Iowa Department of Inspections and Appeals

                                                   Administrative Hearings Division

                                          Wallace State Office Building – Third Floor

 

In the Matter of:                                                         )

)           DIA No. 09DORFC025           

THE CONNELLY GROUP, L.P.                                    )           (Rev. Docket No. 01-30-2-0262)

d/b/a PRESIDENT RIVERBOAT CASINO                  )

802 N. 1^st Street                                                                          )          

St. Louis, Missouri  63103                                                     )          

                                                                                    )           PROPOSED DECISION

)          

 

Statement of the Case

 

The Iowa Department of Revenue (the Department) conducted a sales and use tax audit of The Connelly Group, L.P., d/b/a President Riverboat Casino ( President), for the tax periods from April 1, 1994 through March 31, 2000.   During the audit, President asked to have refund claims offset against the Department’s assessment of additional tax.  The Department denied a majority of the refund claims.  After the audit, the President filed additional refund claims for the period April 1, 2000 through June 30, 2001.  The Department denied the entire amount of these refund claims.  On December 18, 2001, President filed a timely Protest, challenging the Department’s denial of the refund claims for the entire period from April 1, 1994 through June 30, 2001. 

 

A prehearing conference for the matter was held by telephone conference call on September 7, 2010.   Attorneys Bruce Baker and Dwayne Vande Krol participated for the taxpayer.  Assistant Attorneys General Valencia McCown and Theresa Dvorak appeared for the Department.   The parties, through counsel, agreed to submit the case upon stipulated facts, with briefs, reply briefs, and oral argument.  A stipulation of issues, facts, and exhibits was filed on November 3, 2010.  Simultaneous briefs and reply briefs were filed by each party.  The case was submitted upon oral argument conducted by telephone conference call on February 4, 2011. 

 

The parties have stipulated that they seek resolution of only the issue and sub-issues stated below.  All other issues arising from the Protest and Answer have either been resolved or waived by the parties.

 

Issues Presented

 

Whether the purchase or lease and use by The Connelly Group, L.P., d/b/a President Riverboat Casino of electronic gaming machines (“EGMs”) or Player Tracking units, including replacement parts, are exempt from sales and use tax as qualifying computers, pursuant to Iowa Code section 422.45(27) (1997).  Resolution of this issue involves resolution of the following sub-issues:

 

a.                  Whether the EGMs were computers, or were attached to computers by means of signal cables.

 

b.                  Whether the Player Tracking units were computers, or were attached to computers by means of signal cables.

 

c.                   If the EGMs and/or Player Tracking units were computers, whether such purchases of leases by President fall under the exception to the exemption in Iowa Code section 422.45(27)(c)(2) (1997) for “point of sale equipment.”  This sub-issue presents the following additional questions:

 

i.                    whether the placing of a wager constitutes a sale, and

 

ii.                  if a wager is a sale, whether the EGMs or Player Tracking units constitute point of sale equipment.

 

Summary of Decision

 

EGMs and Player Tracking units must be treated as computers for purposes of applying the section 422.45(27) sales and use tax exemption.  The purchase and lease of EGMs prior to July 1, 1997 did not qualify for the exemption because the EGMs are not used primarily to store and process data or information.  EGM purchases made on or after July 1, 1997 can  qualify for the exemption, if the machines are not point of sale equipment.  EGMs and Player Tracking units are point of sale equipment and fit within an exception to the sales and use tax exemption. 

 

The Department was correct in denying The Connolly Group’s request for refund of sales and local option tax paid for the purchase or lease of EGMs, Player Tracking units, and replacement parts.

 

Findings of Fact

 

The Connelly Group, L.P., d/b/a President Riverboat Casino seeks a refund of sales tax, use, and local option tax paid upon the purchase or lease of electronic gaming machines (EGMs), Player Tracking units, and replacement parts during the period from April 1, 1994 through June 30, 2001.   President asserts that the EGMs and Player Tracking units are computers used in processing or storage of data or information by a commercial enterprise that qualify for the exemption from sales and use tax set forth in Iowa Code section 422.45(27)(a).  The Iowa Department of Revenue found that the EGMs and Player Tracking units were not eligible for the exemption and denied the President’s refund claims.   

