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HomeMy WebLinkAboutItem 12a - Approval of Advanced Deposit Wagering Tax Payment Agreement DATE: June 5, 2018 TO: Honorable Mayor and City Council FROM: Dominic Lazzaretto, City Manager By: Michael Bruckner, Assistant to the City Manager SUBJECT: ADVANCED DEPOSIT WAGERING TAX PAYMENT AGREEMENT WITH THE LOS ANGELES TURF CLUB, INC. AND THE THOROUGHBRED OWNERS OF CALIFORNIA Recommendation: Approve SUMMARY Under an existing state law known as the Tucker Bill, the City of Arcadia receives a portion of wagering receipts from Santa Anita Park (“Santa Anita”) to offset the cost of providing police, fire, and other municipal services to the facility. The revenue to the City, in net present value terms, has declined from a high of $4.7 million in 1988 to $0.7 million in 2017. While much of the decrease can be attributed to the decline in popularity of horseracing generally, a contributing factor has been the addition of off -track betting in the 1980’s and, more recently, Advanced Deposit Wagering (“ADW”), which is done via smartphones and other mobile technologies. Because the Tucker Bill was written prior to the advent of ADW, the City currently receives no revenue share from this betting method. In an effort to ensure that the City continues to receive its fair share of all Tucker Bill revenue, the City Council directed the City Manager to explore all options to future proof this important source of revenue to the City. After initially engaging a lobbyist to support legislative alternatives to modernize the Tucker Bill, the interested parties instead have agreed to an Advanced Deposit Wagering Tax Payment Agreement that achieves most of the City’s goals. Although a legislative solution may have produced a slightly better outcome, passage of such a bill was extremely unlikely. The proposed 10-year Agreement captures the ADW share of wagering when bets are made on-site at Santa Anita, treating all bets equally, and off- setting the impacts on the community for hosting the facility. Under the Agreement, the City will receive approximately $20,500 in additional Tucker Bill revenue annually. More importantly, as smartphone technologies advance and more betting shifts to those devices, the City will not lose any additional funding . Therefore, it Approval of Advanced Deposit Wagering Tax Payment Agreement June 5, 2018 Page 2 of 5 is recommended that the City Council approve the Advanced Deposit Wagering Agreement with the Los Angeles Turf Club, Inc. (“LATC”) and the Thoroughbred Owners of California (“TOC”). BACKGROUND The horseracing industry in the United States uses a Parimutuel betting system, where the host track takes a specific portion of e very bet to cover its costs for putting on the race and the remainder of the betting pool is divided among those who made winning bets. Therefore, the “house” does not have a vested interest in the winners or losers in races, just putting on engaging events. The total Parimutuel revenues are known as “the handle”. Traditionally, cities have taxed gate receipts and/or parking fees in order to cover costs for providing police, fire, medical response, traffic control, and other community services to such facilities. Over time, different cities in California were charging different amounts for providing services. In order to simplify things, the California legislature adopted t he Tucker Bill (AB 22, 1987), whereby cities receive 0.33% (one-third of one percent) of the betting handle at the racetrack property in-lieu of charging gate fees or other taxes. The Tucker Bill was amended (AB 304, 1995) to include satellite wagering facilities and further mandates that 0.33% of the money bet at a satellite wagering facility goes to the city or county in which the satellite wagering facility is located, in lieu of any taxes or fees. For satellite wagering, no revenue is shared with the jurisdiction in which the race actually occurs. Under the current law, Tucker Bill revenue does not include any wagers made via ADW on a computer or mobile device, even if the user is located on the racetrack property where the wager is placed. So, if two bettors sitting next to each other in the grandstands choose different betting meth ods, one could generate Tucker Bill revenues while the other would not. This is simply because the Tucker Bill did not contemplate mobile technologies when it was last updated in 1995. Parimutuel revenue to the City, in net present value terms, has declined from a high of $4.7 million in 1988 to $0.7 million in 2017. Much of the decrease can be attributed to the decline in popularity of horseracing generally. Where horseracing was on ce a prolific sporting event in the state – in fact, at one point it was the second largest industry in the State behind aerospace – today only four tracks remain operational: Santa Anita Park Del Mar, Los Alamitos, and Golden Gate Park. Santa Anita continues to operate as the premier venue for horseracing, offering more race days , more quality races like the Breeders’ Cup, and servicing more patrons than any other facility in the state. Still, betting is shifting from on-site to satellite methods and, increasingly, to smartphones and handheld devices. As