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All for the Wrong Reasons

November 12th, 2011 1 comment

On Wednesday night, I felt compelled to watch the press conference held by the Penn State board of trustees. “Joe Paterno is no longer the head football coach, effective immediately,” said John Surma, the vice chairman of the trustees and the CEO of Pittsburgh-based U.S. Steel.

The magnitude of the charges brought against former Penn State football defensive coordinator Jerry Sandusky didn’t begin to really hit me until I heard those words. Arguably college football’s most storied head coach and Sandusky’s immediate superior, Joe Paterno now leaves behind a legacy of gross negligence, incompetence, and utter disregard for the welfare of young and vunerable children, regardless of Jerry Sandusky’s criminal fate.

Unfortunately, it appears that the number of individuals known with involvement in the alleged cover-up will grow. Reported by Deadspin, the tax returns of Sandusky’s charity, The Second Mile, reveal that Sandusky received an annual consulting fee of $57,000 beginning in 2001. Sandusky stopped earning income from The Second Mile in 2009.

Although The Second Mile asserts on its web site that possible wrongdoing on Sandusky’s part was not brought to the charity’s attention prior to 2009, there are strong indications of otherwise. The Pittsburgh Post-Gazette reports that in 1998, attorney Wendell Courtney served as counsel for both Penn State and The Second Mile. At that time, Sandusky was under investigation for sexual misconduct with a minor male child taking place in a Penn State shower, according to the presentment by the investigating grand jury.

Jerry Sandusky founded the statewide non-profit organization The Second Mile in 1977 to provide support for at-risk children. This organization may have continued to pay—and hence support—Jerry Sandusky after it became aware of his possible sexual misconduct. It’s unfathomable enough to think that even one man is capable of the horrific acts alleged in the indictment. To think that the organization he founded facilitated the conduct makes you wonder how many people were aware this was going on.

At this point, all we can do is show our support for the victims and hope all those involved are brought to justice.

Greenwood Gaming Less Green, Again

October 20th, 2011 No comments

Back in May, I wrote about a tax case involving Greenwood Gaming and Entertainment, Inc. In that case, an appellate court in Pennsylvania held that the tax rate imposed on daily gross game table revenue from fully automated electronic gaming tables in the state is 48%, and not 34%, as argued by Greenwood.

Greenwood recently found itself in Pennsylvania court again, this time to argue that the value of cash and non-cash prizes distributed by Greenwood to patrons with Players Cards may be deducted from from the tax base of revenues from slot machines, known as gross terminal revenue (GTR). Once again, Greenwood found itself on the losing side of the case.

Greenwood operates The Parx Casino, located in Bensalem, PA, which is approximately 15 miles outside of Philadelphia. According to the casino’s website, Parx houses over 3,500 slot machines. In order to encourage its patrons to visit Parx more frequently, Greenwood distributes some promotional items to those holding Players Cards. Greenwood went to court because the Department of Revenue disallowed a deduction from GTR the value of prizes won by patrons in any of the following ways:

  • (a) when the Players Card was inserted into a slot machine during a designated period or at a designated time;
  • (b) when entries deposited in and selected from a drawing drum by a computer using a random number generator;
  • (c) when redeeming in the casino a postcard or other mailer that the casino had sent to a patron; or
  • (d) when the casino selected specific patrons as part of player development.

Before applying the relevant statute, let’s briefly examine the issue from a purely economical perspective. Assuming Greenwood pays some amount for the non-cash prizes distributed to its patrons, the casino is out-of-pocket each time a prize is awarded to Players Card holders. Accordingly, one would naturally hypothesize that the casino should be entitled to reduce its tax base by these out-of-pocket amounts. But sometimes, the law isn’t written to reflect this principle.

Section 1103 of the Pennsylvania Race Horse Development and Gaming Act defines gross terminal revenue as the total of:

(1) cash or cash equivalent wagers received by a slot machine minus the total of:

(i) Cash or cash equivalents paid out to players as a result of playing a slot machine, whether paid manually or paid out by the slot machine.

(ii) Cash or cash equivalents paid to purchase annuities to fund prizes payable to players over a period of time as a result of playing a slot machine.

(iii) Any personal property distributed to a player as a result of playing a slot machine. This does not include travel expenses, food, refreshments, lodging or services.

(2) cash received as entry fees for slot machine contests or slot machine tournaments.

The term does not include counterfeit cash or tokens; coins or currency of other countries received in slot machines, except to the extent that the coins or currency are readily convertible to cash; or cash taken in a fraudulent act perpetrated against a slot machine licensee for which the licensee is not reimbursed.