 

The disputed refund claims include a total of $533,335.70 in state and local tax.  (Stip. ¶ 27)  The parties have stipulated that 4% of the tax at issue - $21,333.43 - relates to the purchase of Player Tracking units. (Stip. ¶ 28)  The remaining portion - $512,002.27 – relates to purchases and leases of EGMs and replacement parts. 

 

During the years in question, The Connelly Group, L.P., operated the President Riverboat Casino as a for-profit commercial enterprise. (Stip. ¶ 2)  President was licensed as an excursion gambling boat by the Iowa Racing and Gaming Commission, pursuant to Iowa Code chapter 99F.  Code subsection 99F.10(2) (1997) required the casino to pay the Commission an admission fee for each person embarking on the boat with a paid or complimentary admission ticket.  A limited number of fee-free passes could be provided to officials and employees. (Stip. ¶ 3)

 

No sales tax was imposed on amounts wagered or won by casino customers. Customers were subject to Iowa individual income tax on their winnings and President was subject to corporation income tax on its net taxable income.  The casino’s net gambling revenues were also subject to Iowa gambling tax under Iowa Code section 99F.11. (Stip. ¶¶ 25-25)  President purchased or leased many electronic gaming machines for use in the casino and paid Iowa sales or use tax and local option tax on the purchase price or lease payments for the machines, associated Player Tracking units, and replacement parts or components.  (Stip. ¶ 2, 4) 

 

Electronic gaming machines are gaming devices – commonly referred to a “slot machines” – that are equipped with computer-based technology, including a microprocessor.  Each gaming machine is composed of a number of hardware components, including a base cabinet containing the power supply, microprocessor, motherboard, coin hopper, ticket printer and bill acceptor and a top box containing the components to support game functions such as wheels, bonus reels, and LCD video monitors.  Basic machine types include spinning reel machines – designed to replicate the playing experience of traditional slot machines, and video machines – including video slots, video poker, and video keno.  (Stip. Exh. A at pp. 14-16, 30-34 & Exh. B at p. 91)

 

Each electronic gaming machine or terminal is generally capable of supporting a number of different games.  The term “game,” in this context, refers to the theme displayed on the machine.  Games are controlled by firmware (programs stored permanently in read-only memory) that is responsible for the appearance and behavior of the game. Most EGMs are designed so that game firmware and theme or game-specific hardware components, which may include a glass display, reel strips, laminates, toppers, etc., can be exchanged to allow the same machine to be used for different games. The flexibility of the machine design allows the casino operator to change game themes and select game options that are most conducive to player preferences.  (Stip. ¶ 6 & Exh. A at pp. 14-16, 51) 

 

The processor board – or microprocessor – embedded in the EGM controls machine functions such as coin acceptance, coin dispensing, player-panel switches and indicators, game statistical data accumulation.  Features of game play – such as random reel spin/stop, video graphic displays, and audio effects – are also controlled by the processor.  (Stip. Exh. A at p. 16)  The processor board is programmable, using a read-only memory chip, to obtain certain payout percentage.  A random number generator in the memory chip determines when and how much money is paid out during game play.  (Stip. ¶¶ 14-15) 

 

Each EGM electronically retains play history and is capable of providing cumulative statistical data about machine transactions (i.e. the number of coins and bills of various denominations taken in; the number of games played, won, and lost; the number of coins and credits paid out).  (Stip.¶ 17 & Exh. B at sec.4.4.1, 4.4.2, & table 4.4- pp. 120-123)   Mechanical meters are also used to store and display cumulative game-play information.  (Stip.¶ 17 & Exh. B at p. 91) 

 

President uses an electronic information system, the “Smart System,” which includes a slot management system and a player tracking data collection system that enables the casino to gather information about players via ID cards and card readers.  (Stip. ¶¶ 16, 20 & Exh. D, E, F)  The EGMs are connected by cable to a local area network.  Information gathered by the EGMs is transmitted to a central computer system and/or the casino’s other databases and information systems.  Data or information can also be transmitted from the casino’s computer systems to the EGMs, following the opposite route.  (Stip. ¶ 19)  The Smart System is made up of computers and computerized devices.  The computers that store data for and operate the Smart System are physically separate from the EGMs.  The EGMs can function without the Smart System.  (Stip. ¶ 20 & Exh. D)

 

Data collection assemblies within each EGM run on software programs that gather information regarding total amounts wagered and paid out and other information used by President’s financial and management reporting system.  The slot management system continuously receives information concerning each individual EGM’s coin-in, coin-out, and performance factors.  The slot management system processes information from the EGMs, which President uses to monitor and record the performance of any individual EGM or of the EGM network as a whole to ensure that the selected payout is being achieved.  (Stip.  ¶ 16)  Each EGM is equipped with Player Tracking unit card box with card reader. 

