Hamill: Who really wins with the new tip tax break?

During a campaign stop in Las Vegas, then-candidate Donald Trump tossed out an idea to make tips exempt from tax. This presumably appealed to tipped Las Vegas workers.

This was, technically, a “campaign promise.” It did not seem to be a major plank of an economic package, so many did not think anything would come of it.

As Gomer Pyle used to say, “Surprise, surprise.” The Big, Bad law included a new section of the tax code to exempt tips.

But there were conditions. First, you can’t make too much money. Second, there is a cap on the tip exclusion amount.

Third, you can’t be in a “specified” service business. Fourth, you must be in a line of business that customarily received tips as of Dec. 31, 2024.

Finally, the statute gave the Treasury Department discretion to specify other qualification rules.

The Treasury first released a list of 68 job titles that met the requirement of customarily receiving tips.

This list was developed based on prior tax return filings that reported tips and based on how the filers classified their occupation.

The Treasury then issued proposed regulations. The “proposed” part of this title is just that — the rules are a proposal subject to comment.

The Administrative Procedures Act requires a regulatory body to seriously consider all comments received.

With tax regulations, the Treasury indicates how it responded to comments in the preamble to the temporary or final regulations.

There were 16,800 comments received on the tip regulations. If you don’t know, that is a very high number.

Many people might think that the exclusion tip income exclusion is not a big deal. After all, most of us don’t receive tips in our line of work.

Apparently, this is a big deal. And not just for the tipped workers. Accounting and law firms were big contributors to the comments.

Accounting and law are specified service businesses that cannot benefit from the tip exclusion. Those folks are commenting for their clients’ benefit.

The statute says that a tip is a voluntary payment. For this reason, automatic gratuities and service charges are not excluded tip income.

Restaurants that automatically add a charge for tables of a certain size may change that policy to help workers’ tax position.

Of course, even if a charge is automatically added, the customer can typically add an additional amount if desired.

The additional amount is eligible for the exclusion. That is likely to add to the reporting burden for the employer.

Some comments suggested that the regulations should simply include automatic charges as excluded tips.

Other commentators noted that the Treasury cannot do this because the law says that a tip must be voluntary.

The “follow the law” crowd is technically correct. But the Treasury has written pro-taxpayer regulations in the past that overlook the actual law.

In a case called Loper Bright Enterprises, the Supreme Court said it is not up to a regulatory body to interpret — and certainly not to write — the law.

If the Treasury expands the meaning of an excluded tip beyond the law, it is unlikely that anyone will ever challenge the regulation.

Hence, Loper Bright Enterprises is often a one-way rule: overturn the rule if it is pro-government, accept the rule if pro-taxpayer.

The Treasury did venture out in defining certain activities that cannot take advantage of the tip exclusion.

Services that are a felony or misdemeanor, or that involve prostitution or pornographic activity, cannot receive tax-free tips.

Commentators questioned excluding such activities. And not because the commentator favors — or engages in — such activities.

Instead, the concern is that the terms are not well defined. In the Supreme Court case, Jacobellis v. Ohio, Justice Potter Stewart defined “hard-core pornography.”

The case held that speech is protected, but not hard-core pornography. Stewart said he could not define the term, but “I know it when I see it.”

Stewart later said he regretted having used those words, because “that’s going to be on my tombstone.”

Someone becomes guilty of a felony or a misdemeanor when found guilty of such an offense. Before that, they could reasonably argue they did no such thing.

The Treasury must now sift through 16,800 comments and finalize the regulations. All to exclude a fraction of the income of a fraction of the people.