MINUTES OF MEETING
ASSEMBLY COMMITTEE ON TAXATION
Sixty-seventh Session
May 25, 1993
The Assembly Committee on Taxation was called to order by Chairman Robert E. Price at 1:50 p.m. May 25, 1993, in Room 332 of the Legislative Building, Carson City, Nevada. Exhibit A is the Meeting Agenda, Exhibit B is the Attendance Roster.
COMMITTEE MEMBERS PRESENT:
Mr. Robert E. Price, Chairman
Mrs. Myrna T. Williams, Vice Chairman
Mr. Rick C. Bennett
Mr. Peter G. Ernaut
Mr. Ken L. Haller
Mrs. Joan A. Lambert
Mr. John W. Marvel
Mr. Roy Neighbors
Mr. John B. Regan
Mr. Michael A. Schneider
Mr. Larry L. Spitler
COMMITTEE MEMBERS ABSENT:
None
GUEST LEGISLATORS PRESENT:
None
STAFF MEMBERS PRESENT:
Ted Zuend, Deputy Fiscal Analyst, Legislative Counsel Bureau
Judy Matteucci, Budget Director
Bill Bible, Chairman, Gaming Control Board
Thomas M. Roche, member, Gaming Control Board
OTHERS PRESENT:
Betty Vogler, member, Barnard, Vogler and Company
J. Richard Barnard, managing shareholder, Barnard, Vogler and Company
Candace Evart Fox, President, Fox Consulting - Reno, and current member of the Nevada Tax Commission
William R. Eadington, Ph.D., professor of economics at University of Nevada - Reno, Director, Institute for the Study of Gambling and Personal Gaming
John Alderfer, Chief Financial Officer and Treasurer, United Gaming, Inc., Las Vegas
Emmett Sullivan, Executive Vice President, Jackpot Enterprises, and President, Slot Route Operators Association of Nevada
Frederick Sandvick, Executive Vice President and Chief Financial Officer, Jackpot Enterprises
Rick Crawford, owner and President, Green Valley Grocery and Crawford Coin
Helen Foley, 7-Eleven Franchise Owners Association of Southern Nevada
Tim Cegavske, a 7-Eleven franchisee
Debbie Sheltra, owner, Short Stop Food Stores, Reno
Lenard R. Loper, owner, Rainbow Market, Sparks
Jim Linscott, operator of two Shop-n-Go convenience stores
James Avance, Jackpot Enterprises
Vice Chairman Myrna Williams explained Chairman Price was testifying on a bill in another committee and would return directly. She called for testimony on AB 533.
The bill explanation for AB 533 is attached as EXHIBIT C.
ASSEMBLY BILL 533 - Revises certain fees collected from restricted gaming licensees to correspond to fees collected from nonrestricted licensees. (BDR 41-1772)
Judy Matteucci, Budget Director, spoke in support of AB 533 which proposed an increase in the slot route operator tax. Ms. Matteucci's written remarks as well as a suggested amendment to subsection two are attached as EXHIBIT D.
Ms. Matteucci stated, after the bill was reviewed by the Barnard, Vogler and Co. representatives, she would be willing to develop amendments as required by the committee.
In answer to a request from Mr. Marvel, Ms. Matteucci said the latest annual revenue projection for Alternative 2 of the study, based on the aggregate basis of slot route operations, which assumed the slot route operators were essentially casinos without a geographic center, would be $7.9 million. The additional income over the course of the biennium would be approximately $16 million.
Betty Vogler introduced herself and the co-authors of the 1992 State of Nevada Study of the Slot Machine Route Operator Industry (the B/V study), J. Richard Barnard, Candace Evart Fox, and William R. Eadington, Ph.D. Barnard, Vogler and Company's complete study may be referred to at the Research Library, marked as EXHIBIT E and is incorporated herein by reference. She explained how Barnard, Vogler and Company had been chosen by the Gaming Control Board to study the Slot Route Operators and what the scope of the study had been.
Ms. Fox, specialist in public sector organizational financial analysis, current member of the Tax Commission, and President of Fox Consulting, Reno, read from the Executive Summary of the study and generally reviewed and broadly read from the study.
Ms. Fox explained how the restricted licensees, including the slot route operators, interacted with the individual slot locations (either on a percentage or space lease basis). She also pointed out the top five of fifty-three slot route operations earned 85 percent of the revenues and owned 80 percent of the slot machines in use. She added, since the study had been conducted, two of those top five slot route operations had been purchased by Jackpot Enterprises. Therefore, there were only three major operators at this time.
Ms. Fox compared the effective tax rate (taxes paid divided by the gross gaming revenues) between restricted and nonrestricted licensees. Restricted licensees paid between 3.4 and five percent annually compared to nonrestricted licensees which paid 5.7 to 7.7 percent annually.
Ms. Fox explained there was variation from one slot location to another; lower gross revenues on machines generally resulted in higher effective tax rates and higher gross revenues on machines resulted in lower tax rates. Also, the geographic location of machines affected the gross revenues of machines.
In summary Ms. Fox stated there were significant variations due to the flat-rate tax structure. She said if good tax policy meant organizations engaged in comparable businesses should have similar tax burdens or tax equity, then what was seen through the flat tax/percentage tax structure currently in effect was inequitable and bad tax policy.
Dick Barnard, managing shareholder of Barnard, Vogler and Company, explained he had approached the task of completing the study by analyzing some of the financial data which had been available for some of the largest slot route operators. That data had been analyzed in several different ways. He referred to page 31, Table I of the study. He stated, based on the analysis of four of the largest SROs compared with four mid-sized casino operations, the SROs were in a strong financial position relative to the publicly traded casino operations sampled.
Mr. Barnard also reviewed page 33, Table II, which showed SROs at a respectable 25.4 percent return on invested capital which favorably compared to the chosen casino operations. Page 35, Table III showed operating income for three publicly traded SROs for the period 1989-91. He stated Table III showed a clear upward trend in gross revenues and operating income for the period. In fact, operating income (the profit number before inclusion of depreciation, amortization, research and development, and general administrative expenses) increased by 61 percent from 1989 through 1991. He also reviewed the SROs' apparent high level of investor confidence, which was based on the high price-to-earnings ratios at which SROs were being traded in the marketplace.
Mr. Barnard concluded all the above taken together indicated an industry (SROs) which was in good financial health and which enjoyed a relatively high degree of investor confidence. Such was the conclusion in the B/V study.
Dr. Eadington, professor of economics at University of Nevada - Reno, Director of the Institute for the Study of Gambling and Personal Gaming, and authority on gaming, gambling and public policy, testified relative to the major challenges and opportunities which faced the SROs. He stated they had studied broad tax policy and the specifics of the slot route and gaming industries in the state of Nevada. Also, they researched gaming trends in the state and throughout the nation.