(Emphasis added.) The issue in the case narrowed to whether cash and non-cash prizes paid to patrons in any of the forms described in (a) through (d) above were considered “as a result of playing a slot machine.” To make this determination, the court examined the Gaming Act’s definition of “slot machine,” which in pertinent part states the device

may deliver or entitle the person or persons playing or operating the…device to receive cash, billets, tickets, tokens or electronic credits to be exchanged for cash or to receive merchandise or anything of value whatsoever, whether the payoff is made automatically from the machine or manually.

(Emphasis added.) The court emphasized that the use of “play or operation” in the definition of slot machine refers to the actual physical operation of the machine. This analysis, said the court, comports with the computer system installed by the Department of Revenue in the Greenwood casinos that tracks the financial events occurring during the operation of the slot machines. Because this computer system does not track the distribution of prizes taking place outside the actual operation of the slot machines, the casino cannot deduct such prizes from GTR.

Ultimately, the prizes in question were viewed as resulting from having a Players Card, and not from simply playing the slot machine. Going forward, if Greenwood seeks to obtain the benefit of the deduction, the gaming company must incorporate the prize distributions in question within the algorithm of occurring financial events tracked by the Department of Revenue’s computer system installed in Greenwood’s casinos.

Case: Greenwood Gaming & Ent., Inc. v Commonwealth of Pa., No. 617 F.R. 2009 (Pa. Commw. Ct. Oct. 13, 2011).

Jock Tax Strikes Big Blackjack Winner in Atlantic City

July 10th, 2011 No comments

High-stakes blackjack player Don Johnson recently walked away from Atlantic City casinos $15 million richer over a five month period. Before taxes, that is. A resident of Pennsylvania, he’s now well-aware how the Garden State’s jock tax leaves a large chunk of those winnings in the state’s coffers:

[Johnson] said the state’s reaction to his winning spree could put a chill on high-roller betting in New Jersey. He said he’s being told to pay New Jersey income taxes on his winnings even though he has never lived, owned property or done business there.

“That would be a precedent that might just kill off New Jersey gaming,” he said. “I can’t imagine any big player going there knowing that if he does hit them big, he might have a tax liability to them even though he’s paying taxes in his home state.”

He said he was being asked to pay under a provision tied to the introduction of gambling in New Jersey in the 1970s.

“It made sense when you had no other states surrounding New Jersey that had gaming,” he said. “Now you have all these competitors involved. It becomes a nightmare for a player who wins big and plays in multiple states. He has to figure out what his P&L is in every state. It’s ridiculous.”

Johnson explained further.

“Let’s say you won $1 million in New Jersey for the year, but you lost $2 million between Pennsylvania and Vegas. You had an overall net loss of $1 million. You lost money for the year, but the state of New Jersey may still come after you to try to require you to pay for what you won from them. That’s where this doesn’t work. The math doesn’t work on that.”

While the math may not “work,” he’s right about New Jersey imposing tax on the $1 million in his example. It’s a killer particularly because New Jersey has one of the highest income tax rates of all states. What Johnson doesn’t point out, however, is that as a resident of Pennsylvania, he may be able to take a credit on his Pennsylvania tax return for taxes paid on his gambling winnings to New Jersey. The significance is that he’ll pay only the higher of the two state’s tax rates (in addition to the federal rate, of course).

Despite the possibility of the credit, he makes a fair observation about how the state’s jock tax may hurt the New Jersey gaming industry, with casinos across the state border in close proximity. If Johnson won the $15 million in Pennsylvania casinos instead, he’d pay far less in state income tax because Pennsylvania’s personal income tax rates are much lower than New Jersey’s.

“Except” and “In addition to” Can Coexist, Apparently

May 22nd, 2011 No comments

Today’s post highlights the exercise of statutory interpretation.  Statutes in all areas of the law face scrutiny, including those impacting the gaming industry.  The particular statute I am about to pick apart constructively critique brought parties with substantial interest to court.

Earlier this month, a Pennsylvania appellate court issued a decision holding that the tax rate imposed on daily gross game table revenue from fully automated electronic gaming tables in the state is 48%.  Greenwood Gaming and Entertainment, Inc., the petitioner, unsuccessfully argued the tax rate was 34%.

How can a tax rate not be clearly stated?  There’s no better example than section 13A62(a) of Title 4 of Pennsylvania’s Consolidated Statutes:

(a) Imposition.–

(1) Except as provided in paragraphs (2) and (3), each certificate holder shall report to the department and pay from its daily gross table game revenue, on a form and in the manner prescribed by the department, a tax of 12% of its daily gross table game revenue.

(2) In addition to the tax payable under paragraph (1), each certificate holder shall report to the department and pay from its daily gross table game revenue, on a form and in the manner prescribed by the department, a tax of 34% of its daily gross table game revenue from each table game played on a fully automated electronic gaming table.

