Sands Bethworks Gaming, LLC v. Pa. Dep't of Revenue, 216 MM 2017

• Decision Date: 26 April 2019
• Docket Number: No. 216 MM 2017,216 MM 2017
• Citation: 207 A.3d 315
• Parties: SANDS BETHWORKS GAMING, LLC, Petitioner v. PENNSYLVANIA DEPARTMENT OF REVENUE ; C. Daniel Hassell in His Official Capacity as Secretary of the Pennsylvania Department of Revenue; and the Pennsylvania Gaming Control Board, Respondents
• Court: Pennsylvania Supreme Court

207 A.3d 315

SANDS BETHWORKS GAMING, LLC, Petitioner
v.
PENNSYLVANIA DEPARTMENT OF REVENUE ; C. Daniel Hassell in His Official Capacity as Secretary of the Pennsylvania Department of Revenue; and the Pennsylvania Gaming Control Board, Respondents

No. 216 MM 2017

Supreme Court of Pennsylvania.

Argued: May 17, 2018
Decided: April 26, 2019

OPINION

CHIEF JUSTICE SAYLOR

207 A.3d 317

This matter is brought in our original jurisdiction and involves a constitutional challenge to a recent amendment to Pennsylvania's gaming law. Under the amendment, casinos pay a supplemental assessment on slot-machine revenue, and the funds are then distributed primarily to underperforming slot-machine facilities to be used for marketing and capital development.

I.

Approximately fifteen years ago, the General Assembly substantially widened the scope of legalized gambling in Pennsylvania by passing the Pennsylvania Race Horse Development and Gaming Act (the "Gaming Act").¹ See generally Pennsylvanians Against Gambling Expansion Fund, Inc. v. Commonwealth , 583 Pa. 275, 877 A.2d 383 (2005) (upholding most of the Gaming Act against a challenge to the process by which it was enacted). The Gaming Act authorized slot-machine operations as a newly-created aspect of the gaming landscape, with licenses divided into three types: a Category 1 license authorizes slot machines at an existing horse racetrack; a Category 2 license allows for slot machines in a non-racing facility in a city of the first or second class, or in a revenue- or tourism-enhanced location; and a Category 3 license authorizes slot machines in an established resort hotel with at least 275 guest rooms. See 4 Pa.C.S. §§ 1301 - 1305 ; Mount Airy #1, LLC v. Dep't of Revenue , 638 Pa. 140, 157 n.7, 154 A.3d 268, 278 n.7 (2016).²

Persons holding one of these types of licenses pay a 34% tax on the gross terminal revenue ("GTR") generated by their slot machines, see 4 Pa.C.S. § 1103 (defining gross terminal revenue as slot-machine money received minus various types of payouts such as cash paid to slot-machine players), which is then transferred into the State Gaming Fund. See 4 Pa.C.S. § 1403 (establishing the State Gaming Fund within the Pennsylvania treasury). They also pay a daily assessment of 5.5% of GTR into the Pennsylvania Gaming Economic Development and Tourism Fund (the "Gaming Tourism Fund"), which is administered by the Department of Community and Economic Development (the "DCED"). See 4 Pa.C.S. § 1407(a) - (c).

The Gaming Act has been revised on multiple occasions since 2004. Of relevance here is amending legislation passed in 2017, known as Act 42. See Act of Oct. 30, 2017, P.L. 419, No. 42. Act 42 contains many varied provisions. For present purposes, it establishes a restricted account

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called the Casino Marketing and Capital Development Account (the "CMDC Account") within the Gaming Tourism Fund, to be administered by the Gaming Control Board (the "Board"). See 4 Pa.C.S. §§ 1407.1(a), (b). Act 42 states that, beginning on January 1, 2018, each Category 1, Category 2, and Category 3 slot-machine facility is required to pay a supplemental daily assessment of 0.5% of its GTR into the CMDC Account. See id. § 1407(c.1). Besides these monies, Act 42 also provides for ongoing transfers of $ 2 million annually from the State Gaming Fund into the CMDC Account. See id. § 1408(c.1).³

In terms of how the CMDC Account monies are used, first, the Board is required to make certain statutory distributions from the account.⁴ These include disbursements of $ 4 million to each Category 1 or 2 licensee with a GTR of $ 150 million or less for the prior fiscal year; $ 2.5 million to any such licensee with a GTR between $ 150 million and $ 200 million during the prior fiscal year; and $ 0.5 million to each Category 3 licensee with a GTR of less than $ 50 million in the prior fiscal year. See 4 Pa.C.S. § 1407.1(e)(1)(i)-(iii). If the CMDC Account lacks sufficient funds, these distributions are prorated according to a statutory formula. See id. § 1407.1(e)(1)(iv). Any money remaining in the CMDC Account after such distributions are made is to be disbursed by the Board on a discretionary basis to Category 1, 2, or 3 licensees that have applied for grants, see id. § 1407.1(e)(2), with the proviso that no casino may receive more than $ 4 million from the account in a single year, and no casino may receive any funds from the account during the casino's first two years of licensure. See id. § 1407.1(e)(3).

