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Best of Liz Benston

Gaming Guru

Liz Benston

Lawsuits Likely Over Nevada Entertainment Tax

24 November 2003

LAS VEGAS -- Even after getting the nod from the state's top tax attorney, the final draft of regulations governing a new tax on live entertainment is likely to contain loopholes that will result in disputes and even lawsuits over whether certain venues are taxable, regulators say.

After several hours of testimony Friday, the Nevada Tax Commission drafted a regulation that included many casino-friendly exemptions from a new tax on live entertainment, including an exemption for nightclubs and other venues that use disc jockeys.

Excluding the nightclubs from the tax is expected to yield an annual windfall of at least $4 million to casinos that were taxed on such entertainment in previous years, gaming regulators estimate.

Whether casino nightclubs -- which have become large and profitable components of major casinos in recent years -- would be subject to the tax had become a sticking point in the debate over how to interpret a vague law to tax live entertainment venues at 10 percent.

The Gaming Control Board -- charged with providing input to the Tax Commission, which has the final say on interpreting what constitutes "live entertainment" under the law -- had supported taxing venues using disc jockeys based on the idea that casino nightclubs already pay entertainment taxes. Starting next year, the live entertainment tax will replace the casino entertainment tax, capturing non-gaming venues such as adult clubs and larger events that weren't previously taxed.

But draft regulations supported by the Nevada Gaming Commission and crafted by its advisory agency, the Gaming Control Board, conflicted with a version proposed by the state

Department of Taxation, which advises the Tax Commission.

Under the draft rules, expected to be adopted by the Tax Commission Tuesday, venues with disc jockeys who play recorded music aren't subject to the tax if they limit their interaction with customers to "introducing or generally describing the recorded music" and "directing or explaining participatory activities between patrons."

Gaming Control Board member Scott Scherer warned that venues are likely to test the boundaries of the tax law.

"I think it'll get tested several times," he said.

Another area of the regulation that will likely be tested are shopping malls, which are common areas exempt from the tax, officials said.

A property could try to escape the tax by offering live entertainment within a common area and have a fenced-off nightclub near the band, for example, Scherer said.

"I think if (taxpayers) create sham transactions ... we can address these things at the enforcement or audit level," Deputy Attorney General Gregory Zunino said. "I think we are going to see all kinds of crazy scenarios we never anticipated," said Zunino, the Department of Taxation's legal advisor.

Several exemptions to the tax remained intact from earlier drafts, such as ambient music that isn't a primary attraction and strolling musicians. The firing of several pianists months ago prompted regulators to rework language relating to background music. Karaoke singing by customers in nightclubs, restaurants and other locations also was added to the list.

Another casino-friendly exemption applies to performances in larger casinos "which enhance the theme of the establishment or attract patrons to the areas of the performances so long as any seating provided in the immediate area of the performers is limited to seating at slot machines or gaming tables."

But another exemption was tacked to the list for venues with animal acts used "primarily for the purpose of education and scientific research."

MGM MIRAGE, which offers a dolphin habitat as part of its Secret Garden attraction at The Mirage hotel-casino, pushed for the exemption.

The dolphin exhibit involves scientific research that is exchanged with zoos and academic institutions and offers free educational programs and tours for schoolchildren across Southern Nevada, MGM MIRAGE officials said.

Trainers interact with animals to maintain their health and to conduct research rather than to stage a show for customers, unlike other performances involving animals on the Strip, they said.

Scherer questioned the exemption, saying the exhibit is a for-profit enterprise and a major tourist attraction for the resort. Admission to the Secret Garden is $12 per person and free for children through age 10.

Not everyone left the meeting satisfied with the regulations.

The Silver Saddle Saloon in Las Vegas, which has about 280 slot machines, expects to pay the tax on a live band that charges admission two nights a week.

While many casinos in town will pass on the tax to tourists, the Silver Saddle is primarily a neighborhood nightclub that caters to the Mexican community, owner Charlie Howell said.

"It just seemed like it hit us unfairly like it did a lot of other places," Howell said.

The final draft also didn't sit well with the owners of The Beach, a nightclub across from the Las Vegas Convention Center that wasn't subject to the previous casino entertainment tax.

The regulations are too restrictive for disc jockeys, Ted Quirk, one of the owners of the Beach, told both Tax Commission and Gaming Control Board members Friday.

"To hamstring a DJ to announcing the song is unrealistic," Quirk said.