After several months of negotiation, and amid a larger debate on gaming expansion, the Pennsylvania General Assembly passed Act 42 of 2017, a sweeping gambling reform bill. For municipalities in Pennsylvania, Act 42 has two notable provisions, one of limited impact on municipalities hosting casinos and the other of potentially much greater impact.

Act 42 contained a legislative “fix” to a problem that arose in the case of Mount Airy #1 v. Pennsylvania Department of Revenue, 154 A.3d 268, 271 (2016 Pa.). In that case the Pennsylvania Supreme Court struck down a vital component of Pennsylvania's Race Horse Development and Gaming Act, 4 Pa.C.S. Section 1101 et seq. (the Gaming Act), known as the “local share assessment.” The local share assessment provided certain local governments a substantial funding stream through assessment on certain gross revenue from casinos located in or around their municipality. The Supreme Court's ruling, prompted by a lawsuit filed by Mount Airy Casino, located in Monroe County, put in jeopardy hundreds of millions of dollars in local funding for counties and municipalities across the commonwealth.

The 2016 lawsuit was premised on Mount Airy's belief that the local share assessment violated Article VIII, Section 1 of the Pennsylvania Constitution—the Uniformity Clause—which provides, “All taxes shall be uniform, upon the same class of subjects, within the territorial limits of the authority levying the tax, and shall be levied and collected under general laws.” According to Mount Airy, the local share assessment violated the Uniformity Clause by requiring certain casinos to pay a minimum amount of tax, regardless of how much gaming revenue they produced.

Specifically, the Gaming Act required casinos, except those located in Philadelphia and resort-based casinos (referred to as “Category 3” casinos), to pay 2 percent of their gross gaming revenue, or $10 million, whichever was higher, to their local municipalities. Since none of the state's 12 operational casinos had gross gaming revenue from slot machine gaming above $500 million, in effect, the Gaming Act required casinos located outside of Philadelphia to pay the minimum $10 million amount. According to Mount Airy, the flat fee of $10 million created variable tax rates between casinos outside of Philadelphia, in violation of the Uniformity Clause.

In defending the local share assessment, the Pennsylvania Department of Revenue focused on the Equal Protection Clause of the Fourteenth Amendment of the U.S. Constitution, on the assumption that a tax satisfying the Equal Protection Clause also satisfies the Uniformity Clause. The Department argued that uynder an Equal Protection analysis, Mount Airy would have the burden of demonstrating that the local share assessment was not “rationally related to any legitimate state purpose.” According to the department, Mount Airy was unable to meet its burden in this regard, and thus, the local share assessment was permissible.

The Supreme Court, however, rejected the department's assumption. Although willing to acknowledge that the Equal Protection Clause and Uniformity Clause are at times “coterminous,” the Supreme Court ultimately held that in the case of tax legislation, the Uniformity Clause imposes more stringent requirements, and thus controls. The analysis under the Uniformity Clause is not based merely on a “legitimate state purpose,” but rather, it depends on whether the tax classification, in practice, is based upon some legitimate distinction between the classes that provides a nonarbitrary, reasonable, and just basis for the disparate treatment. The Supreme Court held that the Pennsylvania General Assembly's mere desire to increase tax revenues is not a legitimate reason to impose non-uniform taxes, and a tax classification based entirely on differences in quantities (such as differences in the amount of gross gaming revenues), is “unjust, arbitrary, and illegal.” Consequently, the Supreme Court struck down Pennsylvania's tax, and in doing so, instructed the General Assembly to fix the problem, or have this important funding stream end for several municipalities across the commonwealth.

More than a year later, the Assembly acted to fix the problem that was created by the court's decision in Mount Airy. On Oct. 26, the Assembly enacted Act 42, a broad casino gambling reform bill, and which was signed by the Gov. Tom Wolf on Oct. 30.

