Laws, Compacts, Tax Rates will Need to Adapt to New Realities

Laws, Compacts, Tax Rates will Need to Adapt to New Realities

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Can a US Supreme Court decision on the collection of sales taxes offer serious implications for the gaming industry, despite the salient fact that the decision touched neither gaming nor casinos? The short answer is: You bet it can (pun intended).

A recent 5-4 vote by the Supreme Court overturned a 50-year-old precedent that had prevented states from collecting sales taxes from retailers that did not have a physical presence in those states. That precedent, first established in 1967, had been subsequently affirmed in Quill Corporation v. North Dakota, a ruling made in 1992 at the dawn of the Internet age. The recent 2018 decision overturns Quill, giving states the right to collect sales taxes on online purchases. Writing for the majority, Justice Anthony Kennedy noted that the previous standard was both “artificial” and “anachronistic.”

In other words, the Court’s decision was yet another critical recognition of a new reality: The Internet supersedes all borders, and creates a new paradigm for consumer purchases.

As Kennedy noted, “"Each year, the physical presence rule becomes further removed from economic reality.”

That simple, profound statement applies directly to the gaming industry in the United States: The economic reality is changing, and rules that were established in recognition of the “physical presence” of casinos are – in Justice Kennedy’s words – becoming further removed from that economic reality.

Someday, perhaps in the distant future, this could offer implications for intrastate vs. interstate gaming, and could prompt a re-examination of the Wire Act.

More immediately, however, the characterisation of pre-Internet rules as “anachronistic” offers profound lessons for legislators, regulators and gaming operators – both the brick-and-mortar and the online variety.

Consider two clear anachronisms that legislators in many states have effectively managed to ignore, to date:

  • State tax rates on commercial casinos were largely established for political purposes, rather than economic rationales. Political rationales – and even economic rationales that were focused on the pre-Internet era – are anachronistic. Quite simply, they are often too steep, leaving operators little wiggle room to adapt their business models to attract a broader (not to mention younger) demographic.
  • Compacts negotiated between state and tribal governments to allow states to share in the revenue of Class III gaming were largely based on the principle of regional exclusivity.  The Indian Gaming Regulatory Act (Pub.L. 100–497, 25 U.S.C. § 2701 et seq.) requires states to negotiate in good faith, and to offer tribes benefits that are concomitant with the proposed revenue share. Exclusivity has largely been the go-to benefit that states offer, but what does exclusivity mean in an online era?

The ability to ignore either issue is dissipating quickly. In one form or another, these issues will bubble up into active debates, legislative changes or, quite possibly, court decisions.

Compact negotiations, particularly those that live on in perpetuity, were often built on what happened to be the conventional wisdom at the time. Compacts, such as Connecticut’s, that allow states to share in slot revenue, but do not allow for any sharing of table-game revenue, were presumably established on the notion that slots represented the future, and tables represented the past.

That was indeed the conventional wisdom in the 1990s, when some presumably smart people assumed that emerging generations, who were comfortable with new technologies, would gravitate toward technology-based gaming (slots) while eschewing traditional table games. Indeed, once upon a time, conventional wisdom held that craps would die in popularity as the World War II generation passed on.

Today, craps is the most popular game with younger generations, and table games are more representative of the future, while slot floors are more likely to cater to an aging population.

In one sense, the holders of that disproven conventional wisdom were not entirely wrong: Emerging generations, which are indeed comfortable with technology, are embracing new technologies, just not slot machines. They are embracing mobile devices, and are more likely to gravitate toward gaming that meets their needs.

Brick-and-mortar casinos are not dying. Newer casinos – particularly those in markets with reasonable tax rates – are adapting their offering to the needs of emerging generations. As such operators recognise two immutable laws of human nature that will never be anachronisms:

  • Humans are hard-wired to enjoy games of chance, as well as games of skill that offer elements of chance.
  • Humans are also hard-wired to enjoy social settings, just not necessarily the same social settings that appealed to their forebears.

The anachronistic failings that Justice Kennedy alluded to do not mean that consumers will stop purchasing goods and services, but rather that the laws that govern such purchases must adept a new reality. Therein lies the lesson for the gaming industry, for tribal councils and for elected officials throughout the nation.

Legislation, tax rates and compacts that rest on the conventional wisdom of a bygone era will change. There is simply no other option. The only questions are how and when.

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