 

EGMs are connected through the Player Tracking unit card boxes by cable to a Data Collection Unit (DCU).  Each DCU is capable of receiving input from up to 32 card boxes.  The DCU collects and stores data from the EGM and passes the data on to the Plastic Fiber Universal Converter – which converts fiber-optic light signals from the DCUs into computer-readable code that is transferred to the Front End Controller – a dedicated computer that polls machine data from the DCUs and passes the data on to the slot manager and personal computers at other work stations.  From the workstations, casino personnel are able to print reports, oversee operation of the EGMs by monitoring play activity and identifying machine malfunctions.  (Stip. ¶ 20 & Exh. D, F) 

 

President has a members club for frequent customers known as the “Players Club” that allows customers to accumulate points that can be exchanged for food, beverages, hotel stays, and other special customer promotions.  A customer who is a member of the club is provided with a Players Card.  When a customer inserts the card into the Player Tracking unit on an EGM, the unit transmits information about the amount of money wagered by that customer through the network to President’s marketing databases. No Players Club data is retained in the EGM, but when a customer inserts the card into an EGM Player Tracking unit, the Player tracking system is able to send information about the customer to the EGM. (Stip. ¶¶ 10, 21)

 

President’s EGMs were set up to allow players to wager various sums of money.  Some of the machines limited customers to wagering pennies, while others allowed customers to wager several dollars in a single play.  (Stip. ¶ 8)  A customer could play the machines using cash, coins, tokens, or credits that had been purchased or won by the customer.  Each wager was initiated by the customer making a deposit of cash, coins, tokens, or credits into the machine, selecting the amount of the wager, and pulling a lever or pushing a button on the EGM to execute the wager.  (Stip. ¶ 9)  No goods were received by customers in return for wagering.  The player either lost the value wagered or won additional money or credits.  (Stip. ¶ 12)

 

The Department allowed President’s refund clams related to desktop computers, printers and related replacement parts, including those used as a part of the Smart System. The entire amount in dispute in this case relates to sales, use, and local option tax paid on purchases or leases of EGMs, Player Tracking units, and replacement parts.  (Stip. ¶ 5) 

 

Conclusions of Law

 

Relevant statute and rules:  Iowa law generally imposes a tax on the gross receipts from all sales of tangible personal property sold at retail in the state to consumers or users or purchased for use in the state.  Iowa Code subsection 422.45(27), provided a sales and use tax exemption for the gross receipts from the sale or rental of certain industrial machinery, equipment and computers during the period covered by the refund claims  - April 1, 1994 through June 30, 2001. 

 

The parties have stipulated that the issue presented is whether EGMs, Player Tracking units, and replacement parts are exempt from sales and use tax as qualifying computers pursuant to Iowa Code section 422.45(27) (1997).   The exemption in question was contained in subsection 422.45(27) throughout the refund period, but the 1997 version of the code, cited in the parties’ stipulation of the issue, was only in place through June 30, 1997.  I presume that the parties overlooked the change in the statute.  However, even if they intended the 1997 version of the statute to be applied to the entire claim period, I am not bound by that element of the stipulation.  “Stipulations as to the law do not settle for the court what the law is, and consequently are of no validity.”  Freeman v. Earnst & Young, 541 N.W.2d 890, 894 (Iowa 1995), quoting State v. Aumann, 236 N.W.2d 320, 322 (Iowa 1975).  The amended version of the law applies to equipment purchased or leased on or after July 1, 1997.

 

Prior to July 1, 1997 subsection 422.45(27) provided, in relevant part:

 

There are hereby specifically exempted from the provisions of this division and from the computation of the amount of tax imposed by it, the following:

* * *

  (27) The gross receipts from the sale or rental of industrial machinery, equipment and computers, including replacement parts which are depreciable for state and federal income tax purposes, if the following conditions are met:

   (a)  The industrial machinery, equipment and computers shall be directly and primarily used in the manner described in section 428.20 in processing tangible personal property or in research and development of new products or processes of manufacturing, refining, purifying, combining of different materials or packing of meats to be used for the purpose of adding value to products, or in processing or storage of data or information by an insurance company, financial institution or commercial enterprise, or in the recycling or reprocessing of waste products. . . .

