Online gambling bill could violate federal law, tribal compacts
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Not So Fast: Michigan Online Gambling Bill Faces Difficult Path To Make Tribes, Casinos Happy

Michigan online gambling problem
Michigan’s proposed Lawful Internet Gaming Act would erode the sovereignty of the state’s 12 American Indian tribes and subject them to taxation and regulatory provisions that could violate federal law, according to a legislative analysis released last week.

The problems for Michigan’s online gambling bill

The draft Senate Bill 203 also could impact the state’s share of casino revenue from the tribal governments. That’s according to the analysis by the Senate Fiscal Agency. Five of those are operating casinos under expired tribal-state regulatory agreements or compacts already.

The SFA report points out the myriad legal and regulatory complexities in crafting an online gambling bill that would govern both commercial casinos taxed and regulated by the state and tribal government facilities operating under the federal <strong>Indian Gaming Regulatory Act (IGRA)</strong>.

The difficulty meshing state and federal gambling law into a single legislative bill – coupled with additional concerns as to whether expanded gambling would require state and local ballot initiatives to amend the Michigan constitution – pose significant hurdles to enacting S 203.

Michigan’s three commercial casino companies and 12 tribes that operate 23 gambling facilities either oppose or are neutral on the draft legislation.

“There are a lot of obstacles to this,” said Michigan attorney Bryan Newland, former counsel to the US Department of Interior, Bureau of Indian Affairs.

“It’s proven to be difficult on a number of levels …when you have commercial casinos currently regulated under state law and tribal government casinos regulated under federal law,” said James Nye, who handles public affairs for several Michigan tribes.

“It’s definitely been challenging.”

“There are so many regulatory and jurisdictional components to this, it may never get resolved,” said a state official who requested anonymity.

The Michigan legislation could result in tribal casinos paying a lower tax rate than competing websites operated by the three Detroit commercial casinos.

Meanwhile, a federal lawsuit out of California awaiting a ruling by the Ninth Circuit Court of Appeals could enable tribes in Michigan and elsewhere to operate online gambling without any taxation or regulation by the states.

Creating a new regulatory system in Michigan

Senate floor leader Mike Kowall and Sen. Joe Hune sponsor the bill. It calls for the creation of a Division of Internet Gaming as part of the state Gaming Control Board.

The division would issue eight licenses to existing tribal and commercial casino companies. It would also tax and regulate the industry, requiring tribal governments to waive their sovereignty.

Website owners would be assessed $300,000 in initial fees and a $100,000 annual payment. Commercial casino companies would be taxed 10 percent of their internet gross gaming revenues. But the tax for tribal governments could be less.

Tribes under S 203 can apply for website licenses as commercial operators. That would make them subject to state regulation and the 10 percent tax rate.

But the bill also allows tribes to seek licensure as an amendment to their tribal-state compacts under IGRA. The provision is an apparent effort by authors to conform to federal law. It nevertheless raises numerous legal issues.

IGRA generally prohibits taxation of tribal gambling revenues. However, it does allow for tribes to share casino proceeds in exchange for a benefit. (That’s usually statewide or regional exclusivity to offer gambling.)

Seven Michigan tribes with compacts dating back more than 20 years pay the state eight percent of their casino revenues. That’s despite the fact their gambling exclusivity has since been diminished by:

  • Three Detroit casinos;
  • additional tribal casinos;
  • and online lottery sales.

Tribes made $60 million in revenue sharing payments to the state in fiscal 2015-16.

Trying to make tribes, casinos happy

The bill, in a concession to indigenous leaders, states that the internet tax for tribes under compact “would automatically be reduced to a rate equivalent to the rate paid as a revenue share,” or eight percent.

“The legislation would not be fair for the Detroit casinos, as they would have to pay a strict tax on any gaming revenue if they wished to participate in online gaming,” legislative analyst Drew Krogulecki said in the SFA report.

“Indian tribes, however, would have the ability to negotiate a compact [amendment] with the state and be regulated differently. Theoretically [tribes] could negotiate and pay a lower tax …”

But the revenue sharing payment could still be interpreted as a tax in violation of IGRA by the Department of Interior – which as trustee for tribes can reject compact amendments. The same could happen in the event of litigation, via the federal courts.

