The economic recession has not only wreaked havoc on the balance sheet of countless businesses—including gaming businesses, which has been well-documented in global reports—but has correspondingly impacted state budgets. Recent news reports are replete with accounts of increasing budget deficits. Unlike their counterparts in the federal government, which can accumulate unlimited deficit spending, many states are constitutionally restrained from incurring budget deficits through balanced budget requirements. As a result, proposals have cropped up throughout the United States to target specific activities with higher tax rates. So-called “sin taxes,” which are taxes on items such as alcohol, tobacco and similar products, have garnered significant interest from many state legislators. Increasing sin taxes can directly impact gaming businesses, especially as nongaming activities have amounted to a greater portion of casinos’ gross revenue.
Sin tax increases are not the only threat to increased operating costs within the gaming industry. Many gaming jurisdictions have quietly examined raising licensing fees or strengthening enforcement activities. This second prong of assault on the operating costs of gaming businesses can affect not only casinos, but also equipment manufacturers and other suppliers. This article provides an overview of recent developments emanating the likes of South Dakota, Nevada, North Carolina, Florida and Washington state. Increasing the tax burden, or compliance costs, of the gaming industry—and the much larger hospitality industry that the gaming industry is a part of—could further exacerbate the precarious financial condition of the gaming industry. Businesses operating in the gaming industry must, therefore, be aware of the threat and, when necessary, take proactive steps to reduce these threats.
Gaming Tax Increased by 1 percent in S. D.
South Dakota became the first state in 2009 to directly increase taxes on gaming operations. On March 10, 2009, South Dakota Gov. Mike Rounds signed South Dakota House Bill 1251 into law. The bill raised the South Dakota gaming tax on gambling in Deadwood by One percent to an overall tax rate of 9 percent. The South Dakota gaming tax is imposed on adjusted gross receipts received from gaming. At the time of enactment, the tax increase was forecasted to generate an additional $1 million in gaming taxes for the state.
The South Dakota gaming tax increase arose out of a compromise between Deadwood gaming interests and the governor. Rounds had originally proposed increasing licensing fees for gaming devices to $3,000 per year. The licensing fee is presently $2,000 per year. Deadwood gambling interests vocally expressed concern that the higher licensing fee could lead to some gambling halls to cease operations. As a result, a compromise was arrived at to increase the state’s gaming tax.
In a potential blow to the South Dakota gaming industry, coming closely on the heels of the raise in the gaming tax, Rounds signed legislation into law banning smoking in video lottery casinos and gambling halls. The smoking ban goes into effect July 1. The effect of the ban is expected to lead to a decline in gaming revenue and, therefore, cost the state tens of millions of dollars in lost gaming tax revenue. The anticipated state revenue increase may effectively be eliminated due to the smoking ban.
Nevada Legislators Target Increasing Sin Taxes on Alcohol and Cigarettes
Nevada continues to be hit hard by the current economic downturn as a result of several factors, including a collapse of the local real estate market and sharp declines in gaming revenue state-wide. As the gaming industry within Nevada struggles financially, two bills have been introduced in the Nevada Assembly that would indirectly increase the tax burden on gaming businesses. The bills would, respectively, increase state taxes on alcohol and cigarettes.
Assembly Bill 277, introduced by Assemblyman Bernie Anderson, would raise taxes on alcohol by as much as 300 percent. The auspices of the alcohol tax rate hike would be to fund genetic testing in criminal proceedings and substance abuse treatment centers. The rate of the Nevada alcohol tax is based on alcohol by volume and applied on a per gallon basis. A breakdown of the rate changes provided in Assembly Bill 277 are shown in Table 1.
Assemblywoman Sheila Leslie introduced Assembly Bill 255, which provides for an increase in the Nevada cigarette tax. The cigarette tax increase would equate to a tax increase of approximately $1 per pack of cigarettes. Under the technical language of Assembly Bill 225, the tax rate is increased from 40 mills per cigarette to 90 mills per cigarette.
Other tax law changes have been discussed in Nevada. Politicians enjoy targeting “loopholes” as a means of justifying a change in the tax law. A loophole that has gained the attention of some assembly members is to tax meals “comped” by casinos. Taxing comped meals is projected to raise an additional $140 million in revenue for Nevada.Increasing sin tax rates on alcohol and cigarettes could prove costly to a struggling Nevada gaming industry. The well-publicized steep drops in gaming revenue could further be compounded by deteriorating nongaming revenue due to higher operating costs. For instance, revenue data from Las Vegas Strip properties reveal that gaming revenue now amounts to approximately 40 percent of the properties’ total revenue. Thus, the likely effect of an increase in alcohol taxes could further erode the remaining 60 percent of Strip properties’ revenue generated through such activities as the sale of alcohol at the high-end restaurants and nongaming entertainment venues properties now prominently feature. At least one hospitality-related industry association has argued that Assembly Bill 277 would cost the Nevada hospitality industry approximately 2,300 hospitality related jobs and lead to the loss of $160 million in revenue.