Act 42 fixed the local share assessment by removing any reference to the $10 million minimum local share assessment. To ensure that municipalities continue to receive the same level of funding, the new law imposes a “slot machine operation fee” on all casinos with the exception of Category 3 casinos (but including casinos in Philadelphia), that is anticipated to result in each casino still paying $10 million per year.

While reserving the possibility for a challenge by the casinos to Act 42, municipalities who received local share funding from slot machine gaming can expect to continue to receive the same level of funding they previously received, and municipal officials can once again budget in reliance on the receipt of these funds for their municipality.

Act 42 contained many other provisions beyond the legislative fix of the local share assessment. Of particular interest to municipalities is the sections of the act which expand the availability of gaming forms and venues in Pennsylvania. Among the expansions is the addition of up to 10 licenses for “Category 4” satellite casinos. The law permits satellite casinos to eventually operate up to 50 gaming tables and between 300 and 750 slot machines. Although current Pennsylvania casino operators will likely own and operate satellite casinos, a satellite casino cannot be located within 25 linear miles of an existing Category 1, 2 or 3 casino.

Importantly, Act 42 provides for a municipal “opt-out” known as the “municipal option.” The municipal option authorizes municipalities to take certain steps to prohibit the location of a Category 4 casino within the municipal limits. To exercise the municipal option, the governing body of a municipality must: adopt a resolution at a public meeting consistent with the requirements of Pennsylvania's Sunshine Act after Oct. 31, and (deliver an official copy of the resolution to the Pennsylvania Gaming Control Board no later than Dec. 31.

A municipality may rescind their resolution at any time, however, once done, Act 42 prevents municipalities from later enacting a new resolution that prohibits Category 4 casinos. Municipalities that desire to avoid having a satellite casino locate within their borders therefore must act quickly.

Timothy J. Horstmann and Erica M. Koser are attorneys with the law firm of McNees Wallace & Nurick and practice in the firm's financial services and public finance group. Horstmann can be reached at [email protected] and Koser at [email protected].

After several months of negotiation, and amid a larger debate on gaming expansion, the Pennsylvania General Assembly passed Act 42 of 2017, a sweeping gambling reform bill. For municipalities in Pennsylvania, Act 42 has two notable provisions, one of limited impact on municipalities hosting casinos and the other of potentially much greater impact.

Act 42 contained a legislative “fix” to a problem that arose in the case of Mount Airy #1 v. Pennsylvania Department of Revenue , 154 A.3d 268, 271 (2016 Pa.). In that case the Pennsylvania Supreme Court struck down a vital component of Pennsylvania's Race Horse Development and Gaming Act, 4 Pa.C.S. Section 1101 et seq. (the Gaming Act), known as the “local share assessment.” The local share assessment provided certain local governments a substantial funding stream through assessment on certain gross revenue from casinos located in or around their municipality. The Supreme Court's ruling, prompted by a lawsuit filed by Mount Airy Casino, located in Monroe County, put in jeopardy hundreds of millions of dollars in local funding for counties and municipalities across the commonwealth.

The 2016 lawsuit was premised on Mount Airy's belief that the local share assessment violated Article VIII, Section 1 of the Pennsylvania Constitution—the Uniformity Clause—which provides, “All taxes shall be uniform, upon the same class of subjects, within the territorial limits of the authority levying the tax, and shall be levied and collected under general laws.” According to Mount Airy, the local share assessment violated the Uniformity Clause by requiring certain casinos to pay a minimum amount of tax, regardless of how much gaming revenue they produced.

Specifically, the Gaming Act required casinos, except those located in Philadelphia and resort-based casinos (referred to as “Category 3” casinos), to pay 2 percent of their gross gaming revenue, or $10 million, whichever was higher, to their local municipalities. Since none of the state's 12 operational casinos had gross gaming revenue from slot machine gaming above $500 million, in effect, the Gaming Act required casinos located outside of Philadelphia to pay the minimum $10 million amount. According to Mount Airy, the flat fee of $10 million created variable tax rates between casinos outside of Philadelphia, in violation of the Uniformity Clause.

