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Withholding Massachusetts Gambling Winnings: Searching for a Better Solution

January 20th, 2014 No comments

Over the weekend the Boston Globe ran a story about an interpretation of Massachusetts law requiring the state’s casinos to withhold and report a patron’s gambling winnings of $600 or more.

The law would capture far more than the corresponding withholding and reporting rules for gambling winnings under federal law. The Internal Revenue Code requires informational reporting for slot machine winnings of at least $1,200 or more and for poker tournament winnings of more than $5,000. There are no reporting requirements for table games such as blackjack, unless the player wins more than $600 and the odds are no better than 300-to-1.

Here’s the law at issue:

Every person, including the United States, the commonwealth or any other state, or any political subdivision or instrumentality of the foregoing, making any payment of lottery or wagering winnings which are subject to tax under chapter 62 and which are subject to withholding under section 3402 of the Internal Revenue Code, without the exception for slot machines, keno and bingo played at licensed casinos in subsections (q)(5) and (r) of said section 3402 of the Internal Revenue Code, shall deduct and withhold from such payment an amount equal to 5 percent of such payment, except that such withholding for purposes of this chapter shall apply to payments of winnings of $600 or greater notwithstanding any contrary provision of the Internal Revenue Code.

In other words, the law requires five percent withholding for state income tax on all winnings of $600 or more in MA casinos. Read more in the Massachusetts Department of Revenue Technical Information Release 13-4.

With Massachusetts in the process of determining casino licensees, prospective operators are making a fuss. There will be more paperwork to deal with. More significantly, higher stakes players may be less inclined to gamble at MA casinos, because a lot of their winnings would be subject to the reporting and withholding.

This possibly slight shift from the status quo that is unfavorable to the industry demonstrates a higher need to completely overhaul the reporting and withholding rules for gambling winnings. There has to be a more effective method that makes the government, operators, and players all happy.

I’ve discussed before a federal bill that included tax reporting and withholding rules for internet gambling winnings:

H.R. 2230, Internet Gambling Regulation and Tax Enforcement Act of 2011, for example, sought to require “Internet gambling licensees” to report to the IRS, among other things, the “net Internet gambling winnings” for the calendar year of each person placing a bet or wager with the licensee. Such a requirement would maximize the reporting to the IRS. But would it be prohibitively costly for iGaming operators to not only document but also report the net winnings of all persons placing wagers, including nominal amounts (e.g. less than $100)?

Players are happy here, because their losses are built into the amount reported to the tax authorities. There is no issue of substantiating gambling losses, which is a big problem for taxpayers at brick and mortar casinos.

Issuing annual tax forms to all patrons with winnings at brick and mortar casinos is not similarly practical. Or is it?

The IRS and casinos could establish a streamlined process for first-time patrons to provide tax information. Once a patron is in the system, all the casino must do is keep track of a patron’s winnings and losses, which can be done upon issuing and retrieving chips, and then report and withhold accordingly. It’s not quite that simple, but it’s a starting point.

As the possibility—however unlikely—of federal legislation for online gambling remains, an overhaul of the reporting and withholding rules should be kept in mind.

Gambling Loss Deduction Removed from Kansas Tax Code Beginning in 2014

July 29th, 2013 4 comments

Kansas is home to three land-based casinos as well as five Indian-owned casinos. Hosting eight profitable casinos in a state of less than 2.9 million people, the State should not want to discourage its residents from participating in the entertainment.

At least that’s what common sense tells me.

Well, the 2013 legislative session in Kansas appeared to lack some common sense when deciding to remove the gambling loss deduction from the state’s personal income tax beginning in 2014, as reported by the Topeka Capital-Journal.

We know the reason for the change. States are hungry for revenue. Removing a so-called “subsidy” for an entertainment activity is an easy political sell.

Regular readers of this blog know the implications. A taxpayer with gambling winnings in Kansas will have to pay the State personal income tax on gross winnings, and cannot even partially offset the winnings via a gambling loss deduction. The result is paying taxes on “phantom” income.

The article mentions that no one came forward in opposition to defend the gambling loss deduction. I’m surprised the local casino lobbyists did not make any fuss.

The initial impact won’t be felt until April 2015, when taxpayers in Kansas have a balance due on their 2014 Kansas tax returns due to gambling winnings. All it takes is one unhappy taxpayer to make a large fuss about it. That’s when Kansans could be tempted to travel outside the state to gamble or turn to other forms of entertainment.

