June 17, 2002

U.S. Supreme Court Ruling Hurts Restaurants, Small Businesses

LANSING, Mich. - The U.S. Supreme Court today ruled that the Internal Revenue Service (IRS) has the right to charge restaurants, and other establishments with tipped employees, additional Social Security taxes if they think employees are underreporting their tips. "This is a devastating blow to the restaurant industry and could be the difference between an establishment staying in business or closing its doors," said Rob Gifford, executive director of the Michigan Restaurant Association. "The ruling negatively affects our nation's 200,000 restaurants and every business with tipped employees such as hair salons, taxi cab companies and hotels. But the scariest part is that it gives the IRS the power to arbitrarily enforce the penalties - possibly penalizing establishments that have done nothing wrong." The case of Fior d'Italia v. United States involved a claimed underpayment of tip taxes for 1991 and 1992 by the San Francisco-based restaurant. For years, Fior d'Italia fought the IRS through the U.S. judicial system. After a Federal District Court and a Federal Appeals Court ruled in the restaurant's favor, government lawyers petitioned the U.S. Supreme Court to take up the case. At issue was whether the IRS has the right to assess employers a tax bill for their share of Social Security (FICA) taxes on tips the IRS says all employees allegedly earned but didn't report - without ever determining the exact amount of those tips or which employees failed to report their tips, and without crediting the employer's FICA tax payments. "The worst part about this ruling is that it will hurt employees and restaurants that report everything accurately," Gifford said. "The IRS will be using guesswork to determine the assessment because they're not required to determine the exact amount of tips employees receive. They will assess the tax based on what they think the employees are making in tips, not what is actually being given as a gratuity." Founded in 1921, the Michigan Restaurant Association represents nearly 4,000 Michigan foodservice establishments. The foodservice industry plays an integral role in Michigan's economy, employing more than 300,000 people and creating $10.6 billion in annual sales. Contact: Rob Gifford, Executive Director Michigan Restaurant Association 517-482-5244 rgifford@mramail.org