In defending the local share assessment, the Pennsylvania Department of Revenue focused on the Equal Protection Clause of the Fourteenth Amendment of the U.S. Constitution, on the assumption that a tax satisfying the Equal Protection Clause also satisfies the Uniformity Clause. The Department argued that uynder an Equal Protection analysis, Mount Airy would have the burden of demonstrating that the local share assessment was not “rationally related to any legitimate state purpose.” According to the department, Mount Airy was unable to meet its burden in this regard, and thus, the local share assessment was permissible.

The Supreme Court, however, rejected the department's assumption. Although willing to acknowledge that the Equal Protection Clause and Uniformity Clause are at times “coterminous,” the Supreme Court ultimately held that in the case of tax legislation, the Uniformity Clause imposes more stringent requirements, and thus controls. The analysis under the Uniformity Clause is not based merely on a “legitimate state purpose,” but rather, it depends on whether the tax classification, in practice, is based upon some legitimate distinction between the classes that provides a nonarbitrary, reasonable, and just basis for the disparate treatment. The Supreme Court held that the Pennsylvania General Assembly's mere desire to increase tax revenues is not a legitimate reason to impose non-uniform taxes, and a tax classification based entirely on differences in quantities (such as differences in the amount of gross gaming revenues), is “unjust, arbitrary, and illegal.” Consequently, the Supreme Court struck down Pennsylvania's tax, and in doing so, instructed the General Assembly to fix the problem, or have this important funding stream end for several municipalities across the commonwealth.

More than a year later, the Assembly acted to fix the problem that was created by the court's decision in Mount Airy. On Oct. 26, the Assembly enacted Act 42, a broad casino gambling reform bill, and which was signed by the Gov. Tom Wolf on Oct. 30.

Act 42 fixed the local share assessment by removing any reference to the $10 million minimum local share assessment. To ensure that municipalities continue to receive the same level of funding, the new law imposes a “slot machine operation fee” on all casinos with the exception of Category 3 casinos (but including casinos in Philadelphia), that is anticipated to result in each casino still paying $10 million per year.

While reserving the possibility for a challenge by the casinos to Act 42, municipalities who received local share funding from slot machine gaming can expect to continue to receive the same level of funding they previously received, and municipal officials can once again budget in reliance on the receipt of these funds for their municipality.

Act 42 contained many other provisions beyond the legislative fix of the local share assessment. Of particular interest to municipalities is the sections of the act which expand the availability of gaming forms and venues in Pennsylvania. Among the expansions is the addition of up to 10 licenses for “Category 4” satellite casinos. The law permits satellite casinos to eventually operate up to 50 gaming tables and between 300 and 750 slot machines. Although current Pennsylvania casino operators will likely own and operate satellite casinos, a satellite casino cannot be located within 25 linear miles of an existing Category 1, 2 or 3 casino.

Importantly, Act 42 provides for a municipal “opt-out” known as the “municipal option.” The municipal option authorizes municipalities to take certain steps to prohibit the location of a Category 4 casino within the municipal limits. To exercise the municipal option, the governing body of a municipality must: adopt a resolution at a public meeting consistent with the requirements of Pennsylvania's Sunshine Act after Oct. 31, and (deliver an official copy of the resolution to the Pennsylvania Gaming Control Board no later than Dec. 31.

A municipality may rescind their resolution at any time, however, once done, Act 42 prevents municipalities from later enacting a new resolution that prohibits Category 4 casinos. Municipalities that desire to avoid having a satellite casino locate within their borders therefore must act quickly.

Timothy J. Horstmann and Erica M. Koser are attorneys with the law firm of McNees Wallace & Nurick and practice in the firm's financial services and public finance group. Horstmann can be reached at [email protected] and Koser at [email protected].