such, the City of Arcadia continues to shoulder the burden of servicing Santa Anita and its visitors while reaping an ever-declining share of the economic benefit of additional racing. Approval of Advanced Deposit Wagering Tax Payment Agreement June 5, 2018 Page 3 of 5 As part of its goal setting for th e year, in 2015 the City Council directed the City Manager to review alternatives for enhancing the City’s Parimutuel revenue, including potential legislative efforts. The City engaged in conversation with Santa Anita Park and sever al other cities with local racetracks throughout the state to begin a dialogue on how best to update the Tucker Bill. While many of the discussions were positive, they yielded little results. In December 2016, the California Horse Racing Board the regulatory body for horse racing in California, proposed a new rule requiring ADW providers to geo -locate wagers that are placed by an ADW account holder while they are within 100 meters of a licensed California racetrack, satellite wagering facility, or mini-satellite wagering facility. The intended use of this information was to allow track operators to negotiate for higher commissions with ADW providers for ADW wagers placed by customers present at brick-and-mortar wagering locations, yet did nothing to address the City’s application of the Tucker Bill and our concerns regarding a fair share of ADW revenue. The rule was never adopted after track operators, the Thoroughbred Owners of California, and ADW providers worked out an arrangement outside of the regulatory process and without including host cities. In response to the City’s interests being overlooked, in January 2017, the City retained the services of Capital Advocacy, LLC, a Sacramento based lobbying firm to help the City pursue a legislative strategy to modernize the Tucker Bill. Working in concert with our legislative delegation in Sacramento, Assembly member Ed Chau sponsored legislation on behalf of the City that would have modernized the Tucker Bill, but the effort was stalled in committee. While legislators, affected Cities, and track operators universally understood the issue of the law being outdated and largely agreed with the proposed solution, the gaming industry in California is highly entrenched and there was little political will to push for modernization of even this small corner of the industry for fear that it would lead to broader, more difficult conversations elsewhere. However, as a result of the City’s efforts and the pressure from the potential legislation, the City and LATC began a new dialogue to best address the City’s concerns. After several rounds of discussion, the City of Arcadia, the LATC, and TOC have agreed to an Advanced Deposit Wagering Tax Payment Agreement (Attachment “A”). DISCUSSION The proposed Advanced Deposit Wagering Tax Payment Agreement is between the City of Arcadia, Los Angeles Turf Club, Inc., and the Thoroughbred Owners of California, as they are operators and signatories to the agreements with the various ADW companies that operate in the state. The agreement includes the following terms and conditions: Approval of Advanced Deposit Wagering Tax Payment Agreement June 5, 2018 Page 4 of 5 Terms The agreement is effective beginning January 1, 2018, for a period of ten (10) years. There is a Joint Review Period beginning in year five (5) of the agreement to review and discuss changes in technology and any future developments. Any party may terminate the agreement with 12 months’ notice. Legislation The City has agreed to withdraw its legislation and will not pursue and new legislative efforts during the term of the agreement. Geo-Location The LATC and TOC will require ADW companies to geo-locate California account holders within Santa Anita Park’s inclosure on live race days. The geo -locating only applies to mobile phone and tablets. Due to technological restrictio ns and to align with the current agreement between the LATC, TOC, and ADW companies, geo -location will not apply to non-California ADW account holders within Santa Anita’s inclosure nor will it apply to laptop or desktop computers. Further, the geo -location does not apply to any satellite wagering on non-live race days. Should the City wish to capture this revenue, separate agreements would need to be struck between the other racing facilities in the state. Calculation of Tax Payment ADW companies must provide the California Horse Racing Board with detailed documentation of all geo-located wagers per their regulatory requirements. Further, ADW companies must provide a daily download to the CHRB for use in their information management system to identify and calculate wagers subject to the Tucker Bill tax. Payment to the City will be remitted within 30 days. “Me Too” Clause Included in the agreement is a requirement that states if the LATC, TOC, and ADW companies enter into or amend any agreement that requires geo -location by a device other than a phone or tablet, or the geo -location of a non-California account holder, the LATC and TOC must notify the City of negotiations and allow the City to provide input. The LATC and TOC cannot enter into any new or amended agreement with an ADW company without written consent from the City. The proposed 