Historically, Dr. Eadington explained, Nevada's present tax structure and bifurcation of tax policy for licensees (restricted as compared to nonrestricted licensees) had been formed in about 1967. The legislature had indicated a higher fixed fee structure was appropriate for small gaming operations because of the small dollar amounts and the difficulties in administering and auditing the reported revenues. The higher rates were appropriate when comparing the lower fixed plus percentage fees paid by the nonrestricted licensees, had there been only one tax structure.
Dr. Eadington stated he felt after twenty-five years, it was time to reevaluate tax policy. He expanded any tax structure, gaming or otherwise, should be based on five fundamental principles:
1.) Tax neutrality, taxes should not change basic business decisions;
2.) Tax equity, taxes should be the same for businesses which compete with one another for common customers;
3.) Ease of administration, relatively easy and inexpensive to collect from the state's perspective;
4.) Certainty of obligation, easy to understand and compute for the taxpayer, general public and the administration agency; and
5.) No ambiguities, so no loopholes existed which could be exploited.
Additionally, tax policy should be simple and have longevity and survivability in changing economic times.
Dr. Eadington discussed the two types of contracts which existed between the slot route operator and the location owner. He also discussed the five alternative plans which had been propounded in the study. He covered the philosophic and policy reasons for each and the prospective effects of each. He stated although there were some who stated the proposals were not friendly to independent or pure operators neither was the current structure because of the fixed fee structure. If the win was relatively low, the tax rate was quite high.
Dr. Eadington pointed out, with the concentration of SROs, it was no longer as difficult to audit SRO operations as it had been in the past. Adequate accounting information was more easily generated from the three remaining large SROs than it had been previously from nonrestricted licensees, in general.
An anticipated complaint had been voiced, he said. There might be some measure of noncollected fees which might result if a shift was made to a percentage-tax basis. It was suggested in some interviews with operators, if restricted locations were required to pay a percentage of gross win they might underreport those figures in order to avoid tax. However, Dr. Eadington did not feel such would occur as it was quite similar to how sales taxes were imposed and he saw no problem in such regard.
Two factors were important in his review. First, the greater concentration of SROs meant the industry had moved very quickly from a competitive situation into a quasi-monopoly posture. Future growth of the SROs was the second factor. He stated the phenomenal growth of the industry within the state since 1980 meant it was reaching market maturity in Nevada or at least would be constrained by population growth and/or public policy considerations. However, the potential for growth outside the state was unprecedented.
Dr. Eadington explained recently, in the last four years, South Dakota, Montana, Oregon, Louisiana, West Virginia and Rhode Island and parts of Canada had introduced gaming through lotteries or other noncasino gaming devices. He projected all these areas potentially provided new areas for slot route operation and the expertise would be exported from Nevada in order to take advantage of similar business opportunities. He explained all those areas outside Nevada had higher taxes than Nevada and were on a percentage tax basis. He outlined some rates in other states. Those tax rates ranged from 16.25 percent in Montana to a 45 percent rate in South Dakota. Comparatively, Nevada's rate was about 3.5 percent. In conclusion, there was considerable reason for optimism on the part of the SROs of Nevada.
Mrs. Williams asked if any Nevada SROs were operating outside the state presently. Dr. Eadington stated he was not sure, but he thought one company had current contracts in Louisiana. He also told Mrs. Williams approximately 38 percent of location contracts with the SROs were space rent type of contracts.
Bill Bible, Chairman of the Gaming Control Board, explained the 1991 legislature had made a substantial appropriation for the referenced study and had asked the Gaming Control Board to conduct it. He said much of the data had been collected in-house and the reliability of the results of the study had been audited in-house.
John Alderfer, Chief Financial Officer and Treasurer, United Gaming, Inc. of Las Vegas, was first to speak in opposition to AB 533. Mr. Alderfer read from his prepared remarks which are attached as EXHIBIT F.
Mr. Alderfer asked the committee to reject this bill and not to impose an unfair tax increase. Mrs. Williams interjected since the study was requested by the 1991 legislature, she did not feel considering this bill would be breaking faith with the taxpayers of the state who had mandated no new taxes.
Mr. Alderfer added United Gaming was a licensee in the state of Louisiana. In answer to a question from Mr. Marvel, Mr. Alderfer stated the tax base in Louisiana was 22.5 percent of the gross win of the machine plus a $1,000 licensing fee. However, he added, video poker machines were only permitted in certain heavily restricted locations which, in effect, eliminated competition. He contrasted the Louisiana restrictions with the more liberal competitive situation in Nevada. Mr. Marvel asked if United had a monopoly in Louisiana or how many other operators were present. Mr. Alderfer answered they did have a monopoly in southern Louisiana and there were two or three other SROs in the state as a whole.
Emmett Sullivan, Executive Vice President of Jackpot Enterprises, and President of the Slot Route Operators Association of Nevada, introduced Frederick Sandvick, Executive Vice President and Chief Financial Officer of Jackpot Enterprises, Inc. He explained Mr. Sandvick would be reviewing and discussing the Barnard, Vogler report from their perspective.
Frederick Sandvick explained he was a licensed California attorney and certified public accountant. Mr. Sandvick presented A Response to the Barnard, Vogler Study of the Slot Route Industry which is attached as EXHIBIT G. He capsulized his presentation prior to reading from the text of the response stating he felt the financial information given in the Barnard, Vogler study had grossly distorted the slot route industry to the degree the Barnard, Vogler study was patently ridiculous. Mr. Sandvick said, as he understood it, it had been the charge of outside consultants to assess the financial health and prospective growth of the businesses of slot route operators in the state of Nevada. And, from such an assessment, the legislative body would then decide whether a tax increase was warranted.
Mr. Sandvick testified, "I assume you have all read the B/V study. It certainly was presented here today. And, from that report probably believe, as apparently the Governor believes, --that a tax increase is warranted, based on that report. Well, ladies and gentlemen, that report was not about the slot route industry. Part of it was. Part of it was about a gaming machine manufacturer. Part of it was about a utopian society where no general administrative costs exist, no depreciation exists, no amortization exists, no interest expense exists. Unfortunately that is not life.
"Please, before I proceed, I do want to make it clear that I have great respect for everyone who produced that report. I don't know them all but I know of their backgrounds and this presentation today is no reflection on anything with regard to what they did. However, I do need to state that in my over ten years of practice in public accounting, practice as a businessman, the B/V study has to rank as probably one of the top five most grossly misleading reports that I have read.
