Taxes in the Back

Last January the Nevada Tax Commission upheld a decision requiring a major casino company (Boyd Gaming) to collect and remit sales tax on the value of complementary meals provided to its gamblers. Boyd apparently plans to take the case to the Nevada Supreme Court.

In the meantime, the Nevada Tax Commission passed regulations on Monday requiring the state’s casinos and restaurants to pay sales tax on complementary meals provided to its employees and its patrons, reports the Las Vegas Review-Journal.

The Nevada Tax Department issued the regulations last February; casinos and restaurants must remit to the state, by July 15, taxes on meals comped as of February 15, 2012.

The tax base for comped employee meals is the cost of the food when purchased by the employer. The tax base for comped patron meals is the menu price.

Some implicated businesses may stop offering comped meals. Others may refuse to pay up awaiting a court decision and could face a possible 25 percent penalty, plus interest.

Yesterday, Kelly Doll, a former employee at the popular Las Vegas nightclub Pure, pleaded guilty to one count of filing a false tax return, reports the Las Vegas Review-Journal.

Tip income is taxable. Over $220,000 in tips he received between 2005 and 2006 didn’t make its way onto his income tax returns.

You may think I sound like a broken record. That’s because this is the third time I’ve written about former Pure employees/owners committing tax fraud. See here and here. I think I’m running out of catchy headlines.

Doll’s sentencing date is September 24.

Just over a year ago, I wrote about Ali Olyaie. Mr. Olyaie was a “VIP host” at the popular Las Vegas nightclub Pure. He pleaded guilty to failing to report income earned while working at the popular club in 2006.

Mr. Olyaie is not the only Pure employee who pleaded guilty to a tax crime. Today we add Steve Davidovici and Mikel Hasen to the list.

Steve Davidovici used to be a part-owner and manager of Pure. Mike Hasen used to be the head doorman at Pure. Earlier today they both pleaded guilty to one count of filing a false federal income tax return for the 2006 year. From the U.S. Department of Justice press release:

[D]uring the years 2005, 2006 and 2007, in addition to fees charged for admission to the nightclub, some of Pure’s patrons made cash payments to Pure door personnel and “VIP hosts” to bypass the general admissions line and to obtain more desirable seating. This money was collected, pooled and generally distributed on a weekly basis to the door personnel and VIP hosts, as well as to managers of Pure such as Davidovici and Hasen. In Hasen’s case, distributions from this “tip pool” comprised the bulk of his compensation during the time he worked at Pure. Davidovici and Hasen each concealed large amounts of this income from the IRS.

Davidovici’s and Hasen’s sentencings are set for June 27, 2012, at 9 a.m.

You would think the club may crumble as a result.

You thought wrong.

In just a couple of hours, Pure is throwing a party to celebrate its 7th birthday. Of course, patrons will continue to pay large sums of cash to bypass the admissions line and land a comfortable spot to hang out.

Let’s hope Pure personnel who take home the cash learn from the mistakes of their predecessors.

Discussion about the possible legalization of online gambling in the U.S. has been gaining more and more traction for some time. An update here on the current legislative developments is long overdue.

California: In late February, Senate Bill 1463 was introduced. The bill would legalize online poker in California, and has a goal of raising $200 million for the state general fund. The bill is co-authored by Senate President Pro Tem Darrell Steinberg. According to the complete bill history for Senate Bill 1463, the bill may be acted upon on or after March 26.

Iowa: This past Thursday, Iowa House Speaker Kraig Paulsen said the State House does not plan to take up Senate File 2275, which would legalize intrastate online poker in Iowa. The State Senate had recently approved the bill in a 29-20 vote. The bill is all but dead.

Mississippi: In late February, House Bill 1373 was introduced. The bill would have legalized online gambling within the state. The bill is now dead.

Nevada: Nevada is far ahead of any other state in this area, having legalized intrastate online poker late last year. In January, the Nevada Gaming Control Board finalized the Technical Standards for Gaming Devices, and the Minimum Internal Control Standards were finalized in February. At this time, it is unclear when online operators will be permitted to accept real-money deposits. Some speculate late 2012.

