United States

Kansas: Appeals Court Affirms that Kansas Lottery, not Casino Manager, Liable for Electronic Gaming Machine Use Tax

Jan 18, 2016
From KPMG TaxWatch

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The Kansas Court of Appeals recently held that a taxpayer was not liable for use tax paid on casino gaming machines. The taxpayer, a casino facility manager, entered into a management contract with the Kansas Lottery to install gaming machines onsite. The sales agreements for the gaming machines named the taxpayer as the purchasing agent and the Kansas Lottery, an agency of the State of Kansas, as the true owner. The Kansas Expanded Lottery Act controls the statutory authority to gamble in Kansas, and the Act places “full, complete and ultimate ownership” of gaming machines with the Kansas Lottery. In Kansas, gaming facility managers must purchase or lease gaming machines for the Kansas Lottery on behalf of the state. The taxpayer purchased the machines from out-of-state vendors and remitted $801,588.05 of use tax, under protest, for which it subsequently requested a refund. The matter eventually made its way to the appeals court.

Under Kansas law, “use” is defined as “the exercise within this state by any person of any right or power over tangible personal property incident to the ownership of that property…” In a previous Kansas Supreme Court decision, General Motors Corporation v. State Comm. of Rev. & Taxation, the court interpreted the phrase “incident to the ownership of that property” to determine whether General Motors or the United State government owned certain property. General Motors had entered into a contract with the U.S. Government to produce certain military aircraft for the U.S. The government was to provide all equipment for the contract rent-free to General Motors, was required to approve all purchases of material and equipment, and title to all such materials and equipment was to vest with the government at conclusion of the contract, regardless of whether purchased by General Motors or the government. The court ultimately concluded that the taxpayer was not the true owner of the materials and equipment, notably because its use of the property was not incident to its ownership thereof. The Kansas DOR argued that the contract between Kansas Lottery and the taxpayer for the purchase of the gaming machines was factually distinguishable from General Motors because the taxpayer did not receive reimbursement from the state for the purchase of gaming machines. While technically accurate, the court observed that the taxpayer remitted 100 percent of the gross gambling proceeds to the Kansas Lottery on a daily basis. The Kansas Lottery, in turn, transferred 73 percent of this revenue back to the taxpayer on a monthly basis as payment for managing the facility. The court determined that this arrangement amounted to a reimbursement similar to that in General Motors. The court concluded that the machines were owned by the State of Kansas and managed by the taxpayer to produce money for the state. For more information on the Matter of the Appeal of BHCMC, LLC, please contact Andrea Turner at 816-802-5236.

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.