CHARLES TOWN – The attorney for the Charles Town Horsemen’s Benevolent and Protective Association told the Jefferson County Commission last week that it should be concerned about the impact of Penn National Gaming’s proposed split into two corporations.
PNGI announced plans last year to split into a casino and racing operation company and a real estate investment trust – also referred to as a REIT, a specialized real estate holding company that will own all of their physical locations.
[cleeng_content id="517100916" description="Read it now!" price="0.49" t="article"]Dave Hammer told the commissioners that, depending on how state law is interpreted by racing and video lottery regulatory bodies, the split could result in a drastic reduction in tax revenues from the casino.
“The operation company as a licensee, will be subject to the jurisdiction of the Racing Commission and the Lottery Commission,” Hammer told the commission. “The property company is not a licensee. It will not be subject to the jurisdiction of those regulatory bodies. It is a private company.”
Hammer told the commission the concern is how the legal definition of “net terminal revenue” – the amount of money wagered in VLT machines minus the amount payed out to winners, which forms the tax base for lottery taxes – will be interpreted.
“When this section was passed by the Legislature, there was only one owner of the racetracks in the state,” he said. “Each racetrack was owned by one owner. It was not divided into a REIT and into a licensee.”
The section of the definition that is in question, states that “no deduction for any or all costs or expenses of a licensee related to the operation of video lottery games shall be deducted from gross terminal income,” he said.
When both the physical property and the racing license are held by the same company, he argued, the definition is unproblematic. But if and when the split occurs, tax attorneys may be able to open a loophole in the law that would allow the company that operates the casino to deduct a portion of the rent it pays to the REIT from its state taxes.
He speculates that a smart tax attorney will argue: “‘License company, you pay rent to property company. But only a portion of that rent is attributable to the square footage of the facility that holds VLT machines. Most of the square footage of the facility – more than 50 percent – is racetrack, grandstand, farm area.
“‘Therefore … the licensee is entitled to deduct from its net income the amounts payable to the property company to lease that property for those portions that are not related to video lottery games.’”
“If I’m right, and that’s what happens, [the commission], the state, the municipalities will see a dramatic reduction in the base that you receive money from,” Hammer argued.
Hammer said PNGI would not be committing wrongdoing in such a case, but the impact of such a move should be understood, he said.
“That’s not illegal. That is simply an effect of federal law,” Hammer said. “The question is, if I’m right, what effect will that have on the county and the state? I think the effect would be huge.”
Hammer said that the rent charged by the REIT to the operator will necessarily be very high since, as he noted, $109 billion has been wagered at VLTs in the casino since it began operation.
Hammer added that shareholders who own stock in both the REIT and the operations company will have an incentive to maximize that rent, since dividend payments from the REIT enjoy federal tax benefits over dividends paid by the operation company.
“You can well imagine that, if you own both companies – both the operating company and the landholding company – you may set the rent rather high, if you recognize that you’re going to be able to deduct expenses from the operating company, and then that money is just paid to the real estate company which then distributes that money as dividends to shareholders,” he said. “It would be a big win-win for them, and a big lose-lose for the state, Jefferson County and the HBPA.”
Hammer said the change could also harm the HBPA’s constituency by reducing the size of racing purses.
“From the HBPA’s perspective,” he said, “they also receive a very tiny percentage of the revenue that comes from VLTs, and, if that money is cut in the form of purses, then that makes homegrown racing here in Jefferson County much more difficult.”
“It would be a disincentive for these businesses to continue in operation, and you might see a lot of them close up,” he added. “I will seek a legislative remedy if the answer is that the rents payed by the operating company to the property company are deductible.”
Hammer encouraged the commission to seek clarification of state law from Attorney General Patrick Morrisey, Gov. Earl Ray Tomblin, cabinet secretary Bob Kiss and the chairs of the House and Senate Finance Committees.
Hammer said he had already contacted Morrisey. “His grasp and understanding of the issue, I thought, was excellent. But what he is able to do about it, I don’t know.”
“No one in the state, to my knowledge, is on top of this issue,” he said.
Commissioner Walt Pellish said he did not believe it would be appropriate for the commission to pursue such questions yet.
“At this point in time, I don’t believe that’s a question the County Commission should be asking. In the future, depending upon what answers you and others receive from other sources, we may need to ask questions and get involved,” he said, adding that he hoped the HBPA would continue to seek answers.
Widmyer disagreed, saying that the commission should keep an eye on a development that could have “disastrous consequences.”
The commission agreed to take up the issue, and consider a resolution seeking clarification, at this week’s meeting.[/cleeng_content]