"If you can indulge me, I would like to briefly review that response you now have in front of you. If I may direct your attention to page one, and what I consider to be the fundamental conclusions of the B/V study -- `Even if restricted locations were subjected to higher tax rates -- it would not significantly affect the SROs' overall financial health.'-- Well, ladies and gentlemen, the increases proposed by the B/V study probably would significantly eliminate the profits, if any, that the SRO industry will have --
"Because the statement was based on a compilation of financial information that grossly distorted the SRO industry in such a way as to lead a prudent person to conclude that the SRO industry was financially strong, the statement was made. What financial information was distorted you may ask? All the tables and data given concerning the SRO industry financial information, all. What happened. Well, first, in compiling the financial information of the SRO industry the study included financial information of International Game Technology (IGT). Does anyone here in this room understand what that means? They included financial information of International Game Technology. Ninety-five percent of the revenues of IGT are not slot route operator revenues and 100 percent of the net income of IGT is not slot route operator income, yet they included it in this study."
Mr. Sandvick reviewed the findings of the response in light of his comments and concluded, "I submit to the committee that the B/V study is clearly erroneous and provides no justification for any increase in taxes. Since the study was the basis of AB 533, I submit that AB 533 should be rejected. Thank you for your attention".
Mr. Marvel asked Mr. Sandvick why the general administrative (G and A) expenses were overlooked. Mr. Sandvick replied he did not know. He thought all those expenses should have been included in determining operating income for the industry. Mr. Marvel questioned Mr. Sandvick as to the G and A expenses of Jackpot. Mr. Sandvick responded Jackpot had held those expenses under control to a great extent. But, costs such as health care had increased dramatically.
In response to a question from Chairman Price, Mr. Sandvick explained Wayne Label, Dean of Accounting, University of Nevada - Las Vegas, had been instrumental in preparing the response. Chairman Price indicated there were asterisks on the table on page 35, but he would be questioning Dr. Eadington as to compilation techniques at a later point in the hearing.
Responding to a point made by Mr. Neighbors, relative to summarized slot revenues represented on the table on page 35 of the B/V study, compared with similar information on page three of the response, Mr. Sandvick explained the actual slot revenue of IGT in 1991 was $18 million and that other revenues were included in the B/V figures.
Mrs. Williams asked Mr. Sandvick if he had the same information available to him B/V had had available when compiling the figures for their study, or did he work simply off B/V's study.
Mr. Sandvick replied he had worked from the B/V study and then went to independent sources to verify the public information and figures.
Mr. Neighbors asked if Mr. Sandvick felt the information used was tainted throughout the B/V study. Mr. Sandvick stated various information given in the study regarding the SRO industry was tainted.
Emmett Sullivan submitted an additional set of reference papers for the record which is attached as EXHIBIT H. The exhibit included a cover sheet comparing licensing and tax rates for restricted licensees to those of nonrestricted licensees. He stated he felt the study was misnamed because it did not apply only to slot route operators, it applied to every restricted slot machine in the state including independent owner/operators or "pure" locations. He stated he felt the use of the term "effective tax rate" was used as a buzz word to fit Barnard, Vogler's purposes and did not reflect what he referred to as the "real tax rate" which compared to gross income, not gross revenue. He reviewed the supporting schedules to EXHIBIT H. He also pointed out what he felt to be real and significant differences between slot route operations and casino/hotel operations. He contended they were not parallel industries and should not be taxed at the same rates.
Chairman Price asked Mr. Sullivan how many change people were employed by Jackpot Enterprises. Mr. Sullivan stated Jackpot had about 800 employees. Approximately one-half were elderly women (and a few elderly gentlemen) who Jackpot found to be the best and most reliable change personnel.
Mr. Bennett asked Mr. Sullivan where he obtained the figures for hotel/casino revenues and taxes shown on Schedule A-1. Mr. Sullivan explained the information had been gleaned from the Gaming Abstract compiled by the Gaming Control Board annually. Mr. Bennett told Mr. Sullivan he felt only gaming revenues from the hotel/casinos should have been included to determine the effective or real tax rate. Mr. Sullivan responded by saying it was his position taxes, other than gaming, were not paid by the hotel/casino. Those taxes were all charged to the patrons and only passed through the hotel/casino. Only the gaming taxes were assessed directly against the gaming company, whether casino or route operator (except for income taxes which they all paid directly). Mr. Sullivan stated his exhibit represented 100 percent of revenues for both the casino/hotel operations compared with 100 percent of the slot route operators revenues. Mr. Bennett stated he felt the use of all revenues for the hotel/casino operations compared with gaming taxes paid also distorted the results somewhat. Mr. Sullivan stated he felt it represented no distortion because they had also included income for Jackpot Enterprises which was not slot route operations income. Mr. Bennett stated he felt it would be clearer if only gaming revenues had been compared for both segments of the industry.
Vice Chairman Williams recalled Dr. Eadington and Ms. Vogler to testify. Chairman Price explained it was somewhat out of the ordinary to recall witnesses. However, they did want to address a few questions while witnesses were present so they would not have to be recalled at a later date.
Chairman Price asked for an explanation of the selected data included on the table on page 35 of the B/V study. Betty Vogler said it was unfortunate but she had not seen the response prepared by Jackpot Enterprises. Chairman asked Ms. Vogler to refer to page 35 of her report. He asked her to explain the notation number 15 which appeared behind the dates in the FY column headings as it pertained to slot route operations and compare it with page three of Jackpot's response (of which a copy was provided to her). Ms. Vogler commented a copy of the B/V study had been sent to each slot route operator in January of 1993, requesting the operator respond within a given number of days. She added they were not prepared to respond without having an opportunity to review the response properly.
Chairman Price explained some members of the committee had other meetings at 3:30 which could not be ignored. It was the Chair's intention to recess and reconvene at 5:00 p.m. He would allow Ms. Vogler and her associates to use the time to review and prepare their comments relative to what had been presented. Ms. Vogler said they would try to prepare their response and be present when the meeting reconvened.
Vice Chairman Williams asked Thomas M. Roche, member of the Gaming Control Board, if he would respond to a few questions. Mr. Roche came forward and Mrs. Williams asked him if he would like to comment on the questions raised as to the accuracy of the figures used by B/V.
Mr. Roche said, "I would think that some of the representations made by Mr. Sandvick are certainly correct. I mean, those are numbers that we extracted from annual published reports, specifically on page 35. I am not going to dispute the issue that those numbers for IGT include their sales of slot machines. I do believe that what the report was intended to show there was some type of an alignment -- pure -- I don't want to imply "pure" versus "impure" -- to take someone like Jackpot Enterprises who really has as its primary business segment slot route operations, comparing it to United which is, again, a comparable comparison -- then overlaying that against IGT which obviously dedicates a substantial portion of its business to the sale of slot machines, not slot route operations. I think the intent there was simply to show some type of a trend analysis and some type of a profitability analysis. In terms of Mr. Sandvick's comment about the exclusion of general administrative expenses, interest income -- I don't think anyone will debate --
Mr. Marvel, "Income expense".
