Special Section: Tax Report - The Atlantic City Casino Industry: Tax Issues and Challenges

by Lou Perry, The Gelber Organization (As Appeared in April 2007 Commerce Magazine)...

The casinos in Atlantic City, New Jersey, have dealt with numerous tax issues and other challenges since gambling began there in 1978. Originally, casinos were faced with unique fees and taxes over and above those required by other industries. Taxes and fees such as the eight percent Gross Revenue tax, annual slot machine license fees of $500 per machine, and the Atlantic City Luxury Tax — which adds an additional nine percent for hotel room charges and entertainment events, and an additional three percent for alcohohic beverages.

The industry is also subject to various regulatory charges such as the license fee, which is a minimum charge of $200,000 for an inital licensem and $100,000 minimum for renewals. There is also a levy imposed by the Casino Reinvestment Redevelopment Authority (CRDA) which includes 1.25 percent of gross revenues for investment in approved projects by the authority or an investment alternative tax of 2.5 percent of gross revenues. Last year, the Gross Revenue tax yielded $417.5 million, and reinvestment obligations totaled $65.2 million.

The New Jersey Division of Taxation also requires casino-licensed companies to file consolidated Corporation Business Tax (CBT) returns. This requires companies that are not organized as corporations to pay the higher corporate tax rate even though they do not file as such for federal reporting purposes. In 2002 the state imposed a 7.5 percent tax on the adjusted net income of casinos.

Over the years, there has been a proliferation of various taxes impacting the industry. In 2003, Governor McGreevey proposed an increase in the gross revenue tax from eight percent to ten percent, and called for slot-like gambling machines at the state racetracks. Although these proposals were eventually tabled, the state ultimately imposed a 4.25 percent tax on the value of rooms, food, beverages and entertainment given away for free or at reduced prices as a "complimentary" inducement. New Jersey also imposed a $3.00 occupancy fee on each hotel room and increased the hotel parking charge from $2.00 to $3.00.

In addition to raising the sales tax rate from six percent to seven percent last year, Governor Corzine expanded the tax base to include services that were previously exempt from sales tax. Many of those services such as limousine, landscaping, massage, security, floor installation, parking and delivery charges will have a financial impact on the casino industry in Atlantic City.

With consolidation and absentee ownership, there will be a greater inability to stay abreast of the many complex rules and regulations unique to casinos. Compliance with the many reporting requirements will become more difficult, leading to an increase in tax liabilities. Paying too much tax, not recovering overpayments or not taking advantage of the many exemptions will become commonplace without proper representation.

New Jersey has had casino gambling for 29 years, and the casino taxes have become a type of entertainment tax with significant revenue potential. The casino phenomenon has been proliferating across the country, and casino gaming has become one of the fastest growing businesses in the recreation and entertainment sector.

The recent addition of slot parlors in Pennsylvania has already begun to affect the Atlantic City market. Philadelphia Park opened in mid-December of last year and Harrah's Chester Casino and Racetrack opened on January 22. Both of these locations have targeted customers who would have otherwise gone to Atlantic City. In January the overall Atlantic City casino revenue declined 2.9 percent, with slot machines taking an even sharper hit at 7.2 percent.

Smoking restrictions recently imposed by the city require casinos to designate at least 75 percent of their gambling floors as smoke-free by April 15. The state is also considering a complete ban of smoking inside the casinos, after previously granting them the only exemption in the state after it banned smoking from all public buildings. The industry is now concerned about the cost to create walled-off smoking areas with ventilation systems, and is worried about losing a large portion of its smoking patrons.

As a result of the increased competition from Pennsylvania, the new smoking ban and the closing of the Sands casino in November, many gaming analysts predict that the annual revenues generated by the Atlantic City casinos will decline in 2007 for the first time in their history. The decline in revenues would have negative consequences for the industry, the customers, employees and the State of New Jersey, which relies on the various casino taxes.

Lou Perry is a tax consultant with The Gelber Organization (TGO), a consulting firm of CPAs, former senior state tax officals and other state and local tax professionals. TGO practices in all 50 states, providing profit enhancement and tax advisory services for its highly respected clients. For more information, visit www.gelberorg.com.