013, GMRI filed its complaint for refund in the trial court, raising the same
grounds for refund as asserted before the Board. In 2015, the parties filed competing
motions for summary judgment, agreed upon a joint stipulation of facts, and each party
argued the stipulated facts entitled it to judgment as a matter of law. The trial court ruled
in favor of the Board. This appeal followed.
DISCUSSION
I
Summary Judgment Principles
“A trial court properly grants summary judgment where no triable issue of
material fact exists and the moving party is entitled to judgment as a matter of law.
(Code Civ. Proc., § 437c, subd. (c).) We review the trial court’s decision de novo,
considering all of the evidence the parties offered in connection with the motion (except
that which the court properly excluded) and the uncontradicted inferences the evidence
reasonably supports. [Citation.] In the trial court, once a moving defendant has ‘shown
that one or more elements of the cause of action, even if not separately pleaded, cannot be
established,’ the burden shifts to the plaintiff to show the existence of a triable issue; to
meet that burden, the plaintiff ‘may not rely upon the mere allegations or denials of its
pleadings . . . but, instead, shall set forth the specific facts showing that a triable issue of
material fact exists as to that cause of action . . . .’ [Citations.]” (Merrill v. Navegar, Inc.
(2001) 26 Cal.4th 465, 476-477.)
II
The Large Party Gratuity Is a “Mandatory Payment” under Regulation 1603(g)
GMRI contends the trial court should have granted its motion for summary
judgment instead of that filed by the Board because, as a matter of law, the large party
gratuity is an “optional payment” under regulation 1603(g) and therefore not subject to
the sales tax. We disagree.
6
“The sales tax is imposed on retailers ‘[f]or the privilege of selling tangible
personal property at retail.’ (§ 6051.) The retailer is the taxpayer, not the consumer.
‘The tax relationship is between the retailer only and the state; and is a direct obligation
of the former.’ [Citations.]” (Loeffler v. Target Corp. (2014) 58 Cal.4th 1081, 1104.)
“The central principle of the sales tax is that retail sellers are subject to a tax on their
‘gross receipts’ derived from retail ‘sale’ of tangible personal property. (§ 6051.)
Despite the apparent simplicity of a tax based on gross receipts, a complex system of
statutes and regulations minutely controls tax liability. This system closely defines
taxable sales, governs whether particular sales or transactions are subject to the tax, and
defines what constitutes ‘gross receipts.’ ” (Ibid.)
As relevant here, a “sale” includes the “furnishing, preparing, or serving for a
consideration of food, meals, or drinks.” (§ 6006, subd. (d).) “Gross receipts” means the
total amount of the sale price, including “[a]ny services that are a part of the sale.”
(§ 6012.)
“The Board administers and enforces the sales tax law (§§ 7051-7060), and adopts
related regulations.” (Loeffler v. Target Corp., supra, 58 Cal.4th at p. 1107.) “The
regulation defining the taxability of food products is of amazing complexity.” (Id. at
p. 1106.) We are concerned with the proper interpretation of subdivision (g) of that
regulation, defining the taxability of tips, gratuities, and service charges added to
“transactions occurring prior to January 1, 2015” at “restaurants, hotels, caterers,
boarding houses, soda fountains, drive-ins, and similar establishments.”
Regulation 1603(g) provides:
“An optional payment designated as a tip, gratuity, or service charge is not subject
to tax. A mandatory payment designated as a tip, gratuity, or service charge is included
in taxable gross receipts, even if the amount is subsequently paid by the retailer to
employees.
“(1) Optional Payment.
7
“(A) A payment of a tip, gratuity, or service charge is optional if the customer
adds the amount to the bill presented by the retailer, or otherwise leaves a separate
amount in payment over and above the actual amount due the retailer for the sale of
meals, food, and drinks that include services. The following examples illustrate
transactions where a payment of a tip, gratuity or service charge is optional and not
included in taxable gross receipts. This is true regardless of printed statements on menus,
brochures, advertisements or other materials notifying customers that tips, gratuities, or
service charges will or may be added by the retailer to the prices of meals, food, or
drinks:
“Example 1. The restaurant check is presented to the customer with the ‘tip’ area
blank so the customer may voluntarily write in an amount, or
“Example 2. The restaurant check is presented to the customer with options
computed by the retailer and presented to the customer as tip suggestions. The ‘tip’ area
is blank so the customer may voluntarily write in an amount:

[5]

5 The following was then provided as an example:
Guest Check
Food Item A $9.95
Beverage Item B 3.75
Subtotal $13.70
8% sales tax 1.10
Subtotal $14.80
Tip*
Total
*Suggested tips:
15%=$2.06; 18%=$2.47; 20%=$2.74; other.
