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Tip suggestions on receipts usually are after-tax, but is that fair?

Even some restaurant owners are surprised to find the recommendation is typically calculated based on the total including tax. That flies in the face of etiquette advice.

August 03, 2010|David Lazarus

Glendale resident Lee Lanselle ate breakfast the other day at the Hill Street Cafe in La Cañada Flintridge. As he waited for his credit card receipt, he worked out the tip in his head.

The receipt arrived and Lanselle was surprised that his estimate of a 15% tip was less than the "suggested gratuity" printed on the form. A closer look revealed that the recommended tip on the receipt included the full amount of the meal, including taxes.

"This isn't the first time I've seen something like this," Lanselle, 56, told me. "More and more I see 'gratuity guidelines' or 'suggested gratuity' on the receipt. But this was the first time I stopped to think about it and realized that they were calculating the tip for the gross amount, with taxes."

He said he knows this is a relatively minor matter, but doesn't this fly in the face of tipping conventions? "Aren't they supposed to calculate the tip before taxes?"

Good question.

I called Mark Kim, co-owner of the Hill Street Cafe. He readily acknowledged that receipts generated by his credit card processing machine include suggested tips at the 15%, 18% and 20% levels.

But Kim said he never knew the tips were being calculated based on the tax-included amount.

"That's not right," he said. "When I tip servers at other restaurants, I give 20%, but I give 20% before taxes. I don't want to tip the taxes."

Kim wasn't sure who to blame for the after-tax calculations. I'll get back to that in a moment.

First, what's the current thinking on tipping — before taxes or after taxes?

The white-gloved etiquette mavens at the Emily Post Institute in Vermont say that restaurant tips should be 15% to 20% of the bill's pretax total.

The Etiquette Scholar website agrees that you should "tip on the pretax amount of the bill, not on the total."

Most participants in an online discussion on tipping at the Zagat website came down on the side of pretax gratuities, although one person allowed that "if service is good, I tip on the total because a server's job is hard work."

Another person commented that "almost all establishments, if they include recommended tip percentages on the bill, include the tax as part of the tip percentage."

So why is that?

A spokeswoman for MasterCard said don't blame the card companies. She said the recommended tips are either put there by the establishment or by the card processor.

In the case of the Hill Street Cafe, credit cards are processed by an Atlanta company called RBS WorldPay, a subsidiary of Citizens Bank, which is itself a subsidiary of Royal Bank of Scotland. RBS is one of the largest card processors in the country, handling millions of transactions annually.

Tom Konz, RBS' head of strategy and marketing, was surprised that anyone would ask about whether suggested tips are being calculated on a pre- or post-tax basis. "No one's ever wanted to know before," he said.

After looking into the matter, Konz told me that calculating tips on an after-tax basis is pretty much an industry standard. He explained that when a merchant submits a credit card for processing, the card company has to preauthorize the full amount of the transaction before the customer signs the receipt.

This means the preauthorized transaction will typically include all taxes due, plus a little wiggle room for a tip.

But is there anything that would preclude a cash register or processing machine from calculating a pretax tip? We are talking about computers, after all.

"I don't see why it couldn't be done," Konz replied. "It would just be a matter of programming. But the marketplace hasn't said it wants it."

Yes, he's throwing the ball back to merchants, who Konz blamed for not asking for pretax tip suggestions. They likely haven't done this, he said, because customers haven't raised a fuss.

"It's not that it can't be done," Konz said. "It's that nobody's asked us to do it."

It's a whole other question whether the 18% tip that many restaurants require for large parties is charged on a pre- or post-tax basis.

So it's up to you. If you want pretax tip suggestions, rather than after-tax, let the merchant know. You can also let everyone know by posting a comment with this column online.

If enough people make a stink, I'll make sure your voices reach the ears of companies in a position to make a difference.

If not, well, I guess Emily Post had it wrong.

David Lazarus' column runs Tuesdays and Fridays. He also can be seen daily on KTLA-TV Channel 5. Send your tips or feedback to david.lazarus@latimes.com.

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