Mr. Roche continued, "Excuse me, interest income and interest expense. You know, when you look at the debt structures of a lot of these companies, specifically United Gaming, a lot of these companies -- in the case of United Gaming -- that company has had its economic challenges in the last two years. And when you got down to, therefore, comparing a company that's gone to the public debt markets and really over-leveraged its company -- I mean, through, you know, either poor management or poor abilities to project what the capital needs would be, you compare that against the company that has generated cash flows over time and, therefore, is not burdened its balance sheet with debt, you end up getting an incorrect read as to truly what the financial viability of what the slot route operations is. And, really you start to muddle down an operating income number with G and A, with interest expenses and things like that. Again, you start to take company philosophies and really start to bastardize that operating income number. Because different companies are gonna have different organizational structures. Some are going to be -- their G and A numbers are going to be very small in relation to their revenues. Others are going to have inflated G and A numbers. So, we're going to have, as I indicated with United Gaming, large debt loads on their balance sheets, some are not. So, what we try to do is focus in on the operating income number which was alluded to earlier because we wanted to make sure we were comparing apples and apples."
Mr. Marvel commented, "But, if you're -- excuse me -- If you're a publicly traded company, you're sure going to be taking a hard look at your G and A."
Mr. Roche, "No. You definitely are. But, again, I think if you get a spectrum of publicly traded companies, you are going to see different ones that have -- in the casino business -- you take a Circus Circus, you're going to see their G and A numbers substantially less than Hilton Hotels or Caesar's Palace or some others strictly because that's the philosophy of the corporate management. Circus Circus runs a much leaner machine than does, for instance, Caesar's Palace or Hilton. A lot of it is in the interim businesses that they attract. So, again, because of those types of things we felt that in order to get a true comparison of companies, we felt that the operating income number was the more appropriate number to use, rather than some other number that is boiled down through some corporate philosophy."
Mr. Marvel said Mr. Roche had made a good point. Mr. Marvel asked if a balance sheet, which would indicate the history of a company, would be available for review so it might be compared with income statements.
Mr. Roche continued, "Yeah, I don't disagree. When you look at the slot route operator industry -- I do think you look at a United and you look at their bottom line, they're having financial difficulty. They just released earnings from this past quarter, where they lost $900,000. That's primarily due to the fact the company is overleveraged. You look at Jackpot -- Jackpot has better managed their balance sheet. I don't think they've gone to the debt as heavily as some other companies. I think, therefore, their cash flow is fairly good. I think, therefore, that type of a company would probably have a greater elasticity to absorb a tax, structurally. Again, we were just trying to bundle a trend analysis for the industry. I guess, with that we can go through and try to come back and respond to some of the specific complaints."
Mr. Ernaut commented he did not understand how G and A could be left out of any financial analysis of any business, publicly traded or not.
Mr. Roche said he was not trying to make a case against including those expenses. He was simply, from his recollecting, trying to recall why the operating income line was the line they had started with in the study. He added, many analysts at securities firms focused in on operating income numbers, prior to depreciation and interest. The reason being it was the only way those analysts could get a reasonable comparison company to company. Discussion followed.
In conclusion Mr. Roche said, "I'm trying to make the case, and I think you (referring to Mr. Ernaut) are correct, in that when you look at the bottom line, which I think is the point that Mr. Alderfer made and what Mr. Sandvick was making is -- you gotta look at net income, which includes what you were saying."
Mr. Ernaut stated he felt Mr. Sandvick's point was those expenses had not been included at all. Mr. Roche said the study had not been meant to misrepresent expenses on page 35. It had been meant to be interpreted together with the introductory notes.
Mr. Neighbors commented it was very difficult to track the numbers in the study and the response. Mr. Barnard said they felt the study was valid and the figures had been extracted from annual reports and information available from documents submitted to the Securities and Exchange Commission. He concluded they would be ready with a response after the recess.
* * * * * * * * * *
Chairman Price reconvened the meeting and thanked everyone for their cooperation. He also announced some members of the committee would be required at other meetings from time to time.
Betty Vogler began by stating she had a few comments and concerns relative to the sources of Mr. Sandvick's figures included in EXHIBIT G, A Response to the Barnard, Vogler Study of the Slot Route Industry. She stated she would appreciate an opportunity to meet with Mr. Sandvick to review his statistics. Her first reference was to page two of the report, whereon the SROs had contended the original Barnard, Vogler reports had been based upon inaccurate financial information as to selected financial data of the largest SROs. She stated all such information was taken directly from the financial statements prepared by the SROs which had been submitted to the Gaming Control Board.
Chairman Price inquired as to whether there was a difference between inaccurate information as opposed to information which could possibly have been more detailed.
Ms. Vogler said it depended on what Mr. Sandvick meant by "inaccurate." She added it was true certain detailed information on the publicly traded companies was not available to Barnard, Vogler.
Mr. Marvel asked, if a company was publicly traded, why was such information not available. He thought under SEC rules it should have been. Ms. Vogler responded only certain financial information had been available to them. She submitted copies of Consolidated Statements of Income from International Game Technology (IGT), Jackpot Enterprises, Inc. (and Subsidiaries), and United Gaming, Inc. (and Subsidiaries) as EXHIBIT I. She explained those reports gave figures for gaming income and gaming expenses; however, they did not give any further detailed information as to specific figures which pertained only to the operations of SROs.
Mr. Barnard stated he had given them the information which had been used to prepare the Table on page 35 -- (of the Barnard, Vogler report which had been in question earlier in the hearing). He noted they had not had much time to respond to EXHIBIT G. He stated they would like to review Mr. Sandvick's figures and come back with any other information which might assist the committee.
Chairman Price reviewed the 1989 figures for IGT. He asked if it was not self-evident the figures reported for IGT were inclusive of other operations than slot route operations. He also asked if it would not have been prudent to have asked for additional information so an accurate comparison could have been made.
Mr. Barnard said, "One of the difficulties that we have working with the information that was available to us was in cost allocations and breakdowns as far as revenue goes. The breakdown between gaming and casino operations, for instance, on IGT -- obviously includes slot route operations together with other gaming activities; not manufacturing, however. And, a cost listed under costs and expenses are combined in gaming and casino operations. We do not have any detail to break the gaming and slot route operations apart as to revenues and expenses. That is true with respect to many of the publicly traded companies. And, we commented in our report that it was only an indication, that it is very difficult to get pure departmental income from a slot route operation, per se. And, it's even more difficult to find out what a bottom-line number might be from a slot route operation.
