June 2017 Term 2017
from the District Court of the Fourth Judicial District of
the State of Idaho, Ada County. Hon. Melissa Moody, District
judgment of the district court is affirmed. Costs and
attorney fees on appeal are awarded to the respondent.
Pursley, LLP, Boise, attorneys for appellant. Peter Barton
Lawrence G. Wasden, Idaho Attorney General, Boise, attorneys
for respondent. Erick Shaner argued.
Nature of the Case
LLC ("Chandlers"), challenges a district
court's grant of summary judgment upholding the Idaho
State Tax Commission's (the "Commission")
deficiency determination. The Commission determined that
Chandlers did not pay sales tax on gratuities that were
automatically added to customer checks between 2007 and 2010.
Factual and Procedural Background
a sales tax appeal, and the facts are uncontested. The crux
of the appeal concerns an administrative rule and its
interaction with certain sections of the Idaho Sales Tax Act
(the "Tax Act"), Idaho Code title 63, chapter 36.
The Legislature amended the Tax Act in the midst of the
underlying litigation (the "2011 Amendment"). The
following is a review of relevant portions of the Tax Act,
the administrative rule, and the 2011 Amendment.
Code section 63-3619 imposes a tax upon "each sale at
retail at the rate of six percent (6%) of the sales
price." I.C. § 63-3619. A "sale" is
defined by Idaho Code section 63-3612(1) as follows:
The term "sale" means any transfer of title,
exchange or barter, conditional or otherwise, of tangible
personal property for a consideration and shall include any
similar transfer of possession found by the state tax
commission to be in lieu of, or equivalent to, a transfer of
title, exchange or barter.
I.C. § 63-3612(1). Idaho Code section 63-3612(2)(b)
provides that a "sale" also includes
"[f]urnishing, preparing, or serving food, meals, or
drinks and nondepreciable goods and services directly
consumed by customers included in the charge thereof."
I.C. § 63-3612(2)(b).
Code section 63-3613(a) defines "sales price" as
the "total amount for which tangible personal property,
including services agreed to be rendered as a part of the
sale, is sold." I.C. § 63-3613(a). However, Idaho
Code section 63-3613(b) excludes certain charges from the
"sales price" thereby rendering said charges
tax-exempt. There are two exclusions that Chandlers contends
are relevant to this appeal.
subsection (b)(4), as it existed in 2010, exempts the
following charges from the "sales price":
The amount charged for labor or services rendered in
installing or applying the property sold, provided that said
amount is stated separately and such separate statement is
not used as a means of avoiding imposition of this tax upon
the actual sales price of the tangible personal property;
except that charges by a manufactured homes dealer for set up
of a manufactured home shall be included in the "sales
price" of such manufactured home.
I.C. § 63-3613(b)(4) (2010). Second, subsection (b)(6)
excludes: "The amount charged for finance charges,
carrying charges, service charges, time-price differential,
or interest on deferred payment sales, provided such charges
are not used as a means of avoiding imposition of this tax
upon the actual sales price of the tangible personal
property." I.C. § 63-3613(b)(6).
is also a tax commission rule that is at issue in this case.
The 2010 version of IDAPA Rule 35.01.02.043.04.c (the
"Pre-2011 Rule") provided as follows:
When an amount is added to a customer's bill by the
retailer, and the customer is not advised in writing on the
face of the bill that he may decline to pay all or part of
the amount, it is not a gratuity and the fee so added is
subject to the sales tax.
35.01.02.043.04.c (2010). As previously mentioned, the Tax
Act was amended by the Legislature in 2011. The 2011
Amendment added the following exemption to Idaho Code section
63-3613: "Sales price shall not include a gratuity or
tip received when paid to the service provider of a meal. The
gratuity or tip can be either voluntary or mandatory, but
must be given for the service provided and as a supplement to
the service provider's income." I.C. §
63-3613(f). By adding this exemption, the Legislature did
away with the voluntariness distinction in the Pre-2011 Rule.
Accordingly, the Tax Commission revised the Pre-2011 Rule to
provide: "When a gratuity is paid in addition to the
price of a meal, no sales tax applies to the gratuity. A
gratuity can be paid voluntarily by the customer or be
required by the seller." IDAPA 35.01.02.043.04.
owns and operates a steak and seafood restaurant in downtown
Boise, Idaho. The Commission, through its Sales, Use, and
Miscellaneous Tax Audit Bureau (the "Bureau"),
conducted a comprehensive sales audit of Chandlers for the
period of May 1, 2007, through May 31, 2010 (the "Audit
Period"), to determine sales tax law compliance. After
its audit, the Bureau asserted errors in sales, fixed asset
additions, ordinary purchases, and meals given to employees
and guests. The only error relevant to this appeal is
Chandlers' failure to pay sales tax on automatically
added gratuities that were added
to banquet meals, room service meals, and restaurant dining
services for groups having six or more persons (the
"Charges"). The bills that Chandlers gave its
customers during the Audit Period did not contain a written
statement indicating that the Charges could be declined as
required by the Pre-2011 Rule. Chandlers did not retain the
Charges in question; rather, the employees involved in
preparing or providing the meals, including the server,
busser, and bartender, kept the Charges.
18, 2010, the Bureau issued a Notice of Deficiency
Determination to Chandlers wherein it determined that
Chandlers owed $91, 243 for sales and use tax plus penalty
and interest. On August 20, 2010, Chandlers timely protested
the deficiency and filed a Petition for Redetermination of
Notice of Deficiency Determination to the Commission. At that
time, Chandlers provided additional documentation for the
Bureau's review. After reviewing the documentation, the
Bureau modified the audit findings and reduced Chandlers'
14, 2015, the Commission upheld the Bureau's
determination that the Charges were subject to sales tax and
concluded that Chandlers owed $52, 167, less $9, 748 that had
already been paid. On October 13, 2015, Chandlers filed a
Complaint for Judicial Review and Redetermination of Tax with
the district court challenging the Commission's updated
Notice of Deficiency Determination. On March 1, 2016, both
parties filed motions for summary judgment.
April 7, 2016, the district court granted summary judgment in
favor of the Commission thereby affirming the deficiency
determination. In its summary judgment order, the district
court explained that the Pre-2011 Rule was in effect during
the entire Audit Period. The district court noted that the
parties agreed that Chandlers added the Charges to
customers' bills without writing on the face of the bills
that the Charges may be declined. The district court held
that, according to relevant law in effect at the time of the
Audit Period, sales tax must be paid on the Charges. The
district court acknowledged that Idaho Code section 63-3613
was amended in 2011 to exempt gratuities, whether voluntary
or mandatory, from being taxed as part of the "sales
price." However, the district court held that the 2011
Amendment did not affect the Commission's deficiency
determination because it was not retroactive to the Audit
Period. The district court did not address attorney's
fees or costs. A corresponding judgment was entered on April
Issues on Appeal
Whether the district court erred by determining that Idaho
Code sections 63-3613(b)(4) and (b)(6) did not apply to this
Whether the district court erred by determining that the 2011
Amendment did not clarify or reflect the state of the statute
as it existed all along.
Whether the Commission is entitled to costs and