 

Iowa Code § 422.45(27)(a) (1997) (emphasis added).  

 

The 1997 amendment, effective July 1, 1997, revised the subsection to the version applicable to the remainder of the refund period.

 

There are hereby specifically exempted from the provisions of this division and from the computation of the amount of tax imposed by it, the following:

* * *

(27)(a)  The gross receipts from the sale or rental of computers, machinery, and equipment, including replacement parts, and material used to construct or self-construct computers, machinery, and equipment if such items are any of the following:

   (1)  Directly and primarily used in processing by a manufacturer.

   (2)  Directly and primarily used to maintain the integrity of the product or to maintain unique environmental conditions required for either the product or the computers, machinery, and equipment used in processing by a manufacturer, including test equipment used to control quality and specifications of the product.

   (3)  Directly and primarily used in research and development of new products or processes of processing.

   (4)  Computers used in processing or storage of data or information by an insurance company, financial institution, or commercial enterprise.

   (5)  Directly and primarily used in recycling or reprocessing of waste products.

   (6)   Pollution control equipment used by a manufacturer, including but not limited to that required or certified by an agency of this state or of the United States government.

* * *

   (c)  However, the gross receipts from the sale or rental of the following shall not be exempt from the tax imposed by this division:

* * *

   (2)  Point-of-sale equipment and computers.

 

Iowa Code § 422.45(27)(a)(4)(Supp. 1997) (emphasis added).  The exemption, now found at Iowa Code section 423.3(47)(a)(4) (2011), remains in place in essentially the same form.

 

Subsection 422.45(27) does not directly define the terms “computer,” “processing or storage of data or information,” or “point-of-sale.”  However, until 1996 subsection 422.45(27) incorporated the definition of computer found within Iowa Code subsection 427A.1(j).^[1]  Iowa Code subsection 427A.1(j)(1) classified computers as property to be taxed as real property and provided the following definition:

 

Computers.  As used in this paragraph, “computer” means stored program processing equipment and all devices fastened to the computer by means of signal cables or communication media that serve the function of signal cables, but does not include point of sales equipment.

 

Iowa Code § 427A.1(1)(j) (1995).  This definition of computer remains in place today.  Iowa Code § 427A.1(1)(j) (2011). 

 

The legislature has granted the Department of Revenue “the power and authority to prescribe all rules not inconsistent with the provisions of [chapter 422], necessary and advisable for its detailed administration and to effectuate its purposes.”  Iowa Code

§ 422.68(1).  The Department has exercised this authority by adopting administrative rules guiding the application of sales tax exemptions.  Rule 18.45 applies to sales before July 1, 1997.  Rule 18.58 applies to sales on or after July 1, 1997.

 

The rules incorporate the requirements of the statute.  Rule 18.45 provides that the sale or rental of “specified property” including a computer and depreciable replacement parts is exempt from tax if “[t]he property is directly and primarily used in . . . processing or storage of data or information by . . . [a] commercial enterprise.” 701 IAC 18.45(2)(b)(3).  Rule 18.58, which was adopted to implement the 1997 revision of subsection 422.45(27), omits the requirement for a computer to be “directly and primarily” used in processing or storage of data.  This rule provides:  “sales and rentals of the following  . . . computers (including replacement parts) are exempt from tax: . . . Computers used in processing or storage of data or information by  . . . [a] commercial enterprise”).  701 IAC 18.58(2)(f).

 

Department rules include the following definitions to be used in applying the subsection 422.45(27)(a) exemption:

 

“Computer” means stored program processing equipment and all devices fastened to it by means of signal cables or any communication medium that serves the function of a signal cable. Nonexclusive examples of devices fastened by a signal cable or other communication medium are: terminals, printers, display units, card readers, tape readers, document sorters, optical readers, and card or tape punchers.  Excluded from the definition of “computer” is point-of-sale equipment. For a characterization of “point-of-sale equipment” see 701—sub-rule 71.1(7).

* * *

“Processing or storage of data or information.”  Not only a computer, but machinery or equipment may be used in the processing or storage of data or information.  All computers store and process information.  However, only if the “final output” for a user or consumer is stored or processed data will the computer be subject to refund or exemption of tax.

