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Restaurant owners blast proposal to tax employees' tips as business' income

New Hampshire Union Leader
New Hampshire Union Leader

May 13. 2013 9:47PM

A waitress at the Red Arrow Diner in Manchester rings in a receipt in this file photo. Until last year, the state Department of Revenue Administration accepted BET payments based on the hourly wages paid to workers. Now the state has reinterpreted the rules and is seeking to tax tips as well. (Union Leader)

CONCORD - Representatives of the hospitality industry are expected to turn out in force today to support a Senate proposal that would block state tax collectors from using tips to calculate a business owner's tax bill.

Senators sympathetic to the pleas of the New Hampshire Lodging and Restaurant Association have attached an amendment to a House-approved bill establishing a committee to study allowing Keno in New Hampshire. The amendment has nothing to do with Keno, and everything to do with blocking a new form of tax collection by the Department of Revenue Administration.

"It was just done through audit letters," said Mike Somers, president and CEO of the Lodging and Restaurant Association. "For all intents and purposes, this is a new tax on us, and that's really what's got a lot of industry folks very upset. If you are going to impose such a dramatic tax policy change, that policy debate should take place in the Legislature."

All businesses in the state pay two major taxes - a Business Enterprise Tax and a Business Profits Tax. The BET is basically a payroll tax. It is supposed to be levied at a rate of 0.75 percent on the compensation a business pays to employees, as well as interest or dividends it may pay to equity stakeholders.

A business has to pay the enterprise tax whether it is profitable or not. A profitable business can deduct the enterprise tax payment from whatever it may owe in business profits tax.

Until last year, the state Department of Revenue Administration accepted BET payments based on the hourly wages paid to workers, which in the hospitality industry are usually around $3.27 an hour - the discount off the minimum wage allowed by the state in anticipation of tips.

If tips are taken into account, those amounts could easily double, thus doubling the enterprise tax of a business if there is no profits-tax offset.

For a profitable restaurant, the change would increase the deduction against the business profits tax, and could be a wash. But for an unprofitable or break-even business, the change would mean a significant increase in taxes.

Tom Boucher, whose restaurants include T-Bones and Cactus Jack's, said his business would not be severely affected, but the impact on new restaurants and start-ups would be severe.

"When we open a new restaurant, maybe the first two years of business you are not profitable, so it would greatly affect the potential for restaurants to open up, because that BET would be a substantial hit for that new restaurant trying to open," he said.

Audit letters arrive

Somers said lodging and restaurant association members started getting audit letters earlier this year from the DRA, regarding unaccounted tips in 2012 BET tax returns.

"From the inception of the tax in 1993 until January of 2008, tips were specifically excluded from the calculation of the BET," said Somers. In 2008, administrative rules were changed to make state tax rules correspond with federal IRS requirements, but the collection practices did not change.

The DRA maintains that tips were always supposed to be part of the BET calculation. The restaurant association attorney argues that the DRA has always distinguished between non-gratuitous tips (service charges for large parties, for example) and gratuitous tips, paid directly to the employee.

"Gratuitous tips are not paid by the employer and therefore are not included in the compensation tax base," wrote attorney Peter T. Beach of Manchester in an opinion sought by the restaurant association.

Somers and Beach met with Kathleen Sher, director of the Audit Division of the DRA, and got a polite hearing but no reversal, said Somers.

The DRA later cited confusion over previous directives, and agreed that the state would not seek back taxes over the issue, but would expect the tips to be built into the tax calculations moving forward.

Sher declined to comment, referring questions to tax policy analyst Melinda Cyr, who was unavailable. DRA Commissioner Kevin Clougherty and Gov. Maggie Hassan were also unavailable.

Tips not counted

Having failed to get an administrative solution, Somers turned to the Legislature and got the support of Republican Sens. Jeb Bradley and Bob Odell, among others.

The DRA argues that some restaurant owners have paid their BET tax with tips included, and that fairness dictates more widespread enforcement.

Boucher, who has been in the restaurant business for 28 years, said he has never included tips in his BET calculations and doesn't know anyone who has.

"Maybe the DRA has a restaurant or two that have paid it that way, but that was clearly a mistake on the restaurant's part, and quite frankly the state should have alerted that restaurant that it was a mistake, based on their own guidelines," said Boucher,

Somers said a survey of members has failed to turn up more than a handful of members who have used tips in their BET calculations.

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