The issue with the IRS threshold change
I know I wasn’t the only one to groan when the Internal Revenue service announced its proposal to reduce the threshold for reporting casino winnings from $1,200 to $600.
Seems a bit punitive given the stress operators have been under on the slot side of the business. And unusual, given that the $1,200 figure has been in place since 1977 and was never adjusted for inflation. An articulate response came from the American Gaming Association (AGA) and here it is:
“Not only would this potential policy change create additional burdensome and unnecessary reporting requirements for gaming companies, but it could also cost states millions of dollars in revenues that support vital public services,” said Sara Rayme, senior vice president of public affairs of the AGA. “Rather than going backwards, the gaming industry seeks forward-looking policies that enable our industry to reinvest, innovate and create more jobs.”
On a conference call to the gaming press following the announcement of the proposed rule, AGA President Geoff Freeman said the current threshold, now pushing 40 years in age, would currently be closing in on $4,600 if it had been allowed to keep pace with inflation.
The good news is this isn’t a done deal, and the IRS is receiving public comments until early June. The AGA Tax Working Group will be submitting comments on behalf of the industry. If you want a template for a comment that you could either send to the IRS or to your state or regional trade association, you could do worse than to borrow from a note that Brian Decorah, senior vice president and assistant general manager, Firekeepers Casino Hotel, Battle Creek, Mich., sent to us on the topic recently. Here’s what he wrote:
Our processes, gaming machines, accounting systems, staffing levels and business models are based on the $1,200 threshold, which results in tens of thousands of taxable jackpots per year. Any change to that threshold, up or down, would impact our operation. Here is a quick list of reasons that outline how the proposed rule would negatively impact our gaming operation:
Increased Staffing: We manually and physically transact with each jackpot winner in excess of $1,200, to ensure that we properly identify the guest and accurately report the tax liability. The proposed change would significantly increase the staffing requirement to attend to the additional jackpots.
Less Revenue: The slot machines “lock up” when a taxable jackpot is hit, until we complete the necessary paperwork to unlock the machine. Lowering the threshold would increase the number of taxable jackpots, which would result in more players waiting for the W2G paperwork to be completed, resulting in less time gaming, which lowers tribal revenues and compact payments.
Vendor Changes: As vendors change their gaming software and/or pay tables to decrease the frequency of jackpots in the $600-$1,200 range (at the request of the industry, or to meet expected demand), the vendor costs will increase, which will result in increased costs to us.
Single W2G Reporting: At first glance, the proposed change appears to reduce the amount of administrative work related to taxable jackpot reporting. However, the cost of this change is significant, and creates additional concern, for the following reasons:
Gaming Day—Our gaming operation, like most, uses an early-morning gaming day for record-keeping purposes. The purpose of using an early morning start/end of the gaming day is to take advantage of lower business volumes to perform cash collections on the gaming floor, resulting in increased accuracy and efficiency. Using a 12:00am-11:59pm calendar day would require an investment in manual reporting, or upgraded system reporting capabilities, or both. Either includes the burden of additional costs.
Player Tracking Systems—Simply put, they were created to develop loyalty programs for frequent players, based on an estimate of each club member’s overall play. The programs were not built with the responsibility of attesting to their tax liabilities.
Guest Notification—Operators rarely know when a gaming session ends for any given player. This rule would require us to notify all taxable jackpot winners that their reportable winnings and potential tax liability would rely upon what the player tracking system reports at the end of the day, pursuant to the taxable threshold. Trying to notify and/or explain the new tax rules would undoubtedly cause misunderstanding and alarm amongst our guests, resulting in frequent disputes over the accuracy of the activity being tracked. This, in turn, will lead to resulting in fewer gaming trips, which would negatively affect tribal revenues and compact payments.
Here’s hoping this one doesn’t move forward.