BET tips amendment gets a Senate hearing

The draft amendment to House Bill 520 did not receive a completely warm welcome

The New Hampshire Senate is considering legislation at the behest of the state’s hospitality industry that would block the Department of Revenue Administration from taxing businesses based on their workers’ tips.

The draft amendment to House Bill 520 — submitted Tuesday to the Senate Ways and Means Committee — did not receive a completely warm welcome. And the New Hampshire Fiscal Policy Institute, which questions cutting taxes when the state doesn’t have the money to fund essential programs, has already come out against it.

The brouhaha, first reported May 3 by NHBR, began after audit letters were sent out by the DRA to restaurants informing them that their business enterprise tax would be determined by counting the gross W-2 income of tipped employees.

The DRA never tried to tax business on tips before. Indeed, previous regulations indicated that such tips were exempt from the BET, which is a tax on wages, interest and dividends. It is primarily paid by companies that don’t make enough money to pay the business profits tax.

The DRA also didn’t try to tax tips after 2008, when regulations were changed to clarify the situation. It was only this year, after the DRA gained access to employees’ W-2 forms, that the collection effort began.

The New Hampshire Lodging and Restaurant Association cried foul, maintaining that businesses have no control over customers’ tips to their workers, so they shouldn’t be counted as part of the business enterprise. Restaurants include them on W-2 forms so the federal government can accurately tax workers, as well as to compute various forms of payroll taxes.

But the DRA said the law is clear that tips are part of the overall enterprise and the state has had the authority to tax them all along. Indeed, it said, some businesses were already paying them. However, it did concede that its regulations were confusing in the past, so it would only start collecting them this tax year and not seek back payment from businesses.

On Tuesday, a hearing was held on the amendment to House Bill 520 — which would study allowing keno games. Sponsored by Sen. Ways and Means Chairman Bob Odell, R-Lempster, it would block that collection by defining compensation as wages and other payments paid “directly or accrued by the business enterprise.” The NLHRA and several restaurant owners testified for the amendment.

But Jeff McLynch, the New Hampshire Fiscal Policy Institute’s executive director, said that the amendment should be rejected for several reasons.

For one, he said, no one is sure how much money is involved. The DRA has not provided an estimate, and McLynch noted that several other tax breaks businesses were seeking could cost the state some $50 million.

McLynch also said it’s’ unfair that “employers are allowed to treat tips as compensation for the purposes of meeting the federal wage standard,” but then are allowed to ignore them in calculating their taxes.

“Employers would be permitted to treat tips in two different ways, both to their benefit,” McLynch testified.

He also said if employers were able to exempt tips from the BET, what about bonuses and commissions? All this could erode the base of the BET, he argued.

“The BET is not designed as a direct tax on the compensation, interest, or dividends any one person receives. Rather, it is intended to serve as tax on overall economic activity,” argued McLynch. “Tip compensation, as it represents payment for services rendered, is simply part of that larger economic whole.”

Mike Somers, president and CEO of the Lodging and Restaurant Association, said he doesn’t see the tip tax as lost revenue for the state, but as “found money.” Very few, if any, of his members were paying the tax before.

“This is a new tax as far as we are concerned — a tax by audit,” he said. “That’s not how the process is supposed to work.”

The committee did not vote on the amendment, and there was some discussion that it might also be included in House Bill 2, the trailer bill to the budget.