Online Poker Tournaments Now Taxable in Nevada

July 28th, 2013 2 comments

Back in February, the Las Vegas Review-Journal reported that the Nevada Gaming Control Board introduced a bill to tax online poker tournaments. Last month, Governor Brian Sandoval signed Senate Bill 9 into law.

Control Board Chairman A.G. Burnett had noted that in-person poker tournaments are not taxed in Nevada because of the significant costs incurred by the hosts to run these promotional events. Online tournaments, however, do not require the same expenses, such as utilities, floor space rental fees, and food and beverages.

Senate Bill 9 amended, among other things, Nevada Revised Statutes Chapter 463.0161(1) (amendments in bold italics):

“Gross revenue” means the total of all:
(a) Cash received as winnings;
(b) Cash received in payment for credit extended by a licensee to a patron for purposes of gaming; and
(c) Compensation received for conducting any game, or any
contest or tournament in conjunction with interactive gaming, in
which the licensee is not party to a wager,
¬ less the total of all cash paid out as losses to patrons, those amounts paid to fund periodic payments and any other items made deductible as losses by NRS 463.3715. For the purposes of this section, cash or the value of noncash prizes awarded to patrons in a contest or tournament are not losses, except that losses in a contest or tournament conducted in conjunction with an inter-casino linked system or interactive gaming may be deducted to the extent of the compensation received for the right to participate in that contest or tournament.

To be clear, this amendment does not make a player’s winnings from online poker tournaments subject to personal income tax in Nevada. (Nevada does not have a personal income tax.) Rather, an interactive gaming operator’s cut from online poker tournaments is now included as part of the 6.75 percent tax imposed on gross gaming revenue in Nevada.

This amendment has not yet been updated on the Nevada Legislature’s website.

Ohio Tax Man Giveth, then Taketh from Gamblers

July 11th, 2013 1 comment

On June 30, 2013, Ohio Governor John Kasich signed into law Amended Substitute House Bill Number 59. The 3,747 page bill sets forth the Buckeye State’s 2014-15 fiscal year budget.

But that’s not all. Tucked into the bill is the following:

Sec. 5747.01….

As used in this chapter:

(A) “Adjusted gross income” or “Ohio adjusted gross income” means federal adjusted gross income, as defined and used in the Internal Revenue Code, adjusted as provided in this section:

(29) Deduct, to the extent not otherwise deducted or excluded in computing federal or Ohio adjusted gross income for the taxable year, any loss from wagering transactions that is allowed as an itemized deduction under section 165 of the Internal Revenue Code and that the taxpayer deducted in computing federal taxable income.

Gambling losses are no longer deductible as an itemized deduction for purposes of the Ohio income tax, effective immediately.

Gambling losses became deductible under Ohio tax law beginning January 1, 2013, as part of legislation expanding commercial gambling in Ohio.

I located one remark after a brief search for the purpose behind the repeal, in an article quoting a GOP budget fact sheet: “Why should Ohioans subsidize the risky behaviors and bad luck of others?”

I wasn’t fully satisfied, so I kept searching, and found this 2010 Columbus Dispatch op-ed that details the circumstances arising to allowing the deduction in the first place. Legislators have since been convinced otherwise, apparently.

From my reading, the repeal is retroactive. In other words, gambling losses are not deducible in Ohio in 2013 for any part of the tax year.

Ohio rejoins the list of other “bad” gambling states that do not permit gambling losses as an itemized deduction at all for income tax purposes:

  • Connecticut
  • Illinois
  • Indiana
  • Massachusetts
  • Michigan
  • West Virginia
  • Wisconsin

This change in the law does not impact professional gamblers in Ohio, of course. Professionals may deduct gambling losses up to the extent of gambling winnings as a trade or business expense.

Anonymous Lottery Winner Bill Introduced in New Jersey

September 6th, 2012 No comments

A few months ago I received an e-mail from someone claiming to hold a Powerball ticket good for a seven figure sum. This someone, however, was seeking to claim the ticket anonymously, and wanted to know if I had any ideas.

I suspect this someone came across my post about an unclaimed winning lottery ticket in Iowa. In that case, the Iowa Lottery refused to honor the ticket unless the recipient came forward. In both situations, state law required the winner’s name and location to be made public information.

