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10% Withholding Tax On Winnings Would Increase Burden On Casino Operations

Slot machines gross revenue increases 52% in six years


June 24, 2004
Copyright © 2004 CARIBBEAN BUSINESS. All Rights Reserved.

If the Legislature passes House Bill 4838, Puerto Rico will be the only U.S. jurisdiction requiring casino operators to withhold 10% of any jackpot exceeding $1,500, a move that casino operators and players oppose.

Hector Collazo, president of Caribbean Gaming Distributors, told CARIBBEAN BUSINESS that if the proposal passes, the government would be delegating its tax collection duties to a third party, i.e. casino employees, an action that would hurt casino operations and the hospitality industry.

"Every time someone wins, the cashier’s cage pays the player and reports the prize money to the Treasury Department. That voucher provides the government with all the necessary information to collect taxes; casinos shouldn’t be withholding money from players," said Collazo, who has 17 years’ experience in the casino industry.

The intention of this bill is to obtain $30 million to balance the government’s operational budget. The Treasury Committee in the House of Representatives is evaluating it and the Legislature has until tomorrow to pass the bill.

Collazo has compared this move with a 6.6% excise tax the Treasury Department wanted freight forwarders to charge for customers’ packages two years ago. A court order ruled against the measure.

Collazo, a former croupier whose company provides gaming supplies to nearly 50 customers in Puerto Rico, the Caribbean, and Central and South America, said local casinos are already more regulated than casinos elsewhere.

"Government oversight of casino operations helps players trust the system, but elsewhere, the government doesn’t regulate casinos as much. Here, the Puerto Rico Tourism Co., the Financial Institutions Commissioner, the Treasury Department, and the Legislature all have a hand in the matter," he added.

In Collazo’s opinion, the measure would discourage locals from playing and would raise already increasing operational costs.

Collazo explained hotels already have many resources invested in casino operations, including renovations, personnel, and amenities. "Each slot machine costs up to $15,000 and a game table could cost $2,500. You need enough money to create a comfortable ambiance for players, among many other things," he said.

According to Collazo, 60% of casinos’ slot-machine earnings go to taxes, leaving only 40% to cover expenses.

Casinos mean entertainment

Expert Bruce R. Smith, president of WestVille Enterprises Inc., said the casino withholding tax would hurt the dynamics of gaming.

"On one level, taxation on winnings makes sense, yet it becomes a fuzzy issue when it involves small prizes," said Smith. He explained that federal law requires banks and casinos to report any jackpot of $10,000 or more, but players also report gambling losses to the Internal Revenue Service so they pay taxes only on actual earnings.

"If a player spends $100 at a slot machine and wins the same amount, he didn’t really win anything," said Smith. "If the inspector pays the winner $90 and withholds the remaining $10 for taxes, the player will be upset. It changes the experience of gaming. It’s very awkward," explained Smith.

Smith also questioned the government’s motives since the same law doesn’t apply to lotteries and horse races.

Slot-machine revenue on the rise

In fiscal year 2003, slot machines registered $2.5 billion in plays. Of the total sum played at 5,500 local slot machines, players won $1.9 billion. After deductions and payments went to the casino, the government earned $120 million.

The figure represents a 52% increase over slot-machine gross revenue in 1998, when slot machines brought in $1.3 billion and the government received $77 million in net revenue.

Tourism Co. Gaming Division Director Guillermo Cabret justified the government’s decision to implement the withholding tax by claiming it is lower than the current—and unenforced—17% tax on winnings for Puerto Rico residents. "The proposal eliminates higher rates and sets a standard for all," he said. The island’s Internal Revenue Code imposes 17% for Puerto Rico residents, 21% for nonresident U.S. citizens, and 29% for foreigners.

"The law has always required casino winnings to be taxed. There was a perception that casino winnings weren’t taxable, but they are," said Cabret.

According to Cabret, the U.S. Internal Revenue Service taxes prizes worth $1,200 and more.

He also acknowledged the measure might reduce government revenue from slot machines, which register an average annual increase of 12%. "It would certainly affect our revenue and our efforts to increase it. In addition, players have told our [Tourism Co.] officials they are opposed to the proposal," said Cabret.

Slot Machines Gross Revenue

Fiscal Years 1998-2003

1998: $1.3 billion

1999: $1.5 billion

2000: $1.7 billion

2001: $2.0 billion

2002: $2.1 billion

2003: $2.6 billion

Source: Puerto Rico Tourism Co.

This Caribbean Business article appears courtesy of Casiano Communications.
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