It appears that the state tax world is not immune to the scandal involving former Illinois Governor Rod Blagojevich. On March 2, 2011, the U.S. Court of Appeals for the Seventh Circuit issued its ruling in Empress Casino Joliet Corp. v. Blagojevich, Nos. 09-3975 and 10-1019 (7th Cir. 2011), holding that the Tax Injunction Act (TIA) does not bar four riverboat casinos from challenging casino surcharges paid into the Illinois Horse Racing Equity Trust Fund because such payments were fees rather than taxes and not subject to the TIA.
Signed into law by Blagojevich in 2006, the casino surcharge amended the Riverboat Gambling Act, imposing an additional 3% surcharge upon the four most profitable riverboat casinos in the state. The monies, collected into a segregated fund, were paid directly to horse-racing tracks in the state. The primary legislative purpose was to save the state’s flagging horse-racing industry, but benefits were also expected to indirectly inure to the general public. After unsuccessfully challenging the legality of the casino surcharge in various state courts, the casinos went to federal court to challenge the surcharge as part of an illegal pay-to-play scheme. The state contended that the TIA precluded the federal court from hearing the matter.
The primary issue related to the TIA was whether the casino surcharge was a tax or a fee. The TIA only applies to taxes: “district courts shall not enjoin, suspend or restrain the assessment, levy or collection of any tax under State law where a plain, speedy and efficient remedy may be had in the courts of such State.” The Seventh Circuit found that the casino surcharge bears none of the characteristics of a tax. The court considered the ultimate use of the surcharge: it is not imposed for the purpose of raising revenue for government programs, but rather to protect horse-racing tracks from competition from riverboat casinos. The court noted that the enacting legislation does not refer to the surcharge as a tax, and there are other provisions in the Riverboat Gambling Act that tax riverboat casinos for the benefit of the general public. In particularly blunt language, the court described the surcharge as an “involuntary transfer of property from one private owner to another.” The surcharges are paid into a segregated account, not the general revenue fund, and no state agency or program may use the money. Moreover, the Seventh Circuit stated that the secondary legislative purpose—to indirectly benefit the general public—is insufficient by itself to transform the surcharge into a tax. Finally, the court gave weight to the fact that the surcharge was enacted pursuant to the Legislature’s police power and not its power to tax.
Taxpayers seeking to avoid the TIA should consider the Seventh Circuit’s analysis.