8
“If an employer misappropriates these payments for these charges, as discussed in
subdivision (g)(1)(B) below, such payments are included in the retailer’s taxable gross
receipts.
“(B) No employer shall collect, take, or receive any gratuity or a part thereof, paid,
given to, or left for an employee by a patron, or deduct any amount from wages due an
employee on account of such gratuity, or require an employee to credit the amount, or
any part thereof, of such gratuity against and as a part of the wages due the employee
from the employer. (Labor Code section 351.) If this prohibition is violated, any amount
of such gratuities received by the employer will be considered a part of the gross receipts
of the employer and subject to the tax.
“(2) Mandatory Payment.
“(A) An amount negotiated between the retailer and the customer in advance of a
meal, food, or drinks, or an event that includes a meal, food, or drinks is mandatory.
“(B) When the menu, brochures, advertisements or other printed materials contain
statements that notify customers that tips, gratuities, or service charges will or may be
added, an amount automatically added by the retailer to the bill or invoice presented to
and paid by the customer is a mandatory charge and subject to tax. These amounts are
considered negotiated in advance as specified in subdivision (g)(2)(A). Examples of
printed statements include:
“ ‘An 18% gratuity [or service charge] will be added to parties of 8 or more.’
“ ‘Suggested gratuity 15%,’ itemized on the invoice or bill by the restaurant, hotel,
caterer, boarding house, soda fountain, drive-in or similar establishment.
“ ‘A 15% voluntary gratuity will be added for parties of 8 or more.’
“An amount will be considered ‘automatically added’ when the retailer adds the
tip to the bill without first conferring with the customer after service of the meal and
receiving approval to add the tip or without providing the customer with the option to
write in the tip. Nonetheless, any amount added by the retailer is presumed to be
9
mandatory. This presumption may be overcome as discussed in subdivision (g)(2)(C)
below.
“(C) It is presumed that an amount added as a tip by the retailer to the bill or
invoice presented to the customer is mandatory. A statement on the bill or invoice that
the amount added by the retailer is a ‘suggested tip,’ ‘optional gratuity,’ or that ‘the
amount may be increased, decreased, or removed’ by the customer does not change the
mandatory nature of the charge.
“This presumption may be controverted by documentary evidence showing that
the customer specifically requested and authorized the gratuity be added to the amount
billed.
“Examples of documentary evidence that may be used to overcome the
presumption include:
“1. A guest check that is presented to the customer showing sales tax
reimbursement and the amount upon which it was computed, without tip or with the ‘tip’
area blank and a separate document, such as a credit card receipt, to which the retailer
adds or prints the requested tip.
“2. Guests receipts and payments showing that the percentage of tips paid by
large groups varies from the percentage stated on the menu, brochure, advertisement or
other printed materials.
“3. A retailer’s written policy stating that its employees shall receive confirmation
from a customer before adding a tip together with additional verifiable evidence that the
policy has been enforced. The policy is not in itself sufficient documentation to establish
that the customer requested and authorized that a gratuity be added to the amount billed
without such additional verifiable evidence.
“The retailer must retain the guest checks and any additional separate documents
to show that the payment is optional. The retailer is also required to maintain other
10
records in accordance with the requirements of Regulation 1698, Records.” (Regulation
1603(g), italics added.)
