Request By:
Honorable Mark D. Wilson
General Counsel and Secretary
Churchill Downs Incorporated
700 Central Avenue
Louisville, KY 40208
Opinion
Opinion By: Frederic J. Cowan, Attorney General; John S. Gillig, Assistant Attorney General
On behalf of Churchill Downs Incorporated ("Churchill Downs"), the Thoroughbred Racing Association, and Breeders' Cup Limited, you have requested an opinion as to whether the excise tax established by KRS 138.510 applies to certain sums, paid to Churchill Downs as agent for Breeders' Cup Limited, on proceeds from interstate wagering agreements for the 1991 Breeders' Cup National Pick-Seven wager. KRS 138.510 imposes an excise tax on pari-mutuel wagering upon associations operating a race track under the jurisdiction of the Kentucky State Racing Commission.
On November 2, 1991, Churchill will be the host of the 1991 thoroughbred racing event known as the Breeders' Cup Championship Day ("Breeders' Cup Day"). As you have explained to us, Breeders' Cup Day consists of seven championship horse races. Breeders' Cup Limited and the Thoroughbred Racing Association have entered into an agreement to jointly sponsor a "Pick-Seven Wager. " The Pick-Seven Wager will be offered to participating outlets through simulcast contracts with Churchill Downs, which will administer the wager. Bettors placing a Pick-Seven Wager will be asked to pick the winners in each of the seven Breeders' Cup races with a pay out to the winners being determined by pooling net wagers made at participating tracks throughout the country. The calculation of the Pick-Seven pay out will be determined as though there was a merged pool between all participating tracks although in fact all wagers on the Pick-Seven will be made at the participating track in its respective state or country. The Pick-Seven Wager will be conducted under a common set of rules approved by the Kentucky State Racing Commission on April 25, 1991 and approved by the regulatory authorities in those states and countries where outlets offering the Pick-Seven Wager are located. The Pick-Seven Wager will be subject to the pari-mutuel tax, if any, in the jurisdiction where a wager is made, including wagers made in Kentucky and at Churchill Downs. Churchill Downs will receive a fee equal to a percentage of the net commission on wagers (less state excise tax) generated by the outlets participating in the Pick-Seven Wager, which is then remitted by Churchill Downs to Breeders' Cup Limited.
In 1984, Churchill Downs had requested an opinion from the Attorney General's Office as to whether sums paid to Churchill Downs as proceeds from interstate wagering agreements were taxable pursuant to KRS 138.510. This opinion request was based upon a proposal that Churchill Downs enter into interstate pari-mutuel wagering agreements with racing entities located throughout the United States and in foreign countries and to authorize those entities to accept pari-mutuel wagers on the 1984 Kentucky Derby, contingent upon payment to Churchill Downs of a fee. The fee paid to Churchill Downs was to be calculated on the basis of a percentage of the net pari-mutuel income generated at the respective off-track facilities. The fees payable to Churchill Downs were the subject of the inquiry and the basis for OAG 84-182.
OAG 84-182 concluded that the fee paid to Churchill for wagers placed at tracks or other facilities not located in Kentucky was not taxable by Kentucky, citing
Great Atlantic and Pacific Tea Company v. Grosjean, 301 U.S. 412, 81 L. Ed. 2d 1193, 57 S. Ct. 772 (1937). OAG 84-182 further stated:
The taxable event is the placing of a wager and that occurs in other jurisdictions. An imposition by a state of a tax on a privilege exercised outside of its borders amounts to a deprivation by the taxing state of the property of the taxpayer without due process of law in violation of the Fourteenth Amendment of the United States Constitution.
Finally, OAG 84-182 emphasized that:
The funds which will be paid to Churchill Downs under the interstate agreements are not wagers placed at Kentucky tracks. The provisions of KRS 138.510 must be limited to what is constitutionally permissible, the taxing of wagers made within the borders of Kentucky (emphasis added).
This review brings us to consideration of the proposed Pick-Seven Wager. We conclude that the reasoning of OAG 84-182 is directly applicable to the situation you have presented. You have stated to us that the Pick-Seven Wager Agreement would be very similar in style and substance to the interstate wagering agreements, entered into between Churchill Downs and other participating outlets for the Kentucky Derby, which served as the basis for the request for OAG 84-182. As under that earlier opinion, the placing of these wagers will take place outside of Kentucky. In our opinion the fact that the pay out will be calculated as though all wagers were placed in one location does not change the outcome. We reaffirm the reasoning of OAG 84-182 and conclude that the fee paid to Churchill Downs for administration of the Pick-Seven Wager, under agreements with participating outlets outside of the Commonwealth of Kentucky, is not subject to an additional excise tax imposed by KRS 130.510.