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Panel: County gambling machine tax is fair game

Tuesday, August 25, 2015
Chicago Daily Law Bulletin
by Lauraann Wood

Cook County can impose taxes on gambling machines again after the 1st District Appellate Court has ruled a 2-year-old ordinance is constitutional.

The 52-page opinion issued Friday reverses a Cook County Circuit Court ruling last August that held the tax violates the Illinois Constitution.

The Cook County Gambling Machine Tax Ordinance imposed registration and tax requirements on owners of gambling devices — such as slot machines at casinos — and video game terminals such as video poker machines at bars and restaurants.

The ordinance requires owners to pay the county $200 each year for every machine that accepts cash to play or simulate games such as poker or blackjack, then awards credits redeemable for cash.

It also requires operators of slot machines and other machines defined as “gambling devices” to pay $1,000 per machine per year.

Owners must pay the tax before the public can use the machines, and each machine must display a department-issued emblem that signifies payment. The county expects to generate $1.4 million from the tax in the current fiscal year.

A few weeks after the tax took effect in June 2013, Midwest Gaming and Entertainment LLC — which owns Rivers Casino in Des Plaines — filed a lawsuit against the county, its department of revenue and department Director Zahri Ali seeking to enjoin the county from applying and enforcing the ordinance.

The company, the only licensed casino operator in Cook County, argued the county had no authority to enforce the tax because the Illinois Constitution prohibits home-rule units such as Cook County from “imposing taxes on or measured by income or earnings, or upon occupations.”

While the phrase “upon occupations” wasn’t defined, the Illinois Supreme Court has held that an occupation tax operates to either regulate or control a given business or occupation or to impose a tax for the privilege of undertaking or operating a given occupation.

Midwest’s suit also alleged the ordinance did not receive the constitutionally required legislative authority to license for revenue, and that the tax violated the state constitution’s uniformity clause by imposing different tax amounts based on the type of gambling machine.

Both Midwest and the county filed motions for summary judgment.

The county argued the tax was valid because it didn’t violate the uniformity clause, wasn’t an improper attempt to raise revenue and was authorized under Section 5-1009 of the Counties Code.

The statute prohibits retailers’ occupation, service, use and various other taxes imposed on the use, purchase or sale of “tangible personal property” based on gross receipts of such sale or purchase prices. However, it allows “other taxes” that aren’t based on those factors.

The county cited this provision to argue the ordinance at issue was not a tax based on any gross receipts, income or earnings but rather an average of each type of machine’s daily revenue accrual.

Last August, Circuit Judge Robert Lopez Cepero granted summary judgment to Midwest, finding the county’s argument disregarded the constitution’s plain language.

He issued a permanent injunction on the ordinance, which prohibited the county from imposing and enforcing the tax.

Cepero held the constitution “clearly separates” occupations in its tax prohibitions so “whether a tax is imposed upon or measured by income or earnings has no bearing on whether it is an impermissible occupation tax.”

He found the county’s interpretation of the Counties Code would make the constitution’s phrasing “useless and meaningless.”

The section the county cited for its argument, Cepero held, allows for taxes other than retailers’ and service-occupation taxes, use taxes and sales taxes that aren’t based on selling and purchasing prices or gross receipts from using, selling or purchasing any tangible personal property.

Cepero also held the various registration requirements placed on a gambling machine fit the bill as a license for revenue, highlighting the fact that the ordinance taxes the owner but requires those who intend to display it to complete the registration requirements — which include being subject to penalties if a machine is displayed without proof of paid taxes.

And although the county argued the substantial distinction existed between gambling devices — typically found in casinos and averaging about $800 in revenue daily — and video gaming terminals — found in bars and restaurants and averaging about $200 daily — Cepero held it provided no support for its assertions and therefore failed to prove the difference.

On appeal, the opinion authored by Justice Robert E. Gordon’s reversed Cepero’s decision.

The panel did not address whether the tax at issue constituted an occupation tax because the county wasn’t taxing the machines based on any gross receipts associated with selling, purchasing or using any tangible personal property.

“Even if the tax is considered to be an occupation tax, we agree with the [c]ounty that it has been authorized by the General Assembly through [S]ection 5-1009 of the Counties Code,” Gordon wrote.

The panel noted that the Illinois Supreme Court has held the constitution’s limits on a home-rule unit’s ability to license for revenue refers to situations when a governing body that doesn’t have the power to tax tried to do so through use of its police powers.

With this in mind, the panel agreed with the county that the ordinance’s enforcement provisions — such as being subject to random audits or penalties for improperly displaying a gambling device — are commonplace.

“As the [c]ounty notes, these measures are in place only to confirm that the tax is paid, not to regulate,” Gordon wrote.

And although Cepero held the county lacked sufficient proof behind its defense in classifying the gambling machines differently, the panel reversed his decision because it had no obligation to provide such evidence.

Rather, it held, the county only needed to provide a justification for its classification. It was then up to Midwest to persuade Cepero that its reason was insufficient or unsupported.

The panel agreed with the county that a difference in revenue accrual presents a “real and substantial” enough reason to distinguish between types of gambling machines.

And although Midwest argued a proper comparison would have stacked the total revenue from a slot machine against that from a gaming terminal under similar use circumstances, the panel rejected its argument because the company didn’t present such evidence in the trial court.

David A. Hughes, a partner at Horwood Marcus & Berk Chtd. who represented Midwest, declined to comment on the opinion.

The company was also represented by Christopher B. Wilson, a partner at Perkins, Coie LLP. He could not be reached.

The county was represented by Assistant State’s Attorney Daniel F. Gallagher.

Steve Campbell, a spokesman for the state’s attorney’s office, said the office thought it presented a strong case and is pleased with the court’s opinion.

Justices Margaret Stanton McBride and Jesse G. Reyes concurred in the opinion, Midwest Gaming and Entertainment LLC v. The County of Cook et. al, 2015 IL App (1st) 142786.

With Friday’s reversal, the ruling is in agreement with a separate case filed in October 2013 by the Illinois Coin Machine Operators Association and two of its terminal-operator members challenging the ordinance. In February, Cook County Circuit Judge James M. McGing ruled in Illinois Coin Machine Operators Association, et al., v. The County of Cook, et al., 13 L 50995, that the county ordinance is constitutional.


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