"That's why we did not try to allocate general administrative expenses. In point of fact, you will see the companies themselves do not even try to allocate general administrative expenses to their separate departmental activities. With respect to IGT, you can note that in 1991 there was $81 million of gaming and casino revenue and $29 million of gaming and casino costs and expenses. That's as far as we have the numbers broken down because this is all they are required to segment for the Securities and Exchange Commission.
"We have similar information on pages two and three for Jackpot Enterprises and United Gaming. Again, this is all public information, and that's what we were working with."
Dr. Eadington added, "The issue that was pointed out is that, especially with IGT, there's clearly more than just slot route operator income in there. And, we tried to put together where that income likely came from. IGT, in that category, would include a number of small casino operations, including the Treasury in Sparks, the El Capitan in Hawthorne, the Kings Casino in Antigua, the Silver Club in Sparks, and from April, '91 onward, the fair share of revenues from the President River Boat in Davenport, Iowa. Plus, Megabucks, Quartermania and other revenues that they get from that particular product over which they hold patent. However, if you look at the other two publicly traded companies, United Gaming and Jackpot, we find similar patterns. United Gaming over this period both had casino operations with the Plantation in Sparks, the Mizpah, Miss Lucy's and Sassy Sally's in the Trolley Stop Mall in Las Vegas. And, Jackpot had Jim Kelly's Nugget in Reno as well as the Owl and two casinos in Deadwood, South Dakota, which they had ownership in. So, the difficulty is that we were unable to breakdown, for any of the companies, a pure operating income statement that would be pure for slot route operations."
Mr. Barnard continued, "Some of the confusion may result from the mixing of the terms "net income" and "operating income," and it was never intended that the information on page 35, Table 3, -- intended to reflect net income. There are so many variations when you go all the way down to the bottom line amongst the companies involved that it is probably not useful to try and take a look at their net income -- their corporate net income --as it relates to their ability to pay tax on their slot route operations."
Mr. Price discussed a typographical error on page two of Jackpot's financial statement with Mr. Barnard briefly.
Candace Fox, Fox Consulting, stated, "What I'm responding to are the two handouts that Mr. Sullivan handed out. The first was, as he reported, a survey that he sent out to other slot route operators to determine what their effective tax rate, or what Mr. Sullivan called the real tax rate, is. The reason our numbers there are a little different is because the slot route operators, in reporting to Mr. Sullivan included local government taxes as well as state taxes. So the real tax rate, or the effective tax rate, is going to be higher than what we have in our reports, since we only report state tax rates. And, again, to reiterate our findings, the restricted license locations have an overall effective tax rate of 3.5 percent --state tax rate -- excluding local government. And, that compares to the nonrestricted SROs and -- of about anywhere from five to seven percent, depending on if it's a slots-only property or with tables."
Mr. Price interjected the argument at hand, whether to included local and state tax revenues, went back many years. He reviewed some history on the debate. He said if a report was to be compiled which gave a clear picture of the impact of taxes on any business, some idea of what the total impact, including local and state and federal taxes, would have to be included.
Ms. Fox stated, "It's important that we compare apples with apples. And, I think Mr. Sullivan needs to compare state rates to state rates or total rates to total rates. And, I think he was mixing them a bit there. But we do have a part in this report that we refer to local government fixed rates, and they change from county to county. So, the total effect of tax rate would change. But, you're right. As long as we just compare the same fruits.
"The second thing that Mr. Sullivan handed out -- on the second page it is entitled "Schedule B-1". A quick review of this over the break -- He is comparing -- he is estimating Jackpot's taxes to be paid in fiscal year 1993 and he comes up with about a $4.2 million figure. And then he compares that to net income, coming up with a tax rate of 71 percent as opposed to comparing it to gross gaming revenue, which is not net gaming revenue. If in fact you compare that $4.2 million to his estimated route revenue in fiscal year '93 of $76 million, you come out with an effective tax rate of 5.5 percent, which is .1 percent higher than what we estimated in the report at 5.4 percent. So, again, if we compare the same set of figures we come up very, very close on his estimates in the report."
Dr. Eadington continued, "I just wanted to continue with one other fine point on Emmett Sullivan's testimony. He indicated that if you take the gaming industry in Nevada at large and take their total tax bill divided by their total revenue, you should come up with a real tax rate of 4.7 percent. What Mr. Sullivan would be suggesting then, is that the appropriate tax base in Nevada is not gaming, per se, but total revenues all together. And, I think this is just a fallacy in his presentation. Nevada through its years of establishment of policy with regard to the gaming industry, has chosen to establish a gross tax on gaming revenues that you are all quite familiar with. What we are suggesting in our report is that this is the appropriate tax base that we are examining with regard to slot route operators as well. If the state of Nevada wishes to change its tax base to put a gross tax on all revenues received by gaming licensees, then Mr. Sullivan's comments would be far more appropriate. As it stands, they are very much off base.
"What I would like to do in terms of my observations on this is to refocus what the issue is. If you'll notice, all the criticisms that are put together in this rather thin document relate to criticisms of the table on page 35 and basically the financial performance of the various publicly traded slot route operator companies. I do not think that that is effectively the issue here. I think the major thrust of the report is that the -- is really the question -- do the slot route operators as a group or do restricted licensees in the state of Nevada -- are there justifications to allow for preferential tax treatment of these particular groups in comparison with the gaming industry at large. This gets to the fundamental issue of tax equity that we spelled out in our report. In effect, we are asking the question, `Should these groups, that are slot route operators, or restricted license locations be subsidized by the state of Nevada, by the gaming industry at large, via preferential tax treatment'.
"We have established, no one has challenged, that the effective tax rates, using the appropriate base and the appropriate definitions, for restricted licensed locations are roughly half of the effective tax rates that everybody else in the state pays. And, I believe that that is the fundamental issue and that is the issue the Legislature must address.
"Second point is, that it is very clear from our analysis, that in the fifteen years or so that the slot route operator industry has evolved -- it has evolved into a highly concentrated industry. A much higher level of concentration of ownership in terms of the percentage of the market that is controlled than any other market segment in the gaming industry that I'm aware of. And, probably more than most -- virtually any industry you can find in America. You have the five largest companies, now effectively the three largest companies, controlling 85 percent of the revenues and 80 percent of the physical product. That is a very high degree of concentration.
