Budget & Tax

Tribes sue state, but concede casino fees subject to renegotiation

January 3, 2020

Ray Carter

Three tribal governments have filed a lawsuit asking a federal court to declare that their casino gaming compacts automatically renew. Yet in that same lawsuit those tribes concede that the fees they pay Oklahoma government for geographic monopolies on casino gaming are subject to renegotiation.

The court filing also comes after a dispute over auditing of casinos that could center on whether existing facilities have paid the full amount owed to the state.

The lawsuit filed on Dec. 31 by the Cherokee Nation, Chickasaw Nation, and Choctaw Nation asks a federal court to declare that the tribes’ gaming compacts with the state of Oklahoma automatically renewed on Jan. 1 for another 15-year term. The lawsuit argues that an auto-renew provision was triggered when state racetracks were authorized to continue offering slot machines. While the two racetracks with slot machines are owned by tribes, they are considered commercial facilities and not tribal gaming facilities.

However, the tribes’ lawsuit stresses that it “does not address secondary questions, including any question of a compacting party’s right to seek to renegotiate the Compact’s revenue-sharing provisions, rates, or the ‘substantial exclusivity’ in gaming rights the State must provide under the compact in exchange for revenue-sharing payments.” (Emphasis in original.)

In another section of the lawsuit, the tribes concede that current state-tribal gaming compacts include a provision that “allows the parties to seek to renegotiate” the portions of the agreement that “address revenue-sharing and the ‘substantial exclusivity’ in gaming rights that the State promised the Tribes in order to justify such revenue sharing.”

Those comments echoed a concession previously made by Matthew Morgan, chairman of the Oklahoma Indian Gaming Association, during a mid-December press conference when Morgan said the existing compacts do “give the governor a chance to renegotiate” exclusivity fees.

Under the current compacts, tribal governments are the only entities allowed to operate casinos in Oklahoma (aside from two racetrack facilities). In return for those geographic monopolies, tribal governments pay an “exclusivity fee” of 4 percent to 6 percent on slot machines, and up to 10 percent on table games.

Gov. Kevin Stitt has argued that the maximum 6-percent rate on slot machines is far below the market rate imposed in tribal gaming compacts in other states with comparable markets. Tribes in other states pay fees of as much as 25 percent, and a 2015 report by the U.S. Government Accountability Office found that 44 percent of 276 tribal gaming compacts examined nationally had rates of 10 percent or more.

While tribal casinos in other states are often in remote, low-population areas, many of Oklahoma’s tribal casinos are near major population centers and directly off major interstates. The world’s largest casino is now located in Oklahoma.

However, the three tribes’ lawsuit argues that renegotiation of casino exclusivity fees is not allowed without the automatic renewal of compacts that contain the lower 6-percent rate, saying the “necessary predicate for the renegotiation of these matters is the continuing effect of the Compact, without which any such renegotiations would be meaningless.”

The lawsuit was filed shortly after the Chickasaw Nation refused to allow the state of Oklahoma to conduct an audit of its casinos.

On Dec. 18, the Gaming Compliance Unit in the state Office of Management and Enterprise Services (OMES) notified the Chickasaw Nation that state officials were preparing “to conduct an investigation of revenue of the Chickasaw Nation’s Class III gaming activity.”

“The objective of this investigation is to determine if the State has received all fees owed from the conduct of covered games pursuant to the terms of the Model Tribal Gaming Compact,” wrote Brandy Manek, director of budget, policy, and gaming compliance at OMES.

On Dec. 26, D. Scott Colbert of the Chickasaw Nation Office of the Gaming Commissioner responded that the Chickasaw “believe you misapprehend the State’s role in these matters.”

OMES noted that state-tribal gaming compacts give Oklahoma government the “authority to monitor the conduct of covered games to ensure that the covered games are conducted in compliance with the provisions of this Compact.” That includes the “right to review and copy documents of the enterprise related to its conduct of covered games.”

However, Colbert argued that section of the compact “does not authorize State financial audits,” and instead pointed to another section that requires tribal governments to select a third-party auditor each year that “shall, at a minimum, examine revenues and expenses in connection with the conduct of covered games,” including “those matters necessary to verify the determination of adjusted gross revenues and the basis of the payments made to the state …”

Colbert wrote that the compact only “entitles OMES to a copy” of the audit report generated by the tribe’s selected auditor and the opportunity for state officials to meet with that firm’s auditors to discuss the results, “subject to certain limitations.”

One possible focus for state officials may be determining if Oklahoma taxpayers are receiving the exclusivity fees for all covered games. Under the compacts, Class III slot machines are considered covered games subject to exclusivity fees, but Class II (“Bingo-style”) slot machines are not.

Because tribal casinos pay nothing for revenue generated off Class II slot machines, state officials have reason to ensure all machines (and their associated revenue) are correctly reported by classification.

The two types of machines are almost indistinguishable to the casual observer, and Oklahoma is a national outlier in the number of Class II machines reportedly in tribal casinos.

Based on self-reported figures provided by tribal casinos to industry consultants, an August 24, 2016 article for Global Gaming Business Magazine estimated that 28,640 Class II machines are in Oklahoma out of 43,859 nationwide.

In most states that allow Class III (“Las Vegas style”) gambling, Class II machines make up a small percentage of slot machines at tribal casinos. But in Oklahoma, they represent a growing share, according to reported figures.

According to the Oklahoma Gaming Compliance Unit’s Annual Report for the 2018 state budget year, the most recent available, the number of untaxed Class II machines has “grown substantially since 2009.”

The report found that in 2008, tribal casinos reported 34 percent of slot machines were Class II machines not subject to state exclusivity fees. By 2016, the share of Class II machines had increased to 43 percent.

It has been estimated that if all Class II machines in Oklahoma were replaced with Class III machines, and exclusivity fees were kept at the 6-percent fee rate, it would result in $80 million to $90 million more in annual fee payments to Oklahoma government.