GMRI argues the large party gratuity at issue in this case is an “optional payment”
under this regulation, and therefore “not subject to tax because it is left by the customer
as ‘a separate amount in payment over and above the actual amount due [GMRI] for the
sale of meals, food, and drinks that includes services.’ ” Not so. As the italicized
portions of the regulation make abundantly clear, the large party gratuity is a “mandatory
payment” under the regulation. Indeed, the menus at the restaurants in question
specifically stated that an “optional [either 15 or 18 percent] gratuity will be added to
parties of 8 or more.” This statement is indistinguishable from the example provided in
the regulation: “ ‘A 15% voluntary gratuity will be added for parties of 8 or more.’ ”
(Regulation 1603(g)(2)(B).) Thus, under the regulation, “an amount automatically added
by the retailer to the bill or invoice presented to and paid by the customer is a mandatory
charge and subject to tax.” (Ibid.) Further, under the regulation, “[a]n amount will be
considered ‘automatically added’ when the retailer adds the tip to the bill without first
conferring with the customer after service of the meal and receiving approval to add the
tip or without providing the customer with the option to write in the tip.” (Ibid.) Here,
there is no dispute that when the large party gratuity was added to a customer’s bill, the
restaurant manager added the gratuity to the bill without first conferring with the
customer and receiving that customer’s approval to add the tip. Nor was the customer
provided the option of writing in the tip on the bill. The amount of the large party
gratuity was simply printed on the bill as part of the total amount owed for the meal and
services provided. Accordingly, where that “automatically added” amount was also
“paid by the customer,” it amounts to “a mandatory charge” under the regulation and
therefore “subject to tax.” (Ibid.)
Moreover, under the regulation, “any amount added by the retailer is presumed to
be mandatory.” (Ibid.) This is so regardless of the fact that the menu states the gratuity
11
is “optional,” and regardless of the fact the amount may actually be removed, increased,
or decreased by the customer upon request. Indeed, this would be the case under the
regulation even if the bill itself notified the customer of these things. (Id., (g)(2)(C).)
The only way to controvert the presumption under the regulation is “by documentary
evidence showing that the customer specifically requested and authorized the gratuity be
added to the amount billed.” (Ibid.)
GMRI argues on appeal that it sufficiently rebutted this presumption because its
credit card receipts from the test period revealed (1) of the 1,191 credit card receipts from
parties of 8 or more, 26 did not include the large party gratuity, (2) of the 1,165 receipts
that did include the large party gratuity, 280 included an additional tip, and (3) on two
occasions, the large party gratuity was not paid. Thus, the Company argues: “For
customers paying by credit card, the amount of the Large Party Gratuity was adjusted
from the menu amount over 25% of the time.” While this evidence certainly establishes
payment of the large party gratuity was “optional” in the sense that a customer was not
obligated to pay it, and also had the option of adding to it, this is not how the regulation
defines the term. Under the regulation, “a tip, gratuity, or service charge is optional if the
customer adds the amount to the bill presented by the retailer, or otherwise leaves a
separate amount in payment over and above the actual amount due the retailer for the sale
of meals, food, and drinks that include services.” (Id., (g)(1)(A), italics added.) Here, it
is undisputed that the restaurant manager, not the customer, added the large party
gratuities to the bills. And the Board, following the hearing on GMRI’s petitions for
redetermination, concluded such gratuities were taxable only where the 15 or 18 percent
gratuity specified in the menu was added to the bill and that amount, no more and no less,
was paid by the customer. It is therefore immaterial that the large party gratuity was not
always added, and was sometimes altered. In those instances, it was not “mandatory”
under the regulation, and the Board so concluded. The question is whether GMRI
rebutted the presumption where the large party gratuity specified in the menu was added
12
by the restaurant manager and paid by the customer without alteration. To do this, GMRI
needed “documentary evidence showing that the customer specifically requested and
authorized the gratuity be added to the amount billed.” (Id., (g)(2)(C).) None of the
evidence cited by the Company establishes customer preapproval of the large party
gratuities.
We conclude the large party gratuities at issue in this appeal are “mandatory”
under regulation 1603(g) and therefore subject to the sales tax as long as this regulation is
valid. We turn to this question now.
III
Validity of Regulation 1603(g)
GMRI asserts that if the large party gratuities are “mandatory” under regulation
1603(g), as we have concluded, the regulation is invalid because it conflicts with section
6012. Not so.
A.