Push to Increase Cigarette Taxes in Florida Meets Resistance
Proposals have been advanced in Florida to raise the state’s cigarette tax to $1 per pack. The existing Florida cigarette tax imposes a 33.9 cent per pack tax on cigarettes. The proposal to raise the Florida cigarette tax has been met with stiff opposition from Florida legislative leaders and Gov. Charlie Crist. An increase in the Florida cigarette tax could have an indirect impact on the growing Florida gaming market. Although a cigarette tax increase may not impact the gaming industry as significantly as, for example, smoking bans or alcohol tax increases, the proverbial slippery slope may lead to tax hikes on other products with a more direct impact on the gaming industry. Moreover, there is a risk that consumers could shift limited dollars away from gaming.
N.C. Governor Advocates Increased Alcohol and Cigarette Taxes
Recently elected North Carolina Gov. Bev Perdue has joined the chorus of politicians pushing for sin tax increases by proposing increases in the state’s alcohol and cigarette taxes. Perdue’s proposal calls for imposing a 5 percent surcharge tax on alcohol and increasing the cigarette tax by $1 per pack. Gaming in North Carolina is currently limited to two Indian gaming facilities. Thus, the North Carolina sin tax proposals, standing alone, facially appear to have limited impact on the gaming industry. Nevertheless, the proposals are illustrative of the trend among the states and are significant because they could encourage other states—with healthy gaming industries—to consider similar tax increases to close budget shortfalls.
Washington State Explores Raising Sin Tax Rates
Political leaders in Washington state have proposed placing an initiative on a state-wide ballot to increase sin taxes on alcohol and cigarettes. Specific details of the proposal have not been released; however, interest groups have actively promoted the tax increases as a means to reduce, or eliminate, a $9 billion budget deficit. Washington is home to some 33 tribal casinos and more than 100 card clubs, which would be directly impacted by such tax increases. Similar to the discussion of the proposals in Nevada, the Washington state gaming industry could face similar economic consequences.
Administrative Efforts to Increase Licensing Fees and Enforcement Actions
Coupled with proposals to increase tax rates, states may adopt other creative measures as a means to raise revenue. These measures may eliminate the necessity for legislative action. The legislative process often is fraught with difficult political battles and competing policy proposals. Administrative level actions can, on the other hand, produce swift policy changes. Further, even those gaming businesses that do not conduct gaming operations may become direct targets of agency enforcement actions. Thus, gaming-related businesses must remain acutely observant of shifts in regulatory attitudes.
Regulatory initiatives can take multiple forms. Increased licensing fees is one example. Under many state gaming laws, gaming control boards have regulatory authority to establish “fees” for gaming-related licenses. Consequently, a gaming control board could adopt new administrative rules raising licensing fees outside the legislative process. South Dakota is just one example of a recent attempt to apply this approach. Deadwood gaming interests ultimately forestalled the threat to raise licensing fees by capitulating to a 1 percent increase in the South Dakota gaming tax. Other jurisdictions similarly may resort to using regulatory actions to raise licensing fees.
A second avenue administrative agencies have used to generate additional revenue is through increased administrative enforcement. As an example, many jurisdictions tax gaming operations by imposing a tax on adjusted gross receipts from gaming. A typical formation of formula to arrive at adjusted gross receipts is simply subtracting winnings from the total amount wagered. With gaming revenue declining, gaming jurisdictions may have an incentive to search for means to preserve existing gross gaming tax revenue. Gaming regulators have several available means to increase gaming tax revenue. Gaming tax returns may face increased scrutiny with respect to the items included in gross receipt and the timing of tax payments. Regulators may further step up compliance examinations and be less likely to waive or reduce monetary fines. Additionally, gaming regulators may also attempt to apply other taxes and fees to gaming businesses.
Concluding Comments
The gaming industry is often perceived as the goose with the golden egg that will infinitely line government coffers. The events of the ongoing recession have, in many respects, dispelled the myth that the gaming industry is immune to an economic downturn. State legislators and regulators have apparently not yet read this memo, as many states contemplate saddling an already struggling gaming industry with increased tax burdens and compliance costs. Gaming industry businesses must stay vigilant with respect to developments in state legislative chambers and from state gaming regulators.
Peter J. Kulick is a tax and gaming attorney with Dickinson Wright PLLC, which has an international gaming law practice with offices in Michigan, Nashville, Washington, D.C., Toronto and an affiliated office in Macau. He received his LL.M in tax law from New York University. Kulick may be reached at pkulick@dickinsonwright.com.
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