Charitable gambling facing long odds

Tax changes force local pull-tab operators to cut back on giving

A Running Aces patron uses a handheld electronic pull-tab machine. The systems went into place at the Columbus horse track on Jan. 7. (Photo submitted)

A Running Aces patron uses a handheld electronic pull-tab machine. The systems went into place at the Columbus horse track on Jan. 7. (Photo submitted)

 

Clint Riese
News Editor

What if the American Legion and VFW suddenly lost much of their financial ability to help the community? What if the Forest Lake Area Athletic Association (FLAAA) had to pick and choose which groups of youth to continue funding?

Wonder no more.

Sports teams and veterans organizations are just some of the groups feeling the squeeze due to changes implemented last year in the state’s lawful gambling tax structure.

Greatly increased tax rates for larger gaming operators has FLAAA, American Legion Post 225 and VFW Post 4210 scrambling to make ends meet.

Changing the System

The 2012 Legislature’s reworking of the tax system came two years removed from the charitable gambling industry’s stretch of at least eight years of flat or falling gross receipts precipitated in part by a smoking ban and competition from casinos.

Industry stakeholders claimed a victory when the state last year approved electronic versions of pull-tabs and bingo. Part of the revenue was tabbed to fund the state’s share of the Minnesota Vikings stadium that was approved by the same legislature; the rest is designed to help offset taxes on other lawful gambling, such as paper pull-tabs.

Those funds have been slow to trickle in, as only just over 100 sites statewide are currently offering electronic pull-tabs.

Then, there is the new tax structure.

Bob Carter, gambling manager for the Forest Lake Lions Club, feels lawmakers viewed the new rates as a way to compensate for the kickback of the electronic gambling funds.

“It kind of sounded like, ‘Well if you really want us to do it, we’re going to need some concessions,’” he said.

 

Related news: Electronic pull-tabs off to slow start, legislative committee learns

What has happened so far, though, is that the concession of the operators has outweighed their gift.

“What happened is almost 50 percent of those running tabs saw an increase [in tax rates]. It was supposed to be a decrease,” said FLAAA gambling manager Larry Porter.

The previous system for pull-tabs consisted of a tax on gross receipts that graduated from 0 to 1.7, 3.4 and 5.1 percent along with a base fee, plus a 1.7-percent tax up-front on potential gross receipts.

Gone now is the up-front tax, but the new tiered rates go from 9 to 18, 27 and 36 percent, plus base fees. As an additional burden, the new system taxes operators’ net receipts, not the gross amount.

Varied Impact

Due to this tiered structure, the highest-netting operators are being hit hard while smaller ones benefit.

The Forest Lake Lions Club is the smallest-netting local operator, and Carter expects the tax change to have little impact on his club.

The Lions, who oversee charitable gaming at the Old Log Cabin and the Forest Laker, paid taxes equivalent to 11.3 percent of net receipts in the fiscal year ending June 30, 2012, according to the Gambling Control Board’s required annual financial summary. The club will again fall into the lowest bracket of revenues, so it may see a decrease in taxes.

That is good news for local students in need of eyeglasses and other beneficiaries of the club’s gambling proceeds.

“We don’t do fantastic. but it gives us that extra money so that we’re occasionally able to help out the city and the school district,” Carter said.

The situation at Forest Lake’s American Legion is much different, as an optimistic outlook would still see the local post disbursing only half as much for charitable purposes as it did in 2011-12. In other terms, Post 225 would have nearly $10,000 less for community causes.

The Legion paid 8.4 percent taxes in fiscal year (FY) 2012. For 2013, it is on the fringe between the 27- and 36-percent brackets. That uncertainty raises another point, said Post 225 gambling manager Jennifer Rich: the progressive nature of the structure makes it hard to budget. Operators will learn in which bracket they fall around the time when property taxes are due, necessitating caution that may further limit charitable efforts.

“We’re going to lose our ability…I’m seeing it already,” said Rich, who oversees requests to the Legion for donations.

For example, she continued, a contribution of $50 was recently approved in order to send a child of a deployed service member to a camp.

“I guarantee you that before this whole tax change we would’ve given them the full $300,” Rich said.

Similar cutbacks will be coming for the likes of 4-H and FFA clubs, she noted.

The same scenario is playing out for FLAAA. Porter said the organization could see a drop of approximately $15,000 in its charitable capability.

With pull-tabs being sold at Friar Tuck’s, Vannelli’s on the Lake, The Cornerstone Pub and Prime and a Forest Lake liquor store, Porter oversees what is easily the highest-grossing license in the area. FLAAA brought in over $2,000,000 in gross receipts in FY2012, netting just over $400,000. As part of the highest tax bracket, FLAAA paid 27 percent in taxes, so its rate will not spike as much as the Legion’s. Given the sales volume, though, the numbers in play will be higher: The association totaled over $60,000 in charitable giving in FY2012.