Standard of Review
“The Legislature has granted the Board the power to make all rules necessary to
administer and enforce the Sales and Use Tax Law. (§ 7051.)” (Agnew v. State Bd. of
Equalization (1999) 21 Cal.4th 310, 321 (Agnew).) “Because agencies granted such
substantive rulemaking power are truly ‘making law,’ their quasi-legislative rules have
the dignity of statutes. When a court assesses the validity of such rules, the scope of its
review is narrow. If satisfied that the rule in question lay within the lawmaking authority
delegated by the Legislature, and that it is reasonably necessary to implement the purpose
of the statute, judicial review is at an end.” (Yamaha Corp. of America v. State Bd. of
Equalization (1998) 19 Cal.4th 1, 10-11.)
“However, an administrative regulation must ‘be within the scope of authority
conferred and in accordance with standards prescribed by other provisions of law.’ (Gov.
Code, § 11342.1.) ‘Whenever by the express or implied terms of any statute a state
13
agency has authority to adopt regulations to implement, interpret, make specific or
otherwise carry out the provisions of the statute, no regulation adopted is valid or
effective unless consistent and not in conflict with the statute and reasonably necessary to
effectuate the purpose of the statute.’ (Gov. Code, § 11342.2.)” (Agnew, supra, 21
Cal.4th at p. 321.) “Even apart from these statutory limits, it is well established that the
rulemaking power of an administrative agency does not permit the agency to exceed the
scope of authority conferred on the agency by the Legislature. [Citation.] ‘A ministerial
officer may not . . . under the guise of a rule or regulation vary or enlarge the terms of a
legislative enactment or compel that to be done which lies without the scope of the statute
and which cannot be said to be reasonably necessary or appropriate to subserving or
promoting the interests and purposes of the statute.’ [Citation.] And, a regulation which
impairs the scope of a statute must be declared void. [Citations.]” (Ibid.)
“When a regulation is challenged on the ground that it is not ‘reasonably necessary
to effectuate the purpose of the statute,’ our inquiry is confined to whether the rule is
arbitrary, capricious, or without rational basis [citation] and whether substantial evidence
supports the agency’s determination that the rule is reasonably necessary (Gov. Code, §
11350, subd. (b)(1)).” (Western States Petroleum Assn. v. Board of Equalization (2013)
57 Cal.4th 401, 415.) But where, as here, “an implementing regulation is challenged on
the ground that it is ‘in conflict with the statute’ (Gov. Code, § 11342.2) or does not ‘lay
within the lawmaking authority delegated by the Legislature’ [citation], the issue of
statutory construction is a question of law on which a court exercises independent
judgment. [Citation.] In determining whether an agency has incorrectly interpreted the
statute it purports to implement, a court gives weight to the agency’s construction.
[Citation.] ‘Nevertheless, the proper interpretation of a statute is ultimately the court’s
responsibility.’ [Citation.]” (Western States, supra, 57 Cal.4th at pp. 415-416.) As we
explained in King v. State Bd. of Equalization (1972) 22 Cal.App.3d 1006: “The rule
14
giving weight to contemporaneous administrative construction is not evoked when the
construction is incorrect.” (Id. at p. 1012.)
B.
Analysis
We begin with the relevant statutes. As mentioned, a retail seller is subject to a
tax on its “gross receipts” derived from the retail “sale” of tangible personal property. (§
6051.) For a restaurant operator, this means gross receipts derived from the “furnishing,
preparing, or serving for a consideration of food, meals, or drinks.” (§ 6006, subd. (d).)
“Gross receipts” means the total amount of the sale, including “[a]ny services that are a
part of the sale.” (§ 6012.) The Legislature did not define the circumstances under which
services are considered “part of the sale” (i.e., part of the furnishing, preparing, or serving
for consideration of food, meals, or drinks) within the meaning of section 6012.
Regulation 1603(g) fills the gap.
“ ‘An administrative agency is not limited to the exact provisions of a statute in
adopting regulations to enforce its mandate. “[T]he absence of any specific [statutory]
provisions regarding the regulation of [an issue] does not mean that such a regulation
exceeds statutory authority. . . .” [Citations.] [The administrative agency] is authorized
to “ ‘fill up the details’ ” of the statutory scheme. [Citation.]’ [Citations.] ‘Moreover,
standards for administrative application of a statute need not be expressly set forth; they
may be implied by a statutory purpose.’ [Citation.] The agency’s authority ‘includes the
power to elaborate the meaning of key legislative terms.’ [Citation.]” (Batt v. City and
County of San Francisco (2010) 184 Cal.App.4th 163, 171.)