"What that implies then is that this industry is likely to go through a number of transitions in the relatively near future. It also explains the kind of pricing behavior that we have seen over the last ten or 15 years. The implications of this much concentration in an industry are that it's quite likely the future is going to bring about higher prices to consumers. And, because of the unique nature of this industry, this probably would be in the form of higher retention percentages or lower payback percentages to players as a group. The industry historically has been very, very price competitive, as customers are terribly price sensitive. If, indeed, there are only two or three major suppliers of this product, it's certainly
going to affect that. Locations are going to find they have less bargaining power, less slot route operators, because they have far fewer to deal with. If there are only two or three major potential slot route operators, the slot route operators have a much stronger bargaining position whether we're talking about space lease or participation types of contracts.
"What we have seen in the past has been what the congress would call predatory pricing. There has been very severe competition among slot route operators to get the best locations. And, this has led to, in many respects, very favorable terms for locations. My suspicion is this is not likely to continue if the kind of concentration we see does indeed continue. We're likely to see higher profit margins and this is a by-product of monopoly. We're also likely to see less sensitivity to changes in the marketplace, changing consumer preferences and needs, which is another by-product of monopoly. The one caveat that I need to throw in here is that ultimately, in the long term, the major competitors for non-casino gaming locations such as restricted license locations are the casinos themselves and, in particular, in the Las Vegas market -- the so-called "locals casinos.
"Even if the financial performance is weak, as was alleged by the chief financial officer of Jackpot, even if the financial performance of the major, publicly traded slot route operators who dominate the industry is, indeed, weak, we still have the question of does this group deserve specific, preferential tax treatment. And, if we compare them against segments of the gaming industry at large, we can find other groups who certainly are in greater need of subsidy or help than this particular group. For example, if we take from the 1992 Gaming Abstract the performance of Las Vegas Strip casinos in the $36-72 million gross gaming revenue range, we have six casinos in this group who had gross revenues of just under half a billion dollars, gaming revenues of just under $300 million, and who lost $7 million in 1992. Their effective tax rate was 7.5 percent. The next group down on the Las Vegas Strip, the $12-36 million group, which includes nine casinos, had gross revenues of $400 million, gaming revenues of a little over $200 million. They lost $37 million as a group. Their effective tax rate was 9.4 percent.
"Even though we are not allowed to divulge the specific performance of the companies in the top five slot route operators, we can at least point to some of the information provided by the publicly traded companies. Jackpot, for example, in fiscal year 1992 had gross revenues of about $63 million, operating income of about $12 million, and net income before taxes of about positive $4 million. So they are certainly not in as dire financial straits as some companies --perhaps, even quite a few companies in the gaming industry at large under nonrestricted licenses.
"One of the real issues this body is going to have to consider are the implications of the different alternatives as we have put them forward. The Governor's office has expressed interest in both alternative two and alternative three. These are two alternatives that we put forward without a recommendation from this particular study group. However, we did point out what we feel are the critical differences between the two, and the differences that you should perceive as legislators, in trying to establish tax equity and tax neutrality in this decision. Alternative three, which is the one that effectively applies the same tax policy to restricted locations as is currently applied to the entire gaming industry but treats each location as a unit, effectively has as its axiomatic beginning the premise that each location acts as if its a casino. And, because of Nevada's tax laws, small casinos do indeed deserve preferential treatment over large casinos. This shows up in our bracketed tax structure.
"Alternatively, if you were considering alternative two where we aggregate across slot route operators, we are effectively saying that a slot route operator is more or less on equal footing with a full-standing casino. The only difference is they don't have a physical structure in which all of their facilities are housed. Alternatively, they have a very different kind of capital stock. They have trucks instead of hotel rooms. They have maintenance problems that are not easily serviced as opposed to what a casino can do with mechanics and slot personnel. On the other hand, they do not have the significant capital costs that come in building hotels or casino facilities. This is the kind of information that Dick Barnard tried to establish in comparison of slot route operations to the gaming industry at large, but for which the data did not exist. Or at least did not exist to us -- was not made available to us.
"The basic issue then that the legislature must consider if it does reduce the question down to these two alternatives, is `What is the real impact of taxation upon slot route operators or locations?'. Economists call this the phenomenon of shifting and incidence. If you create a tax or add a tax to an industry -- who really pays it? In this case there are really three possible payers of the tax. There is the slot route operator himself. Conceivably, the slot route operator might absorb up to one hundred percent of the tax. There is the location. And, the location might pay a portion or all of the tax, depending on the relative bargaining strength of the slot route operators and locations. Or, there is the customer. Part of the tax might be shifted onto the customer if the competitive environment allows the slot route operator and the location to, in effect, increase their cost for gambling. Those are the kinds of consideration I think you need to keep in mind. And, I would recommend you try to avoid the misleading comments that we heard earlier."
In answer to a question regarding "pure" locations which owned their own equipment posed by Mrs. Lambert, Dr. Eadington replied, "I think the most important element that comes out of our study is that the factor that most influences their effective tax rate is their average win per unit. And, even though we did not get as good a data on the -- what we call pure restricteds as we did for the slot route operator restricted locations -- I think our indications were that their revenues were toward the lower end of the range. Which would mean that given a fixed fee tax structure as presently exists, they have a higher effective tax rate than they would under any of other alternatives. If you are concerned about the pure restricted locations, either alternative two or alternative three would effectively allow a lower marginal tax rate on gross winnings. And, it would have a fixed fee structure identical to the fixed fee structure that applies to any casino, large or small that happens to have a nonrestricted license. It's a smoke screen, I think, for someone to say that choosing any of these alternatives is really going to damage the little guy. Because that is not at all the issue. I think any of the alternatives would create the same kind of preferential tax structure for low revenue generating firms, whether they're restricted licensees or not, as presently exists for the casino industry at large."
Chairman Price interjected he had been trying to get an overall feel for various subjects in order to make appropriate policy decisions. He stated he was somewhat bothered by the wording or the tenor or some of the report, although he liked some of the options of it. He did not like the insinuation there was preferential treatment and subsidies being given to a segment of the industry. He added, in reading AB 824 of the Sixty-sixth Session (EXHIBIT P) included hereinafter, he was not sure those compiling the report knew what their mission was, based on the bill. He stated they had expected the return of a report which was pure in its numbers and conclusions, not a report which suggested policy changes in itself.
Chairman Price said it was his opinion the tenor of the report was making the alternatives given somewhat mandatory from the study's authors to the committee, whereas AB 824 of the Sixty-sixty Session did not ask the authors to make such demands. He said he had expected a professional report containing accurate figures upon which the legislative members could make new policy decisions. He reiterated, while the study brought up a significant amount of new and interesting information relative to gaming in general, it did not directly build a case as to whether there was a fair evaluation of the companies in this state which were involved as slot route operations compared to gaming at large. He felt the study was slanted toward encouraging the legislature to move in a predetermined direction.