FLAAA puts its funds toward youth sports teams – both in the association and at the high school – as well as for maintenance of the city’s fields at Fenway Athletic Park.

“That’s a lot of money to the sports groups,” he said.

Porter’s wife, Terri, handles the gambling functions as the bookkeeper for the Forest Lake VFW. She expects Post 4210 to see a significant, but not crippling, drop-off in funds for charity, perhaps approaching 20 percent.

The organization gave out nearly $19,000 in FY2012 gambling proceeds toward causes such as helping transport veterans to the VA hospital or caring for the families of veterans in need.

Though legislators have been careful not to link the changes in traditional charitable gambling to the Vikings stadium, Terri Porter figures it played a factor in the tax structure.

“It was probably worse than I expected,” she said of the tax impact. “You just kind of wonder what they’re thinking when they do that – definitely not of the charitable side of it.”

A steep decline has been followed by a small recovery in toal receipts from the state’s five charitable games.(Graphic courtesy of Minnesota Gambling Control Board)

A steep decline has been followed by a small recovery in toal receipts from the state’s five charitable games.
(Graphic courtesy of Minnesota Gambling Control Board)

Cutting the Pie

Taxes are not the only item pecking away at charitable gambling dollars, which come from five games – pull-tabs, bingo, raffles, paddlewheels and tipboards.

Pull-tabs make up 91 percent of gross sales, or $969,131,000 in FY2012. The vast majority of pull-tab sales – about 83 percent – is paid back out in winnings.

The net receipts, comprised of the remaining 17-odd percent, are split in many ways. Statewide, over half is put toward “allowable expenses,” or operating costs, such as products, rent to bar owners and insurance.

The rest are deemed “lawful purpose expenditures” (LPE). Once taxes and fees are subtracted from the LPE amount, the rest is available for charitable donations. Top recipients in dollars include veterans organizations, youth programs, fire departments, Lions Clubs and fraternal clubs.

Organizations are required to spend at least 30 percent of net profits on LPE, including taxes. The Legion qualifies for a third LPE category: real estate taxes and utilities paid by veterans organizations that own their own building.

Post 225 used over $63,000 for that purpose in FY2012. Keeping the building open is in itself a community service, noted Rich. For instance, Post 225 over the weekend let the high school hockey boys use the hall free of charge for a fundraiser.

Electronic Era

As of this month, there is a new player on the local charitable gambling scene. Running Aces Harness Park on Jan. 7 unveiled both paper and electronic pull-tabs. The new offering is being overseen by the Lakes Area Youth Service Bureau.

It marked a crucial step in the continued development of Running Aces, said General Manager Robert Farinella.

“We are continually looking for ways to stay relevant and offer as many different forms of entertainment that we can,” he said. “If we can do this and support our community, it is a win-win for all of us.”

For LAYSB, which provides healthy options for at-risk youth, the partnership opens a much-needed source of additional revenue.

“Alternative forms of funding are necessary in today’s economy,” said Executive Director Jeanne Walz. “The needs for today’s youth are growing and additional resources are needed to help their future.”

Electronic bingo will come on line at Running Aces in early February.

It appears the Columbus horse track will not be the only electronic gambling spot in the area for long. The VFW hopes to have machines up and running by early next month, Terri Porter said. And at least one of the Lions Club’s gambling sites may explore the concept within six months, according to Carter.

For the other operators, the unknowns still outweigh any potential benefits. Not much remains of paper pull-tab receipts after paying federal taxes, state taxes, the Gambling Control Board’s 1-percent fee, suppliers, bar owners and the like. But the electronic versions will return even less to operators as payouts are mandated at 85 percent.

“My personal opinion is that pull-tabs are never going to be a big money-maker,” Larry Porter said, noting that he holds out more hope for electronic bingo, which was also legalized last year.

At the Legion, Rich has not closed the door on electronic gambling, but has enough on her plate dealing with the paper version.

“We complained about the good old days when they were here,” she said. “Now we wish they were back.”

Larry Porter hopes the 2013 Legislature will revisit the tax structure.

“This is supposed to be money for veterans, kids and communities, and that kind of a tax is crazy,” he said.

  • Phil Fishman

    So, we can’t necessarily tax ourselves into prosperity? Anyone else starting to see the effects of our current policy makers? Not only can’t we bring in the funds to pay for the public stadium which was going to be paid for by electronic gambling, it’s not resulted in the contribution being reduced to a child who is going to the camp while his parent is deployed to serve our country. Real effects to real humans… and it is just getting started.

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