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Sean Whaley

Free meals: Tax case stirs worry

3 April 2008

and Howard Stutz

CARSON CITY, Nevada -- Gov. Jim Gibbons' administration is still gathering information on the financial effect of a recent Nevada Supreme Court ruling that says free meals given away by Nevada casinos are not subject to tax, a governor's spokesman said Wednesday.

"There are a lot of issues that need to be resolved before we know the impact fiscally," Press Secretary Ben Kieckhefer said.

"Obviously it's something we're concerned about," he said. "The governor is working with the attorney general and Department of Taxation to review our legal options at this point."

Kieckhefer said the ruling might have a financial effect in the current budget, but the size of the blow has not yet been determined.

Senate Majority Leader Bill Raggio, R-Reno, said he too is awaiting information on the effect of the ruling, issued March 27.

"I asked the budget office and our fiscal people to come up with some projections," he said.

In the case, Sparks Nugget vs. the Nevada Department of Taxation, the court ruled 6-1 that the casino did not have to pay tax on meals given to guests and workers for free.

Concern exists that the ruling, which applies to all casinos, could mean the refund of millions of tax dollars at a time when the state is facing a $900 million revenue shortfall.

How much individual resorts paid in taxes for free meals was unclear, industry representatives said.

"It's going to take some time to go through the records and file the applications," said MGM Mirage spokesman Alan Feldman, whose company operates 10 Strip resorts.

When publicly traded gaming companies report expenses for free meals, the amount is listed under promotional expenses and is lumped with other gratuities, such a free hotel rooms, air fare and show tickets, offered to select casino customers.

MGM Mirage listed promotional expenses of $706 million in 2007, Wynn Resorts had $200.9 million in promotional expenses for the year, and Las Vegas Sands Corp. recorded $153.8 million.

All three companies operate casinos in Macau, which also factored into the promotional expenses.

Also, Las Vegas Sands Corp. does not own any of the restaurants inside its Venetian and Palazzo resorts. The restaurants are operated by third parties.

"It's a little different for us," said Las Vegas Sands spokesman Ron Reese. "If we send a customer to Delmonico's (at The Venetian), then we get billed back for the meal."

Still, Reese said the company is following the Supreme Court's decision closely to see what effect it will have on the company.

Wall Street gaming analyst Joel Simkins, who follows the casino industry for Macquarie Securities, said any tax dollars that are returned to casinos might not be that much. He said Atlantic City casinos recently went through a similar issue over promotional credits.

"It was sizable, but not earth-shattering," Simkins said. "I don't know if this is going to be enough to move the needle on a particular company."

But casinos executives realize falling tax revenues are a problem for the state now.

In comments expressed through Feldman, MGM Mirage Chairman and CEO Terry Lanni said the timing is not right for the gaming industry to be seeking a check from the state.

"He's in agreement that we should be sitting down and discussing how to phase this in so there is minimal impact on the state," Feldman said.

In the Supreme Court case, the Sparks Nugget contended that the complimentary meals it provides to its patrons and workers are exempted under the sales and use tax in the state constitution, which provides the exemption for most "food for human consumption."

The casino argued the tax did not apply because the uncooked food used to prepare the free meals qualified as food for human consumption at the time of its initial purchase, and no taxable event occurred thereafter.

The court majority agreed, saying no taxable event occurred between the tax-free purchase of the food and when it gave the meals away.

Raggio said there might be another way to resolve the issue. He cited a footnote in the opinion which said there might be an opportunity to collect sales tax when there has been a transfer of personal property "for a consideration."

The court said that this type of transfer was not demonstrated in the case.

"Still, we do not foreclose the possibility that complimentary meals such as the ones at issue in this case may be subject to sales tax where consideration is properly demonstrated," the court said.

How the footnote might be applied to the question of taxing complimentary meals is still unclear, Raggio said.

"But it is worth talking with the gaming industry about this and its impact when we have a budget problem," he said.

Review-Journal Capital Bureau Chief Ed Vogel contributed to this report.