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Pa. Supreme Court says local slots tax violates constitution

The Pennsylvania Supreme Court ruled Wednesday that the municipal portion of tax on slot machines outside Philadelphia violates the state constitution because it effectively imposes different rates on casinos depending on their size.

At stake: nearly $50 million.

The court gave the General Assembly four months to fix the 2004 law that legalized casinos.

Opening up that law for revisions at a time when the state is desperate for revenue could lead to dramatic changes in Pennsylvania's gambling landscape, such as the introduction of video-gaming terminals in bars and online gambling, both of which have already been under consideration by legislators.

"It's fraught with peril," said Thomas Leonard, chairman of Obermayer Rebmann Maxwell & Hippel LLP, who argued the case in March for Mount Airy Casino Resort in the Poconos. "All the game-playing starts when you open anything up, and that's what will happen here."

In Harrisburg, officials were digesting the ruling, which came out late Wednesday.

"We are taking the time to review the details of the decision, the consequences of which could be far reaching," said Jennifer Kocher, spokeswoman for Senate Majority Leader Jake Corman (R., Centre). "We are working to determine what those impacts will be. We will be considering our next steps, if any, in the coming weeks."

Gov. Wolf and House Majority Leader Dave Reed (R., Indiana) also  are reviewing the decision, their spokesmen said.

Mount Airy made three arguments that the state's tax on slot-machine revenue earmarked for the casino's host municipality violated a clause in the Pennsylvania Constitution that requires all taxes to be applied uniformly on the same class, in this case casinos.

First, most casinos outside Philadelphia have to pay a minimum $10 million tax to their host municipalities. SugarHouse, still the only casino in Philadelphia, does not. That difference cost nine Pennsylvania casinos a total of $48.5 million in the year ended June 30, according to the Pennsylvania Gaming Control Board's annual report released Wednesday. That is the amount they had to pay, in aggregate, to meet the $10 million minimum.

Second, the gaming law divided casinos outside of Philadelphia into two classes — those with more than $500 million in annual slots revenue and those with less — and mandated different tax structures for them. The larger casino would pay 2 percent of its slots revenue in a local municipal tax. The $10 million minimum would amount to a higher effective rate for the smaller casino.

This is the argument the Supreme Court based its decision on, though no Pennsylvania casino has ever topped $500 million in annual slots revenue.

The third argument was that the $10 million minimum causes different effective tax rates for casinos. In fiscal 2016, local rates, including amounts paid to both county and municipal governments, ranged from a high of 10 percent for Presque Isle Downs, near Erie, to a low of 3.7 percent for SugarHouse, which is not required to meet the $10 million minimum. Mount Airy had the second-highest rate, at 8.8 percent.

SugarHouse officials could not be reached for comment.

The state's two small, so-called resort casinos, Valley Forge Casino Resort, in Upper Merion Township, and Lady Luck Casino, in Nemacolin, also are exempt from the $10 million minimum.

During oral arguments, the Pennsylvania Department of Revenue suggested that the state could apply the $10 million minimum to all of the casinos, according to the opinion.

"If everyone had to pay $10 million, the rates would be different," Leonard said. "That's not good enough. That's not uniform."

Leonard predicted that the General Assembly will be in for a challenge.

"They are going to have a hard time getting this through because they are used to give-and-take and horse trading," he said. "It's not a simple fix."