 

701 Iowa Admin. Code (IAC) 18.45(1) (applicable to sales prior to July 1, 1997).^[2]  The only notable change in the definitions applicable to sales on or after July 1, 1997 is that the first sentence of the definition of “processing or storage of data or information” in rule 18.45(1) is omitted from the definition in rule 18.58(1).  The terms “stored program processing “equipment,” “final output,” and “user or consumer” are not defined in the statute or rules. 

 

To illustrate the meaning of “processing or storage of data or information,” the rules include the following example:

 

A health insurance company has four computers. Computer A is used to monitor the temperature within the insurance company’s building. The computer transmits messages to the building’s heating and cooling systems telling them when to raise or lower the level of heating or air conditioning as needed. Computer B is used to store patient records and will recall those records on demand. Computer C is used to tabulate statistics regarding the amount of premiums paid in and the amount of benefits paid out for various classes of insured. Computer D is used to train the insurance company’s employees to perform various additional tasks or to better perform work they can already do. Computer D uses various canned programs to accomplish this. The “final output” of Computer A is neither stored nor processed information. Therefore, Computer A does not fit the definition of an exempt computer. The final output of Computer B is stored information. The final output of Computer C is processed information. The final output of Computer D is processed information consisting of the training exercises appearing on the computer monitor. The sale, lease, or use of Computers B, C, and D would qualify for exemption.

 

441 IAC 18.58(5)(c) (applicable to sales on or after July 1, 1997). Rule 18.45(1) (applicable to sales before July 1, 1997), provides the same health insurance company example without reference to computer D.

 

Not all computers that are used in processing or storage of data or information and meet the initial criteria for the exemption are exempt from sales and use tax.  As amended in 1997, the statute includes an exception to the exemption for “point-of-sale” equipment and computers.  Iowa Code § 422.45(27)(c)(2)(Supp. 1997).  Prior to the 1997 amendment, the point-of-sale exception was incorporated into the definition of computer found in Code section 427A.1(j)(1) and rules 18.45.  Rules 18.45 and 18.58 cross-reference to the following definition of point-of-sale equipment:

 

Point-of-sale equipment. . . . the term “point-of-sale equipment” means input, output, and processing equipment used to consummate a sale and to record or process information pertaining to a sale transaction at the time the sale takes place and which is located at the counter, desk, or other specific point at which the transaction occurs.  As used in this subrule, the term “sale” means the sale or rental of goods or services and includes both retail and wholesale transactions. Point-of-sale equipment does not include equipment used primarily for depositing or withdrawing funds from financial institution accounts.

 

701 IAC 71.1(7).

 

Burden of Proof & Rules of Construction:  As a party seeking the benefit of the subsection 422.45(27) sales and use tax exemption, President bears the burden of proving that its purchase of electronic gaming machines and Player Tracking units qualify for the exemption. Sherwin Williams Co. v. Iowa Dep’t of Revenue, 789 N.W.2d  417, 424 (Iowa 2010);  Iowa Network Services, Inc. v. Iowa Dep’t of Revenue, 784 N.W.2d 772, 776 (Iowa 2010). 

 

Statutes which impose taxes are construed liberally in favor of the taxpayer and strictly against the taxing body.  But the opposite rule of construction applies in this case.  Statutes exempting property from taxation must be “construed strictly against the taxpayer and liberally in favor of the taxing body.” Iowa Network Services., 784 N.W.2d at 776, citing Ranniger v. Iowa Dep’t of Revenue & Finance, 746 N.W.2d 267, 269 (Iowa 2008), quoting Iowa Auto Dealers Ass’n v. Iowa Dep’t of Revenue, 301 N.W.2d 760, 762 (Iowa 1981).  “Any doubt concerning an exemption must be resolved in favor of taxation.” Dubuque Casino Belle, Inc. v. Bair, 562 N.W.2d 605, 607 (Iowa 1997), quoting Partnership for Affordable Housing v. Bd. of Revenue, 550 N.W.2d 161, 164 (Iowa 1996).

 

Analysis:  a. EGMs are “computers” that are used in processing or storage of data or information, but EGMs are not used primarily in processing or storage of data or information. 