New Jersey: In early February, Senate Bill 1575 was introduced. The bill would legalize online gambling within the state. Just over a year ago, Governor Christie vetoed a bill that would have legalized intrastate online gambling, citing constitutional concerns. Current bill sponsor Senator Lesniak believes he has addressed these concerns. The bill failed to advance through the legislature during the final voting session this past week, however, so it may not be subject to a vote for at least six more weeks.

Last August, I wrote about a tax case in Nevada requiring Boyd Gaming to collect and remit sales tax on the value of complementary meals provided to its gamblers. Boyd Gaming then appealed the decision to the Nevada Tax Commission.

The Las Vegas Sun is reporting that the Nevada Tax Commission affirmed the ALJ determination. The millions paid by Boyd to the State representing the sales tax at issue for certain periods will stay with the state. At least for now.

This issue isn’t significant only for Boyd Gaming. According to the article, every casino in the state has a similar appeal pending. I have no reason to believe the results of pending appeals will be any different.

The issue is whether the comped meals are provided in exchange for the player’s agreement to gamble. If so, the transaction is considered a retail sale subject to sales tax in the state. The Nevada Supreme Court is likely to examine the issue.

If the Nevada Tax Department prevails, we may see a major change to how casinos approach providing rewards to its patrons.

The state of Nevada is one of seven states that does not impose a tax on any personal income. To generate revenue, Nevada imposes a host of other taxes. Today we examine the reach of a particular excise tax. VEGAS INC is reporting the Nevada Gaming Commission recently determined that some restaurants are subject to the state’s live entertainment tax.

Chapter 368A of the Nevada Revised Statutes imposes an excise tax of 10 percent on admission charges and food purchases at facilities with a maximum occupancy of less than 7,500 if live entertainment is provided. One exception from the definition of “live entertainment”:

Instrumental or vocal music, which may or may not be supplemented with commentary by the musicians, in a restaurant, lounge or similar area if such music does not routinely rise to the volume that interferes with casual conversation and if such music would not generally cause patrons to watch as well as listen.

Last week, the Nevada Gaming Commission heard arguments regarding whether the exception applied to food and drinks sold at the Range Steakhouse in Harrah’s Las Vegas. The Nevada Gaming Control Board told Caesar’s Entertainment, which owns Harrah’s, that the steakhouse was providing entertainment interfering with casual conversation, and sought to collect over $500,000 in back taxes. Caesar’s filed a petition for redetermination to dispute the board’s findings.

via VEGAS INC

Like many Las Vegas restaurants, the Range Steakhouse has a bar. Pictured to the right, the bar is incorporated with a portion of the dining area. According to testimony, musicians performed on an elevated stage and took requests from customers. If a band is better than dreadful, I’d submit a request without hesitation. That point goes against Caesar’s, I suppose.

After painstakingly intense deliberations, the board held that the eight tables in the restaurant’s “Diamond Section” are exempt from the tax. To ascertain the winner of this ruling, I called the restaurant to find out the number of tables at Range Steakhouse. The pleasant woman who took the call actually hand-counted for me^[1]: Seventy-one total tables. As a result of the Commission’s ruling, the food purchases at eighty-nine percent of the Range Steakhouse tables are subject to the live entertainment tax.

Now consider the number of restaurants in Las Vegas with live entertainment. It goes without saying the Nevada Gaming Control Board is exclaiming “winner, winner, chicken steak dinner.”

When authorities struggle to compile evidence sufficient for bringing charges against an individual for operating an illegal enterprise, they often turn to income tax evasion. Reported in a story from the Las Vegas Review-Journal, Las Vegas pimp Micah Duncan, known as “Wheelchair Mike,” recently pleaded to income tax evasion.

Under Nevada state law, some forms of prostitution are legal, but only in counties with a population under 400,000. Las Vegas sits in Clark County, which, according to the 2010 Census, has a population of 1,951,269.

The laws didn’t stop Wheelchair Mike from running a prostitution ring in Las Vegas. But the Metro Vice police couldn’t prove it. The street girls were unwilling to cooperate with authorities, probably because of threats of violence or self-incrimination. Instead, local authorities turned to the IRS to find out whether Wheelchair Mike was paying tax on the income he took in.

