If you are using SQL Azure Reporting Services, the "format" function is unsupported. This is really the only way to format a tooltip in a chart in SSRS. So the workaround is to return a column that has a string representation of the formatted number to use for the tooltip. So, I do agree that SQL is not the place for formatting. Except in cases like this where the tool does not have proper functions to handle display formatting.
In my case I needed to show a number formatted with commas and no decimals (type decimal 2) and ended up with this gem of a calculated column in my dataset query:
,Fmt_DDS=reverse(stuff(reverse(CONVERT(varchar(25),cast(SUM(kv.DeepDiveSavingsEst) as money),1)), 1, 3, ''))
It works, but is very ugly and non-obvious to whoever maintains the report down the road. Yay Cloud!