10-year Agreement captures the ADW share of wagering when bets are made on-site at Santa Anita by California ADW accountholders, treating all bets equally, and providing an enhanced revenue stream to offset the impacts to the community for hosting the facility. Although a legislative solution may have produced a slightly better outcome, passage of such a bill was extremely unlikely and would have required costly lobbying and legislative efforts. This Agreement closes the ADW loophole in the Tucker Bill and provides an opportunity for the City to re view current industry and technology Approval of Advanced Deposit Wagering Tax Payment Agreement June 5, 2018 Page 5 of 5 trends during its term to ensure that the City’s revenue position is either maintained or improved. It is recommended that the City Council adopt th e Agreement. ENVIRONMENTAL ANALYSIS The proposed action does not constitute a project under the California Environmental Quality Act (“CEQA”), and it can be seen with certainty that it will have no impact on the environment. Thus, this matter is exempt under CEQA. FISCAL IMPACT According to the most recent data from LATC, from January 1, 2018, to April 30, 2018, advanced deposit wagering at Santa Anita Park totaled $2,071,192, of which the City would receive $6,834.93 as a result of the proposed Agreement. On an annualized basis this translates to approximately $20,50 0 in additional Tucker Bill revenue. Over the term of the Agreement, using a 2% growth factor, this amounts to approximately $225,000 in additional revenue to the City. Conversely, without the Agreement, it is likely that the City would continue to decrease in annual Tucker Bill revenue as more people choose to bet on handheld devices and other technologies emerge that could take over the marketplace. RECOMMENDATION It is recommended that the City Council approve, and authorize and direct the City Manager to execute the Advanced Deposit Wagering Agreement Tax Payment Agreement with the Los Angeles Turf Club, Inc. and the Thoroughbred Owners of California. Attachment “A” – Advanced Deposit Wagering Tax Payment Agreement 171103.9 1 ADVANCED DEPOSIT WAGERING TAX PAYMENT AGREEMENT This ADW Wager Tax Payment Agreement (this “Agreement”) is entered into effective as of January 1, 2018 (“Effective Date”) by and between Los Angeles Turf Club, Incorporated (“LATC”), the Thoroughbred Owners of California (“TOC”), and the City of Arcadia (the “City”). RECITALS A. LATC operates a thoroughbred racetrack known as Santa Anita Park which is located within the boundaries of the City. Horses owned by members of TOC compete in the horse races conducted by LATC at Santa Anita Park. B. Under current law, the City receives a tax (the “Tucker Bill Tax”) in the amount of 0.33% of wagers placed at Santa Anita Park through LATC’s on-track totalizator system on horse races, including horse races conducted at Santa Anita Park and horse races conducted at other racetracks both inside and ou tside the State of California. Current state law prohibits the City from assessing or collecting any license or excise tax or fee, other than the Tucker Bill Tax and general sales tax, on LATC with respect to any event conducted by LATC at Santa Anita Park. C. The City asserts that the Tucker Bill Tax applies to wagers placed on horse races via mobile or online technologies (“ADW Wagers”) when such ADW Wagers are placed by patrons physically present within the inclosure at Santa Anita Park at the time such ADW Wagers are placed. LATC and TOC disagree with this interpretation. D. The City has recently sought to introduce proposed California legislation that, if passed, would clarify that the Tucker Bill Tax is applicable to ADW Wagers placed by patrons physically present within the inclosure at Santa Anita Park. E. LATC, TOC, and the City have met and discussed the issue of whether or not the Tucker Bill Tax applies to ADW Wagers placed by patrons physically present within the inclosure at Santa Anita Park. F. As a result of such meetings and discussions, the City would like LAT C and the TOC to agree that the Tucker Bill Tax payments to be made beginning with the Effective Date to include ADW Wagers as described in this Agreement, and LATC and the TOC are willing to make such Tucker Bill Tax payments in strict accordance with this Agreement. AGREEMENT With reference to the foregoing Recitals, and in exchange for good and valuable consideration, LATC, TOC, and the City (each a “Party”, and collectively, the “Parties”) hereby agree as follows: 171103.9 2 1. Withdrawal of Legislation. Upon full execution of this Agreement, the City agrees to then immediately request that the pending legislation related to the Tucker Bill Tax be withdrawn, and the City agrees that during the Term (as defined below) it will not request, lobby for, cooperate with, or advocate on behalf of, directly or indirectly, any legislation regarding the inclusion of ADW Wagers within the Tucker Bill Tax. 2. Geo-Location Requirement. LATC will use commercially reasonable efforts to require each ADW company with which LATC has a contractual relationship authorizing their California customers to wager on races conducted at Santa Anita Park (each, an “Applicable ADW Company”) to geo-locate ADW Wagers which are facilitated via phone and tablet and which are placed by California account holders (“Geo-located Wagers”). LATC will use commercially reasonable efforts to require that based on such geo-location, each Applicable ADW Company will report, in accordance with Section 6 below, phone and tablet wagers placed within the inclosure at Santa Anita Park on days that LATC conducts live racing (“Live Race Days”). 