In common usage, the term “computer” brings to mind an electronic device designed and used for the primary purpose of storing and processing information.  The devices take the form of large scale main frames and servers; desktop and laptop personal computers; and – more recently – tablet devices.  I agree with the Department’s argument that the electronic slot and video gaming machines used by the President are not computers in this sense of the term.  Rather, the devices are slot machines designed with an embedded computer microprocessor to increase operational efficiency.  Addition of the microprocessor enhances the function of a slot machine, but does not turn the slot machine into a computer in the commonly used sense of the term.

 

The courts recognize, however, that the legislature may act as its own lexicographer and, when the legislature has chosen to define a term, the court is normally bound by the legislature’s definition.  “Under these circumstances, ‘the common law and dictionary definitions which may not coincide with the legislative definition must yield to the language of the legislature.’”  Sherwin-Williams Co., 789 N.W.2d at 425, quoting, Hornby v. State, 559 N.W.2d 23, 25 (Iowa 1997).  The definition of computer in subsection 427A.1(1)(j) has been incorporated by the legislature and the Department into subsection 422.45(27). The legal question presented here is not whether an electronic gaming machine is something commonly thought of as a computer or something that meets a text-book definition of a computer, the question is whether the machines fit within the definition of “computer” adopted for this context.   

 

 “Computer,” for purposes of the subsection 422.45(27) sales and use tax exemption, means “stored program processing equipment and all devices fastened to it by means of signal cables or any communication medium that serves the function of a signal cable.” 701 IAC 18.45(1) & 18.58(1).  As described above and in the industry literature contained in the record, the electronic slot machines and video gaming devices use embedded computer microprocessors and stored programs to operate.  The machines use microprocessors and software programs stored on memory chips to control game function and to collect, store, and transmit data about machine play to the casinos central computer system, slot management system, and player tracking system. If the microprocessors are not operational, the EGMs will not function. The machines are “stored program processing equipment” and, therefore, must be treated as computers under the controlling definition.  See Iowa Dept. of Revenue Policy Letter, Computers – Doc. Ref. No. 00300094 (7/12/2000) (informal opinion advising that arcade-style computer video games are computers as defined in rule 18.58(1) and the sales tax exemption for computers).

 

The finding that EGMs are computers is not sufficient to qualify purchases of the machines for the subsection 422.45(27) sales and use tax exemption unless they are “used in the processing or storage of data or information.”  Prior to July 1, 1997, the exemption applied only to computers that were “directly and primarily used . . . in processing or storage of data or information.”  After the 1997 amendment, computers “used in processing or storage of data or information” could qualify for the exemption.

 

Determination of whether a computer is used in the processing or storage of data or information requires examination of the output of the device.  The Department rules provide that:  “All computers store and process information. However, only if the ‘final output’ for a user or consumer is stored or processed data will the computer be subject to refund or exemption of tax.” 701 IAC 18.45(1); 18.58(1).  While the definition of “computer” focuses upon how a device operates, this inquiry focuses upon how the device is used.

 

The department’s rule recognizes that many types of machinery and equipment store and process data or information.  Data storage and processing can be accomplished by mechanical means or through use of embedded microprocessors.  The mere fact that a device uses a program-driven microprocessor to collect and store data does not mean that the “final output” of the device is stored and processed data. 

 

Implicit in the Department’s argument is the assumption that a computer can have only one “final output.”  This assumption has no apparent basis in fact or law.  Neither the statute nor the rules explicitly provide that a computer can have only one “final output.”  Indeed, the pre-1997 amendment version of the statute and the corresponding rule implicitly recognize that a computer may have more than one use by limiting the sales and use tax exemption to computers that were “directly and primarily used . . . in processing or storage of data or information.” 

 

As the name implies, the primary use of an EGM is as a gaming machine.  EGMs are designed, marketed, and purchased by casinos and other gaming establishments to serve as a substitute for the machines from which they evolved – mechanical slot machines.  The machines are capable of running a variety of games to maintain player interest and maximize casino revenue.  The player and the casino both use electronic gaming machines as gaming devices.  One output of an EGM is game play.

 

For the casino, output of the EGM also includes compiled data about the game play.  Each EGM electronically retains play history and is capable of providing cumulative statistical data about machine transactions (i.e. the number of coins and bills of various denominations taken in; the number of games played, won, and lost; the number of coins and credits paid out).  This information is transmitted from the attached Player Tracking unit through a Data Collection Unit and signal converter to a computer that is connected to the casino’s central computer network.  One output of an EGM is stored data and information. 