So I wrote back and said it could be considered fraud if someone other than the actual winner claims the prize. I added that I don’t have any viable courses of action to present, and thanked the person for the inquiry.

There are countless reasons why anyone would want to claim a lottery ticket anonymously. The primary reason, of course, is to avoid the public spotlight. Unfortunately, far too many times lottery winners have fallen victim to scam artists or physical harm.

New Jersey Assemblyman John Burzichelli believes lottery winners shouldn’t have to face the fame with their fortune. He recently introduced bill A2982, which would give New Jersey lottery winners the option of remaining anonymous for one year.

The NJ Lottery is likely to lobby against the bill as is. The State Lottery claims that “transparency gives taxpayers increased confidence that lottery games are fair and honest.” But I see a far more significant reason for its opposition: Lost publicity. No one is going to care about a press conference for a lottery winner a year after the fact.

Expect some sort of compromise, such as a prize amount threshold.

I don’t think we should preserve the publicity at the expense of continuing to expose lottery winners to evil. The states generate plenty of revenue from their lotteries and almost certainly could afford to take a small hit, if any. Plus, there are other ways to accomplish transparency.

NY Cigarette Wholesalers Violate CCTA

August 28th, 2012 1 comment

The battle between New York and its federally recognized tribes over the taxation of cigarettes continues.

In the most recent development, other players involved were on the losing end of a recent ruling in federal court. The judge held that wholesalers failed to collect New York City cigarette tax on the sale of millions of cigarette cartons to tribal retailers located on reservations in New York. The New York Times estimates the wholesalers could have to pay penalties up to $15 million to New York City.

New York City brought this action alleging that the wholesalers violated federal law. The Contraband Cigarette Trafficking Act prohibits persons from selling “contraband cigarettes,” which are defined as “a quantity in excess of 10,000 cigarettes, which bear no evidence of the payment of applicable State or local cigarette taxes in the State or locality where such cigarettes are found, if the State or local government requires a stamp, impression, or other indication to be placed on packages or other containers of cigarettes to evidence payment of cigarette taxes.”

Defendant wholesalers Mauro Pennisi and Gutlove & Shirvint each sold from May 2008 to January 2011 more than 10 million cartons to Indian retailers mostly on the Poospatuck Reservation, where fewer than 500 people live. Although cigarette packs sold to tribal members on reservation are exempt from NY cigarette tax, packs sold off-reservation in NYS are taxable.

New York City asserted that the cartons sold by the wholesalers were trafficked into New York City without payment of the New York City cigarette tax and re-sold. The judge ruled that New York City met its burden of proof to establish that the wholesalers should have known the vast majority of the untaxed cigarettes sold to the tribes were re-sold to non-tribal members.

This case will only further encourage tribes located in New York to manufacture their own cigarettes. Whether or not NYS will again seek to stop such activity remains to seen.

Last Two Dollars in State Supreme Court?

August 27th, 2012 1 comment

Last October I wrote about operators of the Napa Valley Casino refusing to pay a $2 card room admissions tax. The city of American Canyon, CA, approved the measure in 2010, yet it has delivered exactly $0 in tax dollars to date, as Napa Valley Casino is the only entity subject to the tax.

The parties ended up in court after the city filed a criminal complaint against the casino’s operators, and the operators countered with a civil suit of their own.

Earlier this month a Napa County Superior Court panel decided in favor of the city, according to the Times-Herald. The operators are seeking review of the decision by the state Supreme Court, but the court is not obligated to hear the case.

The Superior Court panel upheld the constitutionality of the tax, noting that local governments have broad powers to regulate gaming establishments located within their jurisdictions.

I don’t see a reversal here. The operators are asserting that the tax is on private citizens entering into a private business. Problem is, it’s not that straightforward.

New York Expands Film Tax Credit Program

July 27th, 2012 No comments

I give a thumbs up for the HBO series Boardwalk Empire. The title refers to the longest boardwalk in the world, located in Atlantic City, NJ.

But the series hasn’t been filmed in New Jersey. $5 million was spent to build a 300 foot long boardwalk in Brooklyn in order to shoot scenes there. In March, filming for the upcoming Season 3 began at Historic Richmond Town on Staten Island. Season 3 is set to air this fall.

