Request By:
Hon. Thomas H. Meeker
Wyatt, Tarrant, and Combs
Citizens Plaza
Louisville, Kentucky 40202
Opinion
Opinion By: David L. Armstrong, Attorney General; By: Christopher W. Johnson, Assistant Attorney General
You have requested an opinion of this Office as to whether certain sums paid to Churchill Downs Incorporated as proceeds from interstate wagering agreements are taxable pursuant to KRS 138.510. It is our opinion that such revenues are not subject to the excise tax created by that statute.
In your request letter you state that Churchill Downs proposes to enter into interstate pari-mutuel wagering agreements with entities located throughout the United States and in foreign countries which are licensed to do business as racing associations or are otherwise authorized to accept wagers on horse races. The agreements will authorize those entities to accept pari-mutuel wagers on the 1984 Kentucky Derby upon payment to Churchill Downs of a fee, said fee to be calculated on the basis of a percentage of the net pari-mutuel income generated at the respective off-track facilities. You further state that the interstate agreements will be entered into in accordance with the provisions of the Interstate Horse Racing Act of 1978, P.L. 95-515. The fees which are payable to Churchill Downs are the subject of your inquiry.
Kentucky by statute, KRS 138.510, has imposed an excise tax on every corporation which operates a running horse race track at which betting is conducted through a pari-mutuel system. "An excise tax is a charge imposed upon the performance of an act, the enjoyment of a privilege, or the engaging in an occupation . . ." 71 Am.Jur.2d, State and Local Taxation, § 28. While the measure of the excise tax imposed by KRS 138.510 is an amount equal to 4.75% of all money wagered, the privilege taxed is conducting thoroughbred horse racing and pari-mutuel wagering thereon.
Wagers placed at tracks or other facilities not located in Kentucky are not taxable by Kentucky. A state may not lay an excise tax upon the exercise or enjoyment of a privilege in another state derived from the laws of that state and therein exercised and engaged.
Great Atlantic and P. Tea Co. v. Grosjean, 301 U.S. 412, 81 L. Ed. 2d 1193, 57 S. Ct. 772 (1937), reh. den. 302 U.S. 772. The pari-mutuel wagering conducted by those entities is a privilege stemming from the laws of the jurisdiction in which they are located, not the laws of Kentucky. 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.
American Oil Co. v. Neill, 380 U.S. 451, 14 L. Ed. 2d 1, 85 S. Ct. 1130 (1965).
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. This is not to say that the funds received by Churchill Downs Incorporated are not taxable as corporate income, a question which we do not address.