Financial and Taxation Workshop

A Workshop Discussion on the topic:

Financial Transactions, Taxation, Reporting, Withholding, &
Money Laundering Issues, as they relate to Interactive Gaming
held
March 18, 2002

Sponsored by:
· IGI, Interactive Gaming Institute of Nevada
· William F. Harrah College of Hotel Administration,
University of Nevada, Las Vegas

Conducted by:
· IGTF, Interactive Gaming Task Force

Facilitators:
· Dr. Pearl Brewer -- Chair of the Hotel Management Department
· Bill Geoghegan - Lodging & Gaming Technology Consulting Inc.

ISSUES

Q:What is the purpose of Leach & Goodlatte with regard to Interactive Gaming?
A discussion of the Leach and Goodlatte bills pending before the U.S. House of Representatives Banking and Justice committees, respectively led to a question as to the definition of "Legal" gaming. There was no consensus that offshore operators are actually operating illegal games if they do not take bets from within the United States. There seems to have been no definitive ruling establishing what laws are being violated. Both bills ban the use of banking instruments to fund illegal Internet gambling accounts, but no one could offer a definition.

Banking

Q:A growing number of Credit Card Issuers seem to be denying transactions that fund gambling accounts.
It was offered that the high number of disputed transactions was likely the cause of this trend. Additionally, most states do not support the collection of gambling debt. Gambling debts in Nevada are collectable.

There was no consensus that banks would permit the use of credit cards for "legal and licensed" operations in Nevada, and there was some discussion that credit would be interested if not for the disputes. Most agreed that the card issuers could differentiate the source of a transaction sufficiently to do so if they desired.

Q:What other mechanisms could be used to fund accounts?
A number of alternatives were cited, including many electronic transfer or e-cash methods. It was suggested that the public will accept these mechanisms, and in some cases is already using them. Example?

Q:What methods are currently used to pay winnings?
Operators cannot credit more to a credit card than was used to fund the account. Amounts in excess of the credit card amount can be paid via check, or through some other transaction. Debit cards for example may be credited with no limit.
Public credibility issues exist, (and significant time to receive payment.) What does this statement mean? If payment is not received there are few remedies for the player.

Financial

Q:What do you think are the implications of recent closures of offshore operations?
This would make dealing with a well-known brand more valuable and appealing to the Internet gambler.

Taxation, Reporting & Withholding

Q:Would the Federal Occupational Tax apply, and to whom?
A federal Occupational Tax of $50 per employee (equaled by the operator) might apply to Internet gaming as it currently is to race a sports betting. In the event that the site is "illegal" the tax becomes $500 per employee.

Q:Would the Federal Excise Tax apply?
The Federal Excise Tax of 0.25% of wager amounts might apply to all Internet gaming, as it is not exempted. Note that this is on the wager amount, not on win, and, as a result, could have a significant impact on the financial results of a regulated U.S. Internet casino. This could possibly cause a competitive disadvantage.

Reporting

Q:What reporting requirements exist?
W2G reporting on $1200 per transaction and 300 to 1 payouts would trigger the same reporting requirements as currently exist in the brick and mortar world.

Withholding

Q:What are the current legal withholding requirements?
AUS operator is required to withhold 30% of all winnings from any non-U.S. citizen in any amount. This requirement could create a disincentive for foreign play on U.S. sites.

Money Laundering Issues

Q:Is Money Laundering a potential problem in the Interactive Gaming environment?
At this time, there has not been a plausible scenario suggested where money laundering would be a significant risk in the Internet Gaming environment. The attendees in general felt that the record keeping facilities of the on-line transactions would make it far less likely that someone could launder money anonymously.

Action Items

It was suggested that we undertake the process to get a private letter ruling (correct term?) from the IRS on the Excise Tax issue. Some of the participants agreed to take on that task. Additionally, through the IGTF, the mechanism to lobby for an exemption to the excise tax and a change to the occupational tax should be explored