As already set forth in detail, the determination under regulation 1603(g) as to
whether or not a “payment designated as a tip, gratuity, or service charge” is “included in
taxable gross receipts” (i.e., whether or not the payment for such services is “part of the
sale” within the meaning of section 6012), turns on whether the payment is “mandatory”
or “optional,” as those terms are defined in the regulation. (Regulation 1603(g).) GMRI
15
describes this distinction as “illogical” and notes section 6012 “provides for no such
distinction.” With respect to GMRI’s characterization of regulation 1603(g), we simply
note that our function is to inquire into the legality of the regulation, not its wisdom.
(Woods v. Superior Court (1981) 28 Cal.3d 668, 679.) Turning to the absence of a
mandatory/optional distinction in section 6012, we conclude this does not render the
regulation invalid. Again, the Legislature did not define the circumstances under which a
payment for services is considered “part of the sale” within the meaning of section 6012.
This was left to the Board. In so doing, the Board chose to differentiate between
payments that are “mandatory” and those that are “optional,” not as those terms are
commonly understood, but as they are specifically defined in the regulation. Thus,
“mandatory payment” under the regulation can be understood to mean “payment for
services that are part of the sale” and therefore part of taxable gross receipts. Similarly,
“optional payment” can be understood to mean “payment for services that are not part of
the sale” and therefore not part of taxable gross receipts.
The definitions of these terms comport with this understanding. A payment for
services is not part of the sale “if the customer adds the amount to the bill presented by
the retailer, or otherwise leaves a separate amount in payment over and above the actual
amount due the retailer for the sale of meals, food, and drinks that include services.”
(Regulation 1603(g)(1)(A).) In such a situation, the total amount of the sale is the
amount due on the bill, and any amount the customer adds or leaves as a tip or gratuity
over and above that amount is not part of the restaurant’s gross receipts for purposes of
the sales tax. Conversely, a payment for services is part of the sale, and therefore subject
to the sales tax, if it is “[a]n amount negotiated between the retailer and the customer in
advance of a meal, food, or drinks, or an event that includes a meal, food, or drinks” (id.,
(g)(2)(A)), or if it is “an amount automatically added by the retailer to the bill or invoice
presented to and paid by the customer” and “the menu, brochures, advertisements or
other printed materials contain statements that notify customers that tips, gratuities, or
16
service charges will or may be added.” (Id., (g)(2)(B).) In these situations, the total
amount of the sale includes the payment for services. Whether the customer negotiated
such a gratuity upfront or was notified it would or might be added, the bill the customer
receives includes that gratuity as part of the total amount due to the restaurant for the
meal and services. We conclude the definitions in regulation 1603(g) properly “ ‘ “fill up
the details” ’ ” (Ford Dealers Assn. v. Department of Motor Vehicles (1982) 32 Cal.3d
347, 362) of what it means for a payment for services to be considered “part of the sale”
under section 6012. (See also Ramirez v. Yosemite Water Co. (1999) 20 Cal.4th 785, 800
[“delegation of legislative authority includes the power to elaborate the meaning of key
statutory terms”].)
Nevertheless, GMRI argues the large party gratuity is not “part of the sale” under
section 6012 because the Labor Code defines “gratuity” to “include[] any tip, gratuity,
money, or part thereof that has been paid or given to or left for an employee by a patron
of a business over and above the actual amount due the business for services rendered
for goods, food, drink, or articles sold or served to the patron” (Lab. Code, § 350, subd.
(e), italics added), declares such a gratuity is “the sole property of the employee or
employees to whom it was paid, given, or left for,” and prohibits an employer from
receiving any portion of such a gratuity, deducting any amount from wages due an
employee on account of the gratuity, or requiring an employee to credit any portion of the
gratuity against wages due the employee from the employer (id., § 351). According to
the Company, these Labor Code provisions “are instructive in the field of taxation”
because the Board made reference to Labor Code section 351 in regulation 1603(g) and
provided its violation would render “any amount of such gratuities received by the
employer . . . a part of the gross receipts of the employer and subject to the tax.”