Dr. Eadington stated many of the terms used within the study were terms routinely used by economists as descriptive terms for certain groups or circumstances and were not meant to be pejorative, simply statements of fact. He said he did not believe the authors of the study had intended to move toward any predetermined conclusions and he apologized for any such appearance. He felt the study was as comprehensive and cohesive as it could have been based on the information which had been available to them. Chairman Price agreed the study was comprehensive.
Mr. Haller referred to a letter submitted by Bi-Rite Markets which is attached as EXHIBIT J stating he understood their plight. Mr. Haller said he, too, did not expect a "tax 'em" report. He had expected a report which reflected whether or not the slot route operator industry was financially healthy. He added he did not know that yet, even in light of the study.
Dick Barnard responded chapter three of the study addressed the financial health and prospective growth of the slot route operator industry, including some related casino operations. He stated the authors believed the observations in chapter three were still valid. The slot route operator industry demonstrated a degree of financial health. And, the industry showed potential for growth, if not in Nevada where the market appeared to be somewhat mature, then certainly outside the state due to industry expertise.
Rick Crawford, owner and President, Green Valley Grocery, and owner of Crawford Coin, a small slot route operator, stated his operations had 12 locations with 92 machines. He said he was one of the 33 of the 53 slot route operators who operated 99 slot machines or less. Mr. Crawford explained he took issue with those who felt his was not a "mom and pop" industry. He gave a brief history on how he became a slot route operator in 1987.
Mr. Crawford stated he had refigured his tax liability for 1992, based on the proposed bill structure. Contrary to what had been presented he found it would double what he had paid previously in taxes. He said he was not going to be pushed out of business by larger concerns. However the state of Nevada could pass bills which might tax him out of business. He added he would want the committee to consider how many employees were working in small companies which would go out of business if there was no profit left for the owners. He speculated on how many additional state workers would be necessary to administer the new laws and felt the cost of administration could exceed the higher tax revenues.
Mr. Crawford stated he resented the comment made earlier regarding companies intentionally understating their revenues in order to avoid taxation. He stated the current system was simple and worked with very little administrative manpower and he felt it should be left alone.
In response to a question from Mr. Haller, Mr. Crawford explained drop procedures and the effect of Gaming Control Board requirements on his operations. He added, if it became necessary for the Gaming Control Board's representatives to verify beginning and ending numbers on the machines, it would become much more complex and costly for everyone.
Helen Foley, representing 7-Eleven Franchise Owners Association of Southern Nevada, introduced Tim Cegavske, a 7-Eleven franchisee. She commented small businesses which participated as part of the slot route operations had a cap of seven machines at each location with four machines being the average at each location in northern Nevada. She explained most 7-Eleven locations not only paid applicable taxes but also paid Southland Corporation a $200 fee for each machine, whether the machine was profitable or not.
In response to a question from Mr. Marvel, Mr. Cegavske stated the franchisee of each store, together with a representative of the slot route operator, would determine how many machines would be installed in any given location, up to the regulatory limit of seven.
Bill Bible stated the regulatory limit was a function of the Gaming Control Board regulations taken in conjunction with overlapping city and county ordinances.
Mr. Cegavske read from his prepared testimony which is attached as EXHIBIT K. Mr. Cegavske added those who would actually pay the increased amount of any tax would be the store operator and his or her employees, because any increase in tax would be offset by making cuts in payroll expenses for many owners.
Ms. Foley also noted most 7-Eleven operators had existing contracts with slot route operators which would provide the increase in taxes would be split by them. She also said currently the franchisees dealt with whatever slot route operator was under contract with Southland Corporation in the area designated. Mr. Cegavske also added new franchisees had to work under the master contract with Southland and could not own their own machines.
Ms. Foley concluded, if the bill was considered for passage, she would suggest consideration of options one and five which were more favorable to the small business owners.
Debbie Sheltra, owner of Short Stop Food Stores, Reno, introduced Lenard R. Loper, owner, Rainbow Market, Sparks. Mr. Loper read from his prepared remarks which are attached as EXHIBIT L.
Ms. Sheltra suggested alternate tax sources could come from elimination of the exemption from taxes on Indian reservation sales of goods, cigarettes and now the proposed gas and liquor tax exemption. She explained, nationally, cigarette sales made up 16 percent of convenience store total sales and yet reservation sales were proximate to and in competition with her urban businesses and significantly reduced her cigarette sales. Ms. Sheltra reviewed the projected impact of AB 533, see EXHIBIT M, on her business if AB 533 was passed.
Ms. Sheltra explained she had 12 machines in her stores. She had placed them in her stores before the limitations were put into effect. Those machines were most active at lunchtime and between four and seven p.m., during heaviest traffic times. She said her win ratio had not increased when she added more machines and, indeed, her win ratio was much lower than the averages of some other businesses. She said with passage of AB 533 her effective tax rate and the effective tax rate for similar businesses would not go down as had been alleged by the Barnard, Vogler study; it would increase significantly to almost 10 percent. She asked the notes from Jim Linscott, owner of Shop-n-Go, Reno, be added to the minutes as EXHIBIT N (attached hereto). Ms. Sheltra stated no one had asked her about the financial health of her business nor had a financial statement been requested of her. The only thing she had been queried about was her gross win and other gaming figures; whether she was happy with her slot route operator; and, were the SROs taking advantage of location owners. She had not been asked what percentage of her total business slot operations reflected or other pertinent information because of the standard form format of the questionnaire.
Ms. Sheltra volunteered her company profit had been $8,000 one year and $26,000 last year and such profit margins did not provide for replacement of capital assets or growth. She stated she had decreased her work force by one employee and worked more hours herself in order to accommodate payment of the business tax which had cost her $1,500 last year. She added she could not spread herself any thinner in order to come up with more tax monies and she could not generate more sales revenues. Her customer counts and income had been rather static for the past few years. She said she did not have the money to do a great deal of advertising and she could not sell merchandise at a loss to get new customers into her store by competing with 7-Elevens.
Ms. Sheltra said there were 250 pure restricted operators statewide which averaged seven machines per location, based on information from the Gaming Control Board. Those pure restricted operators made up about 10 percent of the industry revenue. Ms. Sheltra implored the committee to help her keep her business solvent by not passing AB 533. She stated the new requirements instituted by other branches of government, including the Environmental Protection Agency (EPA), were posing enough challenges to her being able to continue business without increasing taxes on her slot operations. She stated she had dropped employee health insurance and hired more part-time employees at lower wages in order to stay abreast of increased costs incurred to date and to be able to pay taxes which were already in effect. She stated she was more supportive of the youth associations and other aspects of her neighborhood than larger businesses were. She explained her accounts were not automated, but she would allow the state to inspect her books and records to discern for themselves her business could not support a slot tax increase and remain healthy. Ms. Sheltra concluded if her tax burden continued to increase and she was forced out of business, Nevada's economy would suffer inasmuch as her employees would be laid off and the taxes she now pays would not be collected.