Under Act 42, the Board is tasked with notifying the Legislative Reference Bureau, for publication in the Pennsylvania Bulletin, when the GTR of all Category 1 and 2 licensees exceeded $ 200 million during the previous fiscal year, and the GTR of all Category 3 licensees exceeded $ 50 million during the previous fiscal year. See id. §§ 1407(c.1)(1), 1407.1(f)(1), 1408(c.1)(1). The challenged provisions of Act 42 expire when such notice is published, or ten years after Act 42's effective date, whichever occurs first. See id. §§ 1407(c.1)(2); 1407.1(f)(2); 1408(c.1)(2).

II.

In December 2017, Sands Bethworks Gaming, LLC ("Sands") – which operates slot machines at a casino in Bethlehem under a Category 2 license – filed in this Court's original jurisdiction a petition in the nature of a complaint seeking declaratory and injunctive relief, naming as respondents the Department of Revenue, its Secretary in his official capacity, and the Board (collectively, the "Commonwealth"). Sands challenged the constitutionality, both facially and as applied, of Act 42's provisions relating to the CMDC Account.⁵

207 A.3d 319

Sands alleged that those provisions violated the Pennsylvania Constitution's requirement of uniform taxation, its mandate that all enactments have a public purpose, and its rule against special legislation. Sands also claimed the scheme violated the Equal Protection and Due Process Clauses of the Fourteenth Amendment to the federal Constitution. Thus, Sands asked this Court to declare Sections 1407(c.1), 1407.1, and 1408(c.1) unconstitutional, and to enjoin the state from collecting the tax assessed under those provisions. Thereafter, Greenwood Gaming and Entertainment, Inc. – which operates slot machines under a Category 1 license at Parx casino and racetrack in Bensalem – was permitted to intervene as an additional plaintiff. Greenwood forwarded claims and arguments similar to those of Sands.

After oral argument, Sands notified this Court it had received a letter from the Office of Attorney General, which represents the respondents in this matter, stating that the Board intended to begin distributing funds from the CMDC Account in September 2018. Accordingly, Sands requested that we preliminarily enjoin such distributions until a ruling on the constitutionality of the challenged provisions of Act 42 is issued. We granted that request, directing the Board to retain all funds deposited into the account during the 2017-18 fiscal year until further order of this Court. We additionally noted that in the interim all affected slot machine licensees were still required to pay the supplemental daily assessment. See Sands Bethworks Gaming, LLC v. Dep't of Revenue , No. 216 MM 2017, Order at 1-2 (Pa. Aug. 30, 2018).

III.

Arguing that the CMDC Account program violates the Fourteenth Amendment, Sands calls our attention to Thomas v. Kansas City Southern Railway Co. , 261 U.S. 481, 43 S.Ct. 440, 67 L.Ed. 758 (1923) and Morton Salt Co. v. City of South Hutchinson , 159 F.2d 897 (10th Cir. 1947). See Brief for Petitioner at 34-36. In Thomas , Arkansas passed legislation creating a drainage district. To pay for the improvements, the law imposed a flat six-percent tax on the assessed value of all real estate within the district. The plaintiff, which had a rail line running through the district, complained that the railroad would pay a significant portion of the cost but would receive little benefit since its tracks were above flood level. The Supreme Court agreed: although the railroad might receive a speculative benefit in the form of increased future traffic, this was insufficient to justify imposing on the railroad liability for a significant portion of the project's cost. Deeming the tax "grossly discriminatory," the Court affirmed the order of the federal appellate court, which had held that the tax violated the Equal Protection Clause. Thomas , 261 U.S. at 485, 43 S. Ct. at 441.

Morton Salt involved analogous facts. In that matter, a city sought to issue bonds to build a waterworks system, with the bonds to be retired by a flat tax on properties in the city. Morton Salt alleged it would pay 46 percent of the cost, but would receive no benefit since the system would not supply water to its property. In ordering preliminary injunctive relief, the Tenth Circuit acknowledged that the Fourteenth Amendment does not require that tax statutes – particularly general ones supporting schools, roads, law enforcement, or the like – impose precisely equal hardships on taxpayers or benefit them identically. See Morton Salt , 159 F.2d at 900-01. It observed, however, that the Amendment does impose some restraints: the government must...