(Regulation 1603(g)(1)(B).) From the undisputed fact that GMRI complies with Labor
Code section 351 by giving the large party gratuities to the servers who served the large
parties, the Company concludes such a gratuity “is an amount ‘over and above the actual
17
amount due’ to GMRI for the meals and drinks purchased and is left for the servers ―
not for GMRI.” We are not persuaded.
In King v. State Bd. of Equalization, supra, 22 Cal.App.3d 1006, we held a section
of the Revenue and Taxation Code, dealing with improvements to real property, found in
the division of that code dealing with property taxation, had no application to the field of
sales taxation. We explained: “Like many tax statutes, the sales tax law employs
relatively artificial, relatively self-contained, concepts. If it utilizes popular meaning or
concepts from other fields of law, it does so only by force of its own objectives and
definitions. It does not define real property or ‘improvements’ to real property, if only
because it makes little use of these terms. Its definition of tangible personal property
deals with tangibility, not with distinctions between personalty and realty. To pursue the
will-o’-the-wisp of definitions, concepts and distinctions from other areas of law ―
where they are shaped by purposes and by social and economic factors unrelated to sales
taxation ― leads to false goals. The coverage of the sales tax law is shaped by its own
provisions and definitions and, where these are unclear, by applying its own perceived
policies and concepts.” (Id. at pp. 1010-1011, fns. omitted.)
Similarly, the Labor Code’s definition of “gratuity” is immaterial to the question
of whether or not a particular payment designated as a gratuity is “part of the sale” for
purposes of the sales tax law. Moreover, the aforequoted italicized line in the Labor
Code’s definition, “over and above the actual amount due the business for services
rendered,” begs the question that regulation 1603(g) answers for purposes of the sales tax
law, i.e., under what circumstances is a payment for services over and above the amount
due, and therefore not “part of the sale”? We have already explained the regulation’s
answer and our conclusion that it is a valid exercise of delegated legislative authority.
Nor does the fact GMRI complies with the Labor Code by giving the large party
gratuities to the servers, as also required by regulation 1603(g), undermine this
conclusion. Simply put, the question for sales tax purposes is not who is entitled to the
18
large party gratuity, but rather whether the payment of such a gratuity is “part of the sale”
under section 6012. For reasons already expressed, we conclude regulation 1603(g)
properly elaborates upon the meaning of that statutory phrase.
Nor are we persuaded by GMRI’s reliance on Anders v. State Bd. of Equalization
(1947) 82 Cal.App.2d 88 (Anders) and Herbert’s Laurel-Ventura, Inc. v. Laurel Ventura
Holding Corp. (1943) 58 Cal.App.2d 684 (Herbert’s Laurel-Ventura). In Anders,
restaurant operators and their server employees agreed tips received by servers would
belong to the employers to the extent of the amount of minimum wages owed to the
servers, but would be retained by the servers and credited against the minimum wages
owed. (Anders, supra, 82 Cal.App.2d at p. 91.) We held “the tips received by the
[servers], to the extent of the minimum wages provided for by law, . . . became a part of
[the employers’] gross receipts for services in connection with their sales of tangible
personal property, since it was agreed between [the employers] and [the servers], in
effect, that such tips belonged to the employers and would be credited on payments of
minimum wages, and that they were actually so credited.” (Id. at p. 92.) The same result
obtains under regulation 1603(g) because the agreement involved in Anders is a violation
of Labor Code section 351, and the regulation provides where that provision is violated,
“any amount of such gratuities received by the employer will be considered a part of the
gross receipts of the employer and subject to the tax.” (Regulation 1603(g)(1)(B).) Thus,
the Board has made the Anders situation an exception to the general rule that a tip or
gratuity the customer adds to the bill or otherwise leaves for the server over and above
the amount due to the restaurant is not part of the restaurant’s gross receipts for purposes
of the sales tax law. Anders says nothing about the situation in which the restaurant
automatically adds a large party gratuity to the bill.
In Herbert’s Laurel-Ventura, supra, 58 Cal.App.2d 684, the lessee of a drive-in
restaurant, who had a similar arrangement with its servers regarding their crediting tips
received from customers against the lessee-employer’s obligation to pay them the
19
minimum wage, was obligated under its lease agreement to pay the lessor certain sums
based on a percentage of its “gross receipts,” as that term was defined in the agreement.
(Id. at p. 687.) The Court of Appeal held these tips were not part of the gross receipts
under the lease agreement despite the fact they essentially belonged to the lesseeemployer
to the extent of the amount of minimum wages owed. (Id. at pp. 693-694.)
This case is inapposite because the lease agreement had a specific definition of “gross
receipts” that differed from that of the sales tax law. As Anders, supra, 82 Cal.App.2d
88, and regulation 1603(g), make clear, such tips would constitute a part of the lessee’s
gross receipts for purposes of the sales tax law. And, like Anders, Herbert’s LaurelVentura
says nothing about the situation at issue in this case. “Cases are not authority for
propositions not considered.” (Alameida v. State Personnel Bd. (2004) 120 Cal.App.4th
46, 58.)
GMRI also argues that holding the large party gratuities at issue in this case are
part of its taxable gross receipts essentially means, as the trial court concluded, such
gratuities are a “service cost” because section 6012, subdivision (a) provides in relevant
part: “ ‘Gross receipts’ mean the total amount of the sale . . . without any deduction on
account of . . . . [¶] . . . [¶] (2) The cost of the materials used, labor or service cost,
interest paid, losses, or any other expense.” However, argues the Company, “if the Large
Party Gratuities were service costs, then all gratuities would be service costs because the
Large Party Gratuities are treated no differently from all other gratuities. Consequently,
GMRI would be required to add all gratuities to every customer’s bill in order to collect
the sales tax. If not, then GMRI would be reducing the amount of the sale by a ‘service
cost’ in contravention of Section 6012.” This argument misses the point. As previously
stated: “The sales tax is imposed on retailers ‘[f]or the privilege of selling tangible
personal property at retail.’ (§ 6051.) The retailer is the taxpayer, not the consumer.
‘The tax relationship is between the retailer only and the state; and is a direct obligation
of the former.’ [Citations.]” (Loeffler v. Target Corp., supra, 58 Cal.4th at p. 1104.)
20
“Nevertheless, a retailer may seek sales tax reimbursement from a consumer. ‘Whether a
retailer may add sales tax reimbursement to the sales price of the tangible personal
property sold at retail to a purchaser depends solely upon the terms of the agreement of
sale.’ (Civ. Code, § 1656.1, subd. (a).)” (Bower v. AT & T Mobility, LLC (2011) 196
Cal.App.4th 1545, 1553.) Thus, section 6012 has nothing to do with whether or not
GMRI may collect sales tax from its customers without adding all gratuities to its bills
upfront. The relevant question is simply whether or not GMRI owes the state sales tax on
gratuities that are so added. The answer under section 6012, subdivision (b) is if the
gratuity is a payment for “services that are part of the sale,” then yes. And, as we have
explained, regulation 1603(g) properly elaborates upon the meaning of this statutory
phrase.6

Finally, GMRI’s reliance on Ontario Community Foundations, Inc. v. State Bd. of
Equalization (1984) 35 Cal.3d 811 is also misplaced. There, our Supreme Court
invalidated a regulation it concluded “clearly conflict[ed]” with a provision of the
Revenue and Taxation Code. (Id. at pp. 821-822.) For reasons already explained in
detail, we conclude regulation 1603(g) does not conflict with section 6012. Instead, the
regulation is a valid exercise of delegated legislative authority.

Outcome: The judgment is affirmed. The California Department of Tax and Fee
Administration is entitled to costs on appeal. (Cal. Rules of Court, rule 8.278(a)(1).)

6 We do not specifically address GMRI’s additional argument that holding large
party gratuities are part of its taxable gross receipts unlawfully discriminates against its
customers because this claim was not raised in its claims for refund. As we explained in
Atari, Inc. v. State Bd. of Equalization (1985) 170 Cal.App.3d 665: “The claim for refund
delineates and restricts the issues to be considered in a taxpayer’s refund action.
[Citation.] The trial court and this court are without jurisdiction to consider grounds not
set forth in the claim.” (Id. at p. 672.)

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