NHLRA turns to Senate to block BET tips policy

But the DRA says it’s only enforcing a law that’s already in place

The state Department of Revenue Administration has taken the position that businesses have to calculate their business enterprise tax bills based on tips that employees receive and report on W-2 form, starting this tax year.

The New Hampshire Lodging and Restaurant Association says that it amounts to a new policy that could double the tax burden on restaurants and other businesses with tipped employees, particularly those that are struggling and don’t make a profit. But the DRA maintains that it has been the law since 1993 to apply the BET to all tips that amount to more than $20 a month, even if it was not uniformly observed.

“Our research suggested some taxpayers were paying on all reported tips, some only on a portion, and others not at all,” said Melinda Ellen Cyr, tax policy analyst with the agency. “Audit programs are to ensure compliance by all taxpayers to pay their fair share of tax.”

Cyr would not discuss ongoing audits, but in a letter responding to an audit challenge, the DRA explained the reason it isn’t going after back taxes owed by businesses with tipped employees is because of the “confusing and conflicting information” it has issued about the tax in the past.

The NHLRA, however, is appealing the matter to the Senate Ways and Means Committee, which – according to association CEO Mike Somers – is drafting an amendment to an existing bill that could prevent the DRA from pursuing the interpretation. As part of that effort the association has asked its members to participate in a survey about the tax.

“When a customer leaves a nice tip, that tip is automatically the property of the employee. The employer never has ownership of those funds,” Somers said.

Indeed, Somers said, when the BET was first imposed in 1993, administrative rules specifically exempted tips. That exemption was removed in 2007 as part of an update of state law to conform to federal rules, but it was not enforced, he added.

Currently the BET is based only on the hourly minimum wage for tipped employees that the business entity pays. In New Hampshire, that minimum wage is 45 percent of the normal minimum wage of $7.25 an hour, or $3.27 an hour.

Under federal law, employers are required to record reported tips on an employee’s W-2 form, and the employees are required to report their tips to their employer.

If the tips were added to the BET wage base, the NHLRA argues, it would basically double the amount for tipped employees. This wouldn’t matter that much for profitable companies, which pay the business profits tax, but it would make a difference to unprofitable companies that pay the BET.

The association argues that federal payroll taxes are totally unrelated to the BET, which is a tax on wages that employers pay out as part of the “enterprise." The employers never really control the money, though sometimes they do act as a conduit to divvy up tips.

Cyr argues that the definition of “compensation” under the BET statute means “all wages, salaries, fees, bonuses, commissions or other payments paid or accrued … on behalf of or for the benefit of employees, officers, or directors of the business enterprise.”

She adds, “The BET is an enterprise value-based tax, not an income tax. Tips paid by the consumer add to the value of the business, even more directly than wages paid by an employer and, therefore, have always been considered under the BET statute as includable as compensation.”

The NHLRA is asking all restaurants and hotels with tipped employees that might be affected by the law to contact it at info@nhlra.com or by calling 603-228-9585.