The IRS learned Wheelchair Mike wasn’t filing his tax returns, yet he spent over $800,000 for vehicle and residential lease payments from 2007 to 2010. That’s an income tax problem if the taxpayer can’t explain the source of the funds. Of course, it was a problem for Wheelchair Mike, and now he’ll serve time for it. Let’s just hope the women who had succumbed to his abuse take this opportunity to no longer subject themselves to similar exploitation.

The State of Nevada imposes a 6.75% tax on gross gaming revenues. That rate is the lowest imposed by any state on gross gaming revenues in the United States. For a close look at the history and possible future of the tax, check out this article from the Las Vegas Sun.

Reported by the Las Vegas Sun, the state of Nevada is seeking to pass a regulation that would allow the state to collect from casinos a substantial portion of unclaimed slot machine tickets. Earlier this week, the state’s Gaming Control Board held a workshop to take testimony on the proposed regulation. Nobody showed to speak up.

According to the article, casinos would be required to send 75 percent of the proceeds from expired slot machine tickets straight to the state. The casinos would keep the remaining 25 percent, before taxes. The casinos would still be required to pay the 6.75 percent gaming revenue tax on that amount.

The spike in revenue for the state would be significant. If the regulation passes, I wonder whether casinos would consider bringing a suit to challenge the regulation. My immediate reaction is that they would likely lose, but I’m far from an expert on the Nevada Constitution. To me it’s a valid levy on a certain type of gaming revenue that all casinos with slot machines would be required to pay.

It’s clear that the state is making various efforts to increase its revenues collected from casinos. Last month, I wrote about a battle between the Nevada Department of Taxation and Boyd Gaming concerning whether casinos are required to pay sales tax on the value of food comps to its patrons.

The intensity of the tax battle between Boyd Gaming and the Nevada Department of Taxation appears to have reached an all time high. And other Nevada casinos are closely paying attention. Both parties are appealing an April decision (linked below), which held that the casino is required to collect and remit sales tax on the value of complementary meals provided to its gamblers.

That’s right. The decision requires casinos to pay to the state of Nevada sales tax on transactions that don’t generate gross receipts. Well, it’s not that simple, according to Administrative Law Judge Dena James Smith.

Reported in a story by the Las Vegas Sun, the judge analyzed Boyd’s “reward points” structure, and reasoned that the meals were anything but complimentary. Instead, she wrote they were provided “directly in exchange for…a certain amount of gambling…. [Boyd] simply did not award complimentary meals when they had not received something of value or expected to receive something of value in return.”

Ultimately, she held that the value of the complementary meals provided to gamblers, but not to employees, are subject to sales tax.

The decision is significant. The casino claims it’s owed $210 million that the state previously collected under erroneous legal interpretations. The Department of Taxation, meanwhile, believes tens of millions more is owed. Many millions more may be on the line, since many other casinos provide similar food comps.

The issue is not really one of first impression. Back in 2008, the Nevada Supreme Court held that the casino Sparks Nugget did not have to pay use tax on the cost of food used to prepare comped meals. This ruling triggered the Tax Department’s receipt of refund requests from nearly one hundred other Nevada casinos.

Wait, so what makes Boyd Gaming different from Sparks Nugget? Isn’t the Nevada Supreme Court decision binding? Good question. First, some background.

In Nevada, sales tax is imposed on the retail sale of tangible personal property. Nevada also imposes a use tax on consumers for the storage, use or other consumption of tangible personal property. The use tax is complementary to the sales tax, and only one type of tax can be assessed on a single transaction.

There are also exemptions to sales and use taxes. In Nevada, there is an exemption for food for human consumption. There is an exclusion from the exemption, however, for prepared food intended for immediate consumption. Got it?

In Sparks Nugget, the Department’s position was that the casinos owed use tax on the cost of food used to prepare the comped meals. The Department lost. The Department didn’t alternatively assert in Sparks Nugget that the casino owed sales tax on the value of the comped meals. That’s Boyd.

Casinos have the Sparks Nugget majority to blame. That court suggested if consideration was provided in exchange for the comped meal, then there may be a retail sale subject to sales tax. With the Boyd decision in favor of the Department now on appeal, the state’s highest court may have to rule on the very argument it previously invited.

Case: In re Boyd Gaming Corp., ALJ Determination Apr. 22, 2011.