New York is a popular place to television and film producers because of the State’s post-production tax credit. Post-production refers to editing activity after filming is complete, such as visual effects, color correction, sound editing and mixing.

The State has become even more attractive to producers after Governor Cuomo earlier this week signed legislation expanding the post-production tax credit. From the Governor’s press release:

Under the new law, the qualified film and television post production credit increases from 10 percent to 30 percent in the New York metropolitan commuter region, including New York City and Dutchess, Nassau, Orange, Putnam, Rockland, Suffolk and Westchester counties. An additional five percent (for a total of 35 percent) in tax credits would be available for post-production expenditures in locations elsewhere in the state.

In contrast, California does not offer a specific post-production tax credit. Although the cost of visual effects may qualify for the credit in the Golden State, the movie also must be filmed in the state. New York’s post-production credit does not have that requirement.

Whether a film tax credit program is good policy is another story. The folks at the Tax Foundation released this report in April, and made these key findings:

  • Film tax credits cost states revenue and require either higher taxes or lower government spending elsewhere.
  • At best, film tax incentives largely shift production from one sector to another without producing a net increase in economic activity or employment.
  • However, the program is unlikely to produce a self-sustaining state film industry.
  • Content restrictions raise concerns about censorship.

Film tax credits are also known to invite tax fraud. For example, Dennis Brouse was convicted in March for claiming improper tax credits exceeding $9 million from the Iowa Film Program.

These points must not have carried significant weight to New York lawmakers, as the new legislation received strong support. Only time will tell whether the initiative generates a net positive to the State.

Does the Jock Tax Impact Athletes’ Decisions?

July 15th, 2012 3 comments

Free agency periods in professional sports often elicit discussions about the jock tax. The jock tax is imposed by state and local governments on income earned by athletes when they perform in cities with such taxes.

States and cities have different tax rates. The more games played in a higher tax jurisdiction should result in more total tax paid. I covered the topic after Albert Pujols decided to sign with the Los Angeles Angels of Anaheim this past offseason.

So, do state and local tax rates impact the decisions of free agents?

California State Assemblyman Martin Garrick believes so. In a piece for the San Diego Union-Tribune, he claims the State’s jock tax creates a disincentive for professional athletes who consider whether to join a California team. He then states that the state legislature should take action to reduce or eliminate the disincentive.

I believe his analysis comes up short. There are a few key points Mr. Garrick does not mention.

via Wikipedia

First, he uses the example of baseball slugger Carlos Lee vetoing a trade to the Los Angeles Dodgers. He simply assumes a higher tax burden was the reason of the veto.

How come Albert Pujols decided to sign with the Angels when he could have re-signed with the Cardinals? Pujols is paying more taxes as a result of the decision.

Second, Garrick does not describe the difference in the effective tax rates by playing for different teams. Merely saying that one state’s income tax rate exceeds another’s is an oversimplification.

Sure, Garrick is correct to say that in general professional athletes on Californian teams pay more taxes than athletes on teams in most other states. Asserting that the increased tax burden is the primary reason players turn down the opportunity without offering a quantiative analysis, however, seems unconvincing.

Furthermore, it is at least arguable that moving to a team in a larger market provides athletes more oportunities for endorsement deals, possibly offsetting to an extent the increased tax burden.

Taxes may play a role in athletes’ decisions. It just appears some politicians may be exaggerating the significance of that role.

Hog versus Rooster

July 8th, 2012 No comments

Last February Cook County Commissioner William Beavers was indicted for three separate counts of filing false income tax returns. Beavers has adamantly denied any wrongdoing.

Last week, Beavers held a press conference to further emphasize his innocence as a December trial date looms, the Chicago Sun-Times reports.

Referencing former U.S. Attorney Patrick Fitzgerald, who pushed to bring the charges, Beavers said, “He’s a rooster without nuts, a capon. OK? That’s what he is, a capon.”

I’ll let you look up what a capon is.

Beavers shed some light regarding his defense. In the indictment, Beavers allegedly used more than $68,000 from a campaign account in 2006 to boost his city pensions without paying income tax on the funds. At the press conference, Beavers shared bank statements reflecting that the campaign funds received was in fact a loan he repaid in 2009.

Beavers is a fighter. I wouldn’t be surprised if he takes this matter to trial just for the satisfaction of victory.

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