“It’s clearly a tax,” said Joe Valandra, former executive director of the National Indian Gaming Commission. That’s the federal regulatory agency with oversight of tribal casinos.

Tribes under IGRA have primacy in the regulation of their casinos. That would not be the case in the operation of online wagering under S 203.

“Subjecting tribes to Michigan Gaming Control Board licensure and regulatory structures could be challenged as a violation of [IGRA],” Krogulecki said in his report.

Violating tribal compacts?

Finally, legalizing online wagering could be construed by tribes as an expansion of gambling in violation of exclusivity provisions in their compacts, compelling them to withhold revenue sharing payments to the state.

The process of negotiating an internet gambling amendment to a tribal-state compact and acquiring the necessary federal approvals would likely be lengthy. Some tribes believe it would place them at a disadvantage with the more speedy procedures in acquiring a commercial license.

“These fundamental flaws in the legislation along with a multitude of internal inconsistencies within its provisions threaten to erode tribal sovereignty and provide an unfair advantage to competitor licensees,” Saginaw Chippewa Tribal Chief Frank Cloutier said in a letter to legislators.

The Nottawaseppi Huron Band of the Potawatomi and Saginaw Chippewa Indians, in a joint letter to the Senate, said they oppose state regulation of online gambling. They contend tribes can engage in the activity free of state involvement, under federal law.

The Match-e-be-nash-she-wish [Gun Lake] Band of Pottawatomi Indians also is opposed to the Kowall draft bill.

Operators of the Greektown, Motor City and MGM casinos in Detroit have taken neutral positions on online gambling. That’s largely because of the uncertain tribal legal issues.

“They’re being very cautious,” said a commercial casino attorney who requested anonymity. “They’re not fighting the legislation. They’re not supporting it.”

“What they’re worried about mostly is there will be a tax on it and if the tribes are able to do it without paying a tax, it won’t be competitive.

“Several lawyers have weighed in on that from an Indian gaming perspective. And they all have different views.”

Compact negotiations also pose a problem

Michigan officials are embroiled in protracted compact negotiations with five tribes that currently do not pay a revenue share to the state. Gov. Rick Snyder is seeking eight to 12 percent of tribal revenues as a condition of the talks. Tribes staunchly oppose that demand.

It’s not clear what role, if any, online gambling will play in the compact talks.

Kowall told The Detroit News he intends to meet with tribal leaders and other stakeholders. Such a meeting would try to resolve their concerns on online gambling.

“The potential for jobs and economic development right here in Michigan is being lost,” Kowall told the Senate Regulatory Reform Committee, of which he is chairman.

“This legislation gives Michigan an opportunity to stop this illegal activity and to generate new revenue that could help fund infrastructure improvements, health care, education, public safety and other worthwhile programs.”

Santa Ysabel lawsuit muddles the issue

The Iipay Nation of Santa Ysabel is optimistic it will convince the Ninth Circuit to overturn a federal judge’s ruling that the Desert Rose Bingo website violated federal law by accepting wagers from off its North San Diego County reservation.

A US district court judge in December acknowledged that bingo and poker were classified as Class II games under IGRA. Therefore, they are not subject to state regulations.

But Judge Anthony Battaglia said it was a violation of the Unlawful Internet Gambling Enforcement Act (UIGEA) for Santa Ysabel to accept off-reservation wagers.

Santa Ysabel views Battaglia’s dismissal of the state’s claim the tribe violated its compact as a major victory. That’s despite the judge’s ruling on the federal UIGEA claim.

Tribe attorneys are confident they can convince the Ninth Circuit that online wagers occur with internet servers. In the case of Santa Ysabel, they are on tribal lands.

A federal court ruling upholding the Santa Ysabel’s legal argument could provide Michigan tribes leverage in negotiations with the state.

Image credit: Prasanna Swaminathan / Shutterstock.com

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Dave Palermo
- Dave Palermo is an award-winning metropolitan newspaper reporter. He has written about American Indian governments for more than 20 years, working as an advocate for several tribes and tribal associations. He also has co-authored books on gambling and gambling law.