Eric Schippers, Penn National’s senior vice president for public affairs and government relations, told Online Poker Report that the casino operator is conducting an exhaustive analysis of the 470-page law.
The company is hoping to get clarifications on some gray areas at a Dec. 7 information session being held for the state’s casino licensees by the PA Gaming Control Board before deciding on a path forward.
Penn National’s issues are not with the online poker aspect of the expansion, but with how the law sets up tax subsidies, satellite casinos and an excessive tax rate on online slots.
“This was a money grab, plain and simple,” Schippers said. “The legislature decided that, rather than being fiscally responsible in cutting programs and spending, it would try to expand its way out of a budget mess. So they’ve done it in a way that will result in significant cannibalization. And the tax rate on online slots is just ridiculous and unprecedented.”
The law authorizes Pennsylvania casino operators to set up ten satellite locations in rural areas. Casinos will bid a minimum of $7.5 million, with the highest bidder taking the location of its choice. Operators will have to pay an additional $2.5 million to include table games. Four percent of the tax revenue will go to the host community.
The state’s 2,500 municipalities have until the end of the year to decide if they want to be considered for a satellite casino. The Gaming Control Board is keeping a running list of municipalities that have opted out, which total about 140 thus far.
Competitors cannot build a satellite casino within 25 miles of an existing casino, a number that Schippers views as singularly harmful to Penn National, which operates Hollywood Casino at Penn National Race Course in Grantville.
“When it comes to protective zones, two-thirds of our customers come from beyond 25 miles, so it has a unique effect on us,” Schippers said. “In an urban location, 25 miles may be all the market area that’s needed to protect against, but out in central Pennsylvania it will have a far greater cannibalization impact on us than anyone else.”
Three counties near Mount Airy Casino, outside of 25 miles, were added to the restricted area, but no such concessions were made for Penn National. Schippers called it “pure politics” that Mount Airy gets a greater protective zone, and sees the unequal protection as grounds for a lawsuit.
Auctions on the ten areas are set to begin Jan. 15 and end July 31. Schippers indicated that Penn National is still considering purchasing a satellite casino for either offensive or defensive reasons.
The other area Penn National is exploring for a lawsuit is the disparate tax treatment, with Hollywood Casino — which is middle of the road in revenue among Pennsylvania casinos — having to pay into a fund to subsidize the marketing expenses of smaller casinos.
In negotiating the gambling expansion bill, Senate leaders insisted on the same 54 percent tax rate for online slots that the state receives from the machines in land-based casinos, despite evidence that indicated the marketing expenses and operating costs of online gambling make such a rate infeasible.
“On the iGaming front, it’s less legal analysis and more a question of if anybody can profit from a tax that is the highest rate on the planet for online gaming,” Schippers said.
The tax rate of 16 percent for poker and table games, also equal to the rate in brick-and-mortar casinos, is more in line with other states. In New Jersey, the most comparable state to Pennsylvania offering online gambling, 15 percent is the all-encompassing rate.
Pennsylvania’s law allows casinos to apply for a full license for online poker, table games and slots for $10 million or to get partial licenses for a single activity at $4 million each.
Schippers indicated that Penn National would take a hard look at online poker and table games, and still may go for a full license.
“We know the tax rate on slot machines doesn’t make sense and will continue to be an advocate for a lower tax rate, but we haven’t ruled anything in or out,” Schippers said.
“We’re trying to get more questions answered on the likelihood to roll back the tax rate on slot machines, and if we would be better served to get into the game and argue from a seat at the table as a licensee or wait for it not to be successful and come later to say, ‘We told you so, the tax rate is too high to make work.’”
In California, if just a few tribal casinos disagree with an aspect of an online poker bill it has been enough to kill the legislation.
So how does a bill pass in Pennsylvania with a tax rate, among other issues, that most of the casinos don’t like?
Schippers noted that Penn National did try to convince lawmakers that there was a difference between having a 54-percent tax rate on real slot machines compared to online slots.
“We tried to explain it’s a fundamentally different business model and far more expensive to operate online gaming due to the platform provider and marketing costs,” Schippers said.
“The margins are far more thin in the online space than real-world gaming. They just don’t understand the business model for online gaming and why we need to have a more reasonable tax rate to make it possible. It wasn’t for a lack of effort.”
Schippers acknowledged that the state’s commercial operators didn’t come with a united front. The divided agendas include one casino in Parx that was fighting for the 54-percent tax rate and another with Sands Bethlehem that fought against online gambling all together.
“We did have detractors among the casinos,” Schippers said. “With Sheldon Adelson, it’s no secret Sands wants to eradicate online gaming and spent significant amounts of money at the state and federal level. So there was a lot of negative noise out there as well, which wasn’t helpful.”