3. Tax Payment. The Geo-located W agers which are placed within the inclosure at Santa Anita Park on Live Race Days (the “Taxed ADW Wagers”) will be subject to the Tucker Bill Tax. During the Term, LATC and TOC agree to not contest in any manner or in any forum the levying and collection of the Tucker Bill Tax on the Taxed ADW Wagers, and agree further to not seek any refund of any such Tucker Bill Tax payments. The tax payments will be made collectively by LATC and TOC to the City through a deduction from takeout on the Taxed ADW Wagers. LATC will process and pay the payment by deducting such amount from the takeout on the Taxed ADW Wagers, and the TOC expressly consents thereto. 4. Limitations on Geo-Location. The City agrees that geo-location is not required for laptop or desktop wagers; or for account holders who reside in states other than California. As a result, no Tucker Bill Tax payment will be made with respect to such wagers. 5. Technology Specifications. LATC’s contracts with Applicable ADW Companies will require each such Applicable ADW Company to provide LATC, TOC , and the California Horse Racing Board (“CHRB”) with documentation containing details of the geo-location technology it will use to comply with the geo -location requirement. Each Applicable ADW Company will also be required to provide reasonable documentation periodically confirming that the technology is performing as intended (including making LATC, TOC and CHRB aware of any technological issues or challenges along the way). Upon the reasonable request of the City and subject to any confidentiality limitations imposed upon LATC, LATC will share such information with the City in order for the City to confirm that the spirit of this Agreement is being complied with. 171103.9 3 6. Calculation of Tax Payment. LATC’s contracts with Applicable ADW Companies will require each such Applicable ADW Company to provide to CHRIMS a daily download data file which includes all information needed to calculate the distribution of takeout for Geo-located Wagers subject to the Tucker Bill Tax and Geo- located Wagers which are not subject to the Tucker Bill Tax in a file format approved in advance by CHRIMS. The download file will be required to be provided no later than 8 a.m. Pacific Time for subject wagering generated during the preceding day (except in the case of delay caused by matters beyond the control of the parties ). The data contained in the CHRIMS system specifying the amount of the Geo-located Wagers which are subject to the Tucker Bill Tax will be used to calculate the Tucker Bill Tax payment. Such calculation will be performed for all Applicable ADW Company wagers on a quarterly basis, and the Tucker Bill Tax will be remitted to the City within thirty (30) days following the end of each calendar quarter. 7. Non-California Account Holder Wagers and Additional Technologies. If LATC and/or TOC, on the one hand, and any Applicable ADW Company, on the other hand, were to enter into any amendment of any existing agreement , or were to enter into any new agreement, that (i) requires, permits, or otherwise allows for the geo- location of wagers placed by means of technology other than or in addition to phone or tablet, or (ii) requires, permits, or otherwise allows for the geo-location of wagers placed by non-California account holders (each a “New Agreement”), then the City believes such New Agreement will directly affect the City and its rights and interests under thi s Agreement. Accordingly, to protect the rights and in terests of the City under this Agreement, the Parties agree that: a. If LATC or TOC enters into negotiations with any Applicable ADW Company over any New Agreement, such Party will notify the City of such negotiations so that the City may provide its input regarding the New Agreement to the extent that the New Agreement would have any direct or indirect impact or implication regardi ng the Tucker Bill Tax or this Agreement; b. Neither LATC nor TOC will execute any New Agreement without first obtaining the written consent of the City (which shall not unreasonably be withheld) to do so. The execution by LATC or TOC of any New Agreement without such consent shall be a material breach of this Agreement unless such New Agreement provides for the types of wagers specified in Subsections 7(i) and/or 7(ii) to be reported in accordance with Section 6, and LATC and TOC agree that such reported wagers will be considered Taxed ADW Wagers. 8. Term; Termination. a. This Agreement shall commence as of the Effective Date and, subject to earlier termination as set forth below, shall continue through December 31, 2027 (the “Term”). 