Mr. Haller commented he felt there were many regulations being placed upon small business which added substantially to the costs of doing business. He asked Ms. Sheltra how the EPA requirements had impacted her business. Ms. Sheltra responded she had yet to comply with the requirements but compliance would eventually cost her approximately $35,000 by the 1996 deadline. She stated she had no idea how she was going to finance the retrofit. Mr. Haller stated he felt there were other costs of doing business being levied through governmental mandates, besides taxes, which weighed heavily upon the small businessman and his ability to run a profitable enterprise.
Mr. Loper added he, too, was looking at approximately $35,000 to retrofit his gasoline pumps by 1996. He explained he and Ms. Sheltra were both low-volume stores in terms of gasoline sales and could not compete with the AM PM stations.
Mrs. Williams asked Mr. Bible how many unrestricted-licensee markets in Las Vegas had more than 15 slot machines. Mr. Bible replied there were some locations in Clark County which had up to 20 machines, however it was not a large number.
Jim Linscott, operator of two Shop-n-Go convenience food stores in Reno, stated he spoke on behalf of all independent small businesses which had slots but which were not SROs. He said they should be treated separately and differently from SROs. He indicated passage of AB 533 with either of the proposed alternative tax structures could potentially increase his annual gaming tax liability from $11,000 to close to $20,000. He had no idea where he would raise money to pay the increased taxes. Mr. Linscott, therefore, asked AB 533 not be passed. Mr. Linscott's notes are attached as EXHIBIT N.
James Avance, Jackpot Enterprises, spoke in opposition to the bill. Mr. Avance stated he would like to add one thing not previously discussed relative to the Barnard, Vogler study. He referenced page 33 of the B/V study and said he wondered why the authors had included IGT's operations, which had made a profit, while excluding Bally's operations which had operated at a significant loss. It was indicated inclusion of Bally's figures would have distorted the comparisons.
Mr. Avance submitted the informational agenda for October, 19, 1992 of the Nevada Gaming Commission which is attached as EXHIBIT O. He referred to page two of the agenda which listed application for a field trial of a new game requested by Dr. Eadington. Mr. Avance contended, perhaps, Dr. Eadington had lost his objectivity by putting the new game into Harvey's Casino during the period of time during which he participated in the study. He added the game had been approved in February, 1993 and was now available for use in various locations. He stated he had felt many of Dr. Eadington's previous comments had been biased and misleading.
Mr. Avance stated Dr. Eadington's comments relative to concentration of the industry leading to lower paybacks were untrue. He said the slot route operator industry was very competitive because they not only directly competed with each other for locations and payback rates, which resulted in the lower profit margins within the industry in general, but they also indirectly competed with casinos. He stated lowering the payback on the machines by any company would be suicidal. He added reducing the share to the locations would not be feasible because the location would only go with a competitor due to the intense competition which existed.
Mr. Avance noted he had distributed a copy of AB 824 of the Sixty-sixth Session (First Reprint) which is attached as EXHIBIT P. He reiterated Chairman Price's comments in that he felt the study had gone past its scope and had not included all the pertinent facts to arrive at appropriate conclusions relative to SROs' financial health.
Mr. Avance referred to a letter from the Gaming Control Board dated May 12, 1993 which is attached as EXHIBIT Q. The letter was a request for investigative fees. He stated every location a SRO had was independently licensed and filing fees and assessments of investigative fees were charged separately for each. Recognizing each location as a separate entity precluded, he offered, consolidating a SROs' activities into a master enterprise being effectively taxed at the same rate for restricted and nonrestricted locations. For fiscal 1991-1992 Jackpot and its subsidiaries paid $85,000 for filing and investigative fees, including investigations for two new officers. Jackpot also had paid $40,840 in filing and investigative fees in the nine months preceding the May 12 letter.
Mr. Avance added the slot route industry represented in the B/V study would never be the same again because of the extensive restrictions which had been placed upon it within the past three years. He referenced EXHIBIT R attached which was a copy of Regulation 3.015 passed by the Gaming Control Board in 1990. He explained in 1989 the legislature had added the word "incidental" to a gaming bill which he had strongly opposed. Subsequent to the "incidental" language being added, the referenced regulation was implemented and although section one of the regulation had been the only legislative provision, sections 2 (a)-(f) and 3 (a)-(e) were added by the board to further restrict where machines might be placed. Up to the time the regulations were adopted a slot route operator could add up to 15 machines at virtually any location within the state. The restrictions initiated by the Gaming Control Board internally were effectively codified with the passage of AB 824 of the Sixty-sixth Session. Those types of restrictions had virtually crippled the growth potential of SROs. Therefore, the study was the study of a mature industry in Nevada. The only potential growth available to the SROs was newly built locations and, otherwise, locations outside the state of Nevada.
Mr. Avance cited the B/V study at page 16 which indicated SRO locations with more than 16 machines paid a 6.5 percent tax rate. He stated if the legislature had an appetite to increase taxes on the SROs, please be less restrictive and allow them to install more machines. Otherwise, there was no ability to pay more taxes because growth was impossible within the state. He noted, too, the City of Las Vegas and other areas had continued to place significant restrictions upon SROs in locations which were previously feasible and economically viable. He said much of the attrition in the industry had been due to the increased restrictions and regulations.
Mr. Avance added there had been a significant increase in robberies during the term of the study because notification of the date of intended drop was required, whereas restricted locations regularly utilized unscheduled drop days. United Coin had suffered even more losses due to robberies than had Jackpot.
Mr. Avance said he had been offended at the insinuations made by the authors of the study that since there was little growth potential in Nevada, the SROs could go out of state to maintain their financial health and subsidize the routes in Nevada. He concluded it did not make sense to him for an industry to operate out of state in order to generate revenues to support its Nevada operations and remain viable.
Chairman Price asked Mr. Bible when the contract for the study was let to Barnard, Vogler and Company. Mr. Bible stated he believed it was in March or April of 1992. A general discussion followed as to whether Dr. Eadington might have been compromised by his participation in the study considering his concurrent application for the trial of his new game. Neither Mr. Bible nor Dr. Eadington felt there was any conflict involved because Dr. Eadington did not share in any gaming revenues generated by the field trials. Chairman Price indicated he felt it might have been more ethically appropriate to have made a disclosure within the report in order to have avoided any perception of conflict.
There being no further business to come before committee, the meeting was adjourned at 7:50 p.m.
RESPECTFULLY SUBMITTED:
LINDA CHANDLER LAW
Committee Secretary
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Assembly Committee on Taxation
Tuesday
May 25, 1993
Page: 1