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The Family Foundation of Kentucky Appeals the Circuit Court’s Decision That the Kentucky Department of Revenue Has Authority to Tax Revenue from Pari-Mutuel Wagering on Historical Horse Racing

07.06.2011

In Kentucky Horse Racing Commission v. The Family Foundation of Kentucky, No. 10-CI-01154 (Franklin Cir. Ct., Div. II, Dec. 29, 2010), on appeal No. 2011-CA-000164 (Ky. App.), the Franklin Circuit Court (“Court”) held that the Kentucky Department of Revenue (the “Department”) validly exercised its authority in declaring revenue from pari-mutuel wagering on historical horse races subject to the pari-mutuel tax. The Family Foundation of Kentucky, Inc. (the “Foundation”) appealed to the Kentucky Court of Appeals and asked the Kentucky Supreme Court to hear the case though that Court declined the invitation. The Court of Appeals ordered the appeal to move forward in late May so that briefing is now underway.

By way of context, the horse racing industry in Kentucky is governed by KRS Chapter 230. These statutes created the Commission and provided it with the power to regulate horse racing and pari-mutuel wagering on horse racing in Kentucky. On July 20, 2010, the Commission adopted Draft Regulations (“Regulations”), authorizing pari-mutuel wagering on historical races at licensed premises in Kentucky. 810 KAR 1:001, after relying heavily on an opinion of the Attorney General of Kentucky. The Attorney General’s Opinion stated that pari-mutuel wagering on historical horse races was not prohibited by Kentucky law but was not authorized by the administrative regulations governing horse racing. See Ky. OAG 10-0001 at 4.

The Department is statutorily responsible for the administration and enforcement of Kentucky’s tax laws. Therefore, simultaneous to the Commission’s adoption of the Regulations, the Department amended Revenue Form 73A100 to reflect the Regulations. As a result, revenue from pari-mutuel wagering on historical horse races became subject to the pari-mutuel excise tax of KRS 138.510(1).

The Department, the Kentucky Horse Racing Commission (“Commission”), and several racing associations licensed by the Commission to conduct horse racing and pari-mutuel wagering in Kentucky (collectively, “Associations”) brought suit under Kentucky’s Declaratory Judgment Act, KRS 418.020, asking the Court for a Declaration of Rights. The Foundation, which opposed expanded gambling in Kentucky, was permitted by the Court to intervene in this case. The Court confined its analysis to the three legal issues presented: (i) whether the Commission’s adoption of the Regulations was valid and lawful; (ii) whether KRS Chapter 528 prohibits pari-mutuel wagering on historical horse races; and (iii) whether the Department has the authority to tax pari-mutuel wagering on historical horse races.

First, the Court held that the Commission’s adoption of the Regulations was a valid and lawful exercise of the Commission’s authority. KRS 230.215 grants the Commission plenary power to regulate pari-mutuel wagering on horse racing.

The Court also held that KRS Chapter 528 does not prohibit pari-mutuel wagering on historical horse races despite the Foundation’s argument that the machines used in pari-mutuel wagering are slot machines and, thus, illicit gambling devices prohibited by KRS Chapter 528. The Court held that the determinative factor was the nature of pari-mutuel wagering and not the appearance of the machines and that under KRS 436.480, Chapter 528’s prohibition on gambling “shall not apply to pari-mutuel wagering authorized under the provisions of KRS Chapter 230.”

Finally, the Court held that the Department has the statutory authority to tax revenue from pari-mutuel wagering on historical horse races. The pari-mutuel tax in KRS 138.510 applies to “all tracks conducting pari-mutuel wagering on live racing under the jurisdiction of the [C]ommission.” KRS 138.510(1). Pari-mutuel excise tax liability is determined based on the “daily average live handle.” KRS 138.511(3) defines this as the total amount wagered at a track on live racing and does not include money wagered: (1) At a receiving track; (2) At a simulcast facility; (3) On telephone account wagering; (4) Through advance deposit account wagering; or (5) At a track participating as a receiving track or simulcast facility displaying simulcasts and conducting interstate wagering.

The Court rejected, however, the Department’s contention that “daily average live handle” includes all pari-mutuel wagers except those forms excluded by the statutory definition. Instead, the Court noted that historical horse races are essentially live from a patron’s perspective because the patrons are wagering on a contingent outcome. The Court read the statutory authority to tax pari-mutuel revenue in conjunction with the Commission’s approval of pari-mutuel wagering on historical horse races to determine that the Department acted within its discretion in taxing pari-mutuel wagers on historical horse races.

The Foundation’s appeal of the Court’s decision will now be considered by the Kentucky Court of Appeals since its motion to transfer the case directly to the Kentucky Supreme Court was denied.

If you have questions about this topic or any other legal issue, please contact any member of the firm's State and Local Tax Team.

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