171103.9 4 b. In year five of this Agreement, from the period of October 1, 2022 through December 31, 2022, the City and LATC shall, in mutual good faith, enter into a joint review period to identify any and all changes in technology related to the placement of ADW Wagers and collection of the Tucker Bill Tax. During the review period, the parties may mutually agree to make amendments to this Agreement to ensure full compliance with all then-applicable laws or changes in the location, collection, and distribution of ADW Wagers at that time. c. This Agreement shall terminate immediately if at any time during the Term there is a change in California law such that the Tucker Bill is no longer in effect. d. Any Party may terminate this Agreement in its sole and absolute discretion at any time for any reason, with or without cause, by giving written notice to the other Parties of such termination at least twelve months in advance of the effective date of such termination. e. Should any Party be in material breach of its obligations under this Agreement, the Party asserting that a material breach has occurred shall give the other Parties written notice specifying the alleged breach, and the breaching Party or Parties shall have thirty (30) days in which to cure the material breach, or to demonstrate that a material breach has not occurred. If the material breach remains in existence and uncured after thirty (30) days, any Party that is not then in material breach may terminate this Agreement immediately by providing written notice to the other Parties. Thereafter, all Parties may exercise any and all rights and remedies ava ilable to them under applicable law. f. Any payment obligation due under this Agreement on the part of LATC and/or TOC that accrued prior to the time of termination of this Agreement, shall thereafter continue to exist notwithstanding the termination of this Agreement. 9. Miscellaneous. a. Entire Agreement; Amendment. This Agreement contains the entire understanding of the Parties relating to the subject matter hereof, supersedes any and all prior or contemporaneous agreements or understandings, either oral or written, and may not be changed or terminated orally. This Agreement may be amended only by a writing signed by all Parties. b. Notices. Notice to a Party shall be deemed duly given upon the earliest to occur of the following: (i) personal delivery to such Party, to the address set forth below for such Party, or to any other address which such Party has provided to the other Party for purposes of this Section 9(b); (ii) the close of business on the third day after being deposited in the United States mail, registered or certified, postage prepaid and addressed to such Party at the address set forth below for such Party, or at any other address which such Party has provided to the other Party for purposes of this 171103.9 5 Section 9(b); (iii) the close of business on the first business day after being deposited in the United States with a nationally recognized overnight delivery service, for next business day delivery, with delivery charges prepaid and addressed as provided in the preceding clause; or (iv) actual receipt by such Party via any other means (including e - mail or fax). If to City: City of Arcadia City Hall Attention: City Manager 240 West Huntington Drive Arcadia, CA 91007 If to LATC: Los Angeles Turf Club, Incorporated Attention: President 285 West Huntington Drive Arcadia, CA 91007 If to TOC: Thoroughbred Owners of California Attention: CEO 285 West Huntington Drive Arcadia, CA 91007 c. Applicable Law. This Agreement, including all matters of construction, validity, and performance shall be governed, construed, and enforced in accordance with the laws of the State of California, as applied to contracts executed and to be fully performed in California by citizens of California and without reference to principles of conflicts of law. Any action arising out of this Agreement shall be heard in state court located in the County of Los Angeles. d. Waiver; Remedies. The failure by one Party to require performance of any provision of this Agreement shall not affect that Party’s right to require performance at any time thereafter, nor shall a waiver by o ne Party of a breach by the other Party be considered a waiver of any or all subsequent breaches by the breaching Party. All rights and remedies provided in this Agreement are cumulative and not exclusive of any other rights or remedies that may be availab le to the Parties, whether provided by law, equity, statute, or otherwise. e. Counterparts. This Agreement and all amendments hereto may be executed in several counterparts and each counterpart shall constitute a duplicate original of the same instrument. The Parties agree that copies of this Agreement sent by email (in PDF or similar format) or fax, and the signatures thereon, shall be deemed valid executed originals of this Agreement. f. Severability. Any provision hereof which is held to prohibited, unlawful, or unenforceable shall be ineffective without affecting any other provision or enforcement of this Agreement. [Signatures follow] 171103.9 6 City of Arcadia By: Name: Dominic Lazzaretto Title: City Manager Los Angeles Turf Club, Incorporated By: Name: Title: ATTEST: City Clerk APPROVED AS TO FORM: Stephen P. Deitsch City Attorney Thoroughbred Owners of California By: Name: Title: