Did DRA tip the balance on BET calculation?

How should businesses with tipped employees determine their business enterprise tax bill?


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Are restaurants and other businesses with tipped employees going to have to start factoring their employees’ tips in determining how large their business enterprise tax bill is -- a move that could double that bill for some, particularly those that didn’t make a profit?

That’s what the New Hampshire Lodging and Restaurant Association says it’s worried about after learning that the New Hampshire Department of Revenue Administration has sent letters to some of the NHLRA’s members informing them that the BET will be determined on the gross W-2 income of all tipped employees.

The association, which informed members about the letters in its online newsletter, said it has consulted an attorney who has questioned the legality of the determination, and it advised that it might consider taking the DRA to court over the matter.

Mike Somers, CEO of the association, declined comment, saying that the organization was still discussing the matter with the DRA. Calls to DRA officials were not returned by NHBR deadline.

Currently, said the NHLRA, the BET payment is based on the hourly tipped minimum wage that the business pays to an employee. In New Hampshire, that minimum wage is 45 percent of the normal minimum wage of $7.25 an hour, or $3.27 an hour. The idea is that workers will make so much in tips that they actually make as much or more than the minimum wage.

Under federal law, employers are required to report tips on an employee’s W-2, and those employees are required to report their tips to the employer. Larger employers (those with 10 full-time equivalents) must “allocate them” on the W-2 if the total tips don’t add up to 8 percent of restaurant sales.

Still, does that mean that the employer has to include the tips listed on the W-2 as part of the wages under BET, which requires businesses to pay 0.75 percent on wages, interest and dividends?

The association sought an opinion from Peter Beach, an attorney with Sheehan Phinney Bass + Green, who argued that just because tips are included on the W-2 form, doesn’t mean they can be included in determining the BET. He reasoned that “gratuitous tips” -- those paid directly by a customer to an employee -- shouldn’t be included under the law because they were never touched by the employer, which means they shouldn’t be considered part of its enterprise. And that is the most common form of tipping.

That was pretty clear during the first 15 years after the BET’s enactment, Beach said, but that reasoning became less clear under a DRA administrative rule change in 2007, although the DRA only recently started sending out the determination letters.

Beach recommended that the NHLRA either try to talk to the DRA about the policy, propose legislation or support litigation by an employer with a well-defined test case.

The association started by taking the first route, meeting with Kathy Shur, assistant director of audit at the DRA, and the agency agreed to suspend issuing any more determination letters as it revisits the issue, according to the NHLRA newsletter.

Further, the association said that Shur told it that the DRA’s intent was only to apply the expansion of BET tax assessments for the 2013 tax year going forward. In other words, businesses will not be assessed for back taxes based on the method, the NHLRA reported to its members.

However, if a restaurant did receive such a letter, the association recommended that the letter should be challenged.

If the association decides to go the legislative route, it will have one supporter -- Sen. Andy Sanborn, R-Bedford, chair of the Senate Commerce Committee and owner of The Draft, a Concord bar and restaurant with many tipped employees.

“Taxing a business owner for someone else’s economic activity is not only against federal law, but against state law as well,” said Sanborn.

Calls and emails to Shur and DRA Commissioner Kevin Clougherty were not returned by deadline.


 

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