(3) The tax reported and payable under paragraph (1) by each certificate holder shall be 14% of daily gross table game revenue for a period of two years following
commencement of table games operations at its licensed facility.

Greenwood Gaming went to state court asking for a declaratory judgment.  Greenwood’s position was if paragraph (2) applies, then paragraph (1) does not apply, because the use of “except” in (1) implies (2) or (3) overrides (1) if either applies.  Thus, argued Greenwood, application of (2) means the tax rate on daily gross game table revenue from fully automated electronic gaming tables is 34%.

The Pennsylvania Department of Revenue’s position, however, was that paragraph (2) instead supplements paragraph (1), because (2) begins with “in addition to.”

Ultimately, the court had to decide whether the statute was clear and unambiguous; and if not, render an interpretation with the assistance of, among other things, legislative intent.  (Note that an unambiguous statute trumps legislative intent.)

To me, the statute is poorly drafted and ambiguous.  I don’t see how one can reconcile paragraphs (1) and (2), as written.  If the intent was for (2) to override (1), then “in addition to” should have been excluded.  If, however, the intent was for (2) to supplement (1), then “except as provided in” should have been changed to “except as modified by,” or some other similarly clarifying phrase.

Nevertheless, the court held the statue is unambiguous, siding with the Department of Revenue.  The court raises the fair point that the words “in addition to” would be given no effect if (2) overrode (1).  The problem with this position, however, is by treating (2) as supplementing (1), the use of “except” in (1) is correspondingly given no effect.  The bottom line is under either interpretation, apparently qualifying language becomes meaningless.

If the court correctly decided the statute as ambiguous, we would likely have seen a holding in favor of Greenwood.  Consider these remarks made by Representative Dante Santoni, a sponsor of the bill behind Section 13A62, on record in a legislative journal:

[The casinos] are allowed to have the maximum amount of fully automated machines at 250, but the tax rate is different.  The tax rate is 34 percent if the casino chooses to use those types of machines; 16 percent initially, 14 percent after July 1 if they do not and use the standard tables that will require a dealer, or a person, an employee.

There’s more.  The House Committee on Appropriations’ Fiscal Note states:

In addition to the fees collected, a state tax of 14% is imposed upon the daily gross tables games revenue.  This rate would be applicable for the first two years of operation for each facility, after which time the rate will decrease to 12%.  This tax and any accrued interest is payable weekly to the Department of Revenue.  The tax rate on fully automatic electronic gaming tables is 34%.

The court didn’t utilize this strong evidence in favor of Greenwood’s interpretation because it deemed the statute unambiguous.  If Greenwood decides to appeal the decision to the Supreme Court of Pennsylvania, we’ll see if the state’s highest court has an alternative understanding (or lack thereof) of the statute’s plain language.

Professor Maule also gives us his take on the case.

Categories: Gambling, Pennsylvania, State and Local Tags:

Win-Loss Statements Bill in Pennsylvania Receives Committee Approval

April 7th, 2011 No comments

Yesterday, the Pennsylvania House Gaming Oversight Committee approved a bill requiring casinos in Pennsylvania to mail casino patrons with club cards monthly statements reflecting win/loss amounts.  When I first learned of this measure, I presumed the bill’s advertised purpose was to enhance the Pennsylvania Department of Revenue’s ability to collect tax revenue on gambling winnings.  After all, the state is facing a $4 billion budget deficit.  Nevertheless, I thought wrong.

State Representative Paul Clymer, the leading proponent of the bill, claims that it will inform addicted casino patrons of monies lost in the state’s casinos, calling it a “consumer protection issue.”  “If these monthly statements were to keep coming in, then the spouse, who might not know about the gambling, will start asking questions,” Clymer said.

I’m all for implementing reasonable methods to treat gambling addictions.  If a card club member’s bank statements reflecting excessive ATM withdrawals fail to mitigate addiction, I’m hard pressed to believe a monthly letter showing losses will make any difference.  State Representative Tina Davis also has doubts:

I understand the intent. Clymer wants to help addicts.  But I need to see some evidence that this bill would actually help addicts to break their addictions.

Clymer’s bill platform is misguided.  He is far more likely to win the support of fellow state lawmakers by ensuring that the bill will also address the state’s fiscal troubles.  Here’s a suggestion: include a requirement that the statements must also sent to the Pennsylvania Department of Revenue.  Considering the Form W-2G is issued only under certain circumstances, plenty of additional potential tax revenue from gambling winnings goes uncollected year after year.

We’ll see how much further this bill progresses.

Categories: Gambling, Pennsylvania Tags:
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