 

President uses its EGMs primarily as gaming machines, not as data storage or processing equipment.  Because the primary use of the machines is not the processing or storage of data or information, EGMs purchased or leased prior to July 1, 1997 do not qualify for the sales and use tax exemption. 

 

As rewritten by the legislature in 1997, subsection 422.45(27) exemption is no longer limited to computers used primarily for processing or storage of data.  Since 1997, the exemption is available to all “computers used in processing or storage of data or information.”  President uses its EGMs to compile and store information about game play and to transmit this information to other computers in the casino’s network.  Therefore, the EGMs purchased on or after July 1, 1997 can qualify for the sales and use tax exemption, unless they fall within an exception to the exemption. 

 

b. The Player Tracking units fall within the applicable definition of “computer” because they are attached to computers by means of signal cable. 

 

For purposes of applying the subsection 422.45(27) exemption the definition of computer extends to devices fastened to a qualified computer by means of signal cables or any communication medium that serves the function of signal cable.  Rules 18.45(1) and 18.58(1) include examples of potentially eligible peripheral equipment including:  “terminals, printers, display units, card readers, tape readers, document sorters, optical readers, and care or tape punchers.”

 

The Department found that the purchase and lease of the computers comprising President’s central information and casino management systems qualified for the section 422.45(27) the sales and use tax exemption.  Each electronic gaming machine has a Player Tracking unit attached.  The Player Tracking unit is a card reader used by members of President’s Player’s Club.  The Player Tracking unit is connected by signal cable to the central computer system and serves as the physical link between the EGM and that system.

 

The Player Tracking units fit squarely within the definition of peripheral computer equipment connected to qualifying computers.  The units can qualify for the sales and use tax exemption, unless they fall within an exception to the exemption. 

 

c. EGMs and Player Tracking units are “point of sale equipment” and purchase or lease of the equipment falls within the exception to the tax exemption set forth in subsection 422.45(27)(c)(2).

 

(i)  An EGM wager is a sale.  As set forth above, the sales and use tax exemption in subsection 422.45(27) does not apply to point of sale equipment.  President argues that an electronic gaming machine transaction is not a “sale” because the machines are gaming devices on which wagers, rather than sales, are consummated.  As support for this argument President relies on common use definitions of sale and wager, and upon the distinction drawn between amusement devices and gaming machines in the state and federal regulatory context. 

 

In the regulatory context, there is a distinction between video games played strictly for amusement and gambling devices.  This fact does not negate the fact EGMs offer an entertainment experience to casino customers.  A desire to enhance the game play experience is a driving force behind the development of new games and game themes.  The fact that electronic gaming machines are subjected to regulation that is not applied to non-gambling video games does not negate the entertainment value of the game play experience.  

 

Further, Iowa Code chapter 422 defines the term “sale” for purposes of Iowa sales and use tax and Department rules contain a definition of the term “point of sale equipment” applicable to application of the exception to the sales tax exemption.  Just as the common usage definition of computer does not apply in this context, the common use definitions of “sale” and “point of sale equipment” that President relies upon are not applicable.  The point of sale equipment exception to the exemption must be considered in the context in which it appears using applicable definitions. 

 

For purposes of applying the point of sale exception to the exemption, “’sale’ means the sale or rental of goods or services and includes both retail and wholesale transactions.”  701 IAC 71.1(7), see 701 IAC 18.45, 18.58 (incorporating rule 71.1(7)).  This rule tells us the equipment used for all sale and rental transactions is included in point of sale equipment, but it does not define sales transaction.  Iowa Code chapter 422 defines “sales,” for purposes of Iowa sales and use tax, to mean “any transfer, exchange, or barter, conditional or otherwise, in any manner or by any means whatsoever, for a consideration.”  Iowa Code §422.42(17) (1997). 

 

Receipts from the sale of tickets or admissions to places of amusement, “charges imposed solely for the privilege of participating in an activity at a place of amusement,” and “receipts from devices or systems where prizes are in any manner awarded to patrons” are generally subject to sales tax under Iowa law.  Iowa Code § 422.43(2)-(3) (1997).  “The gross receipts from amusements of every kind and character and from games of every kind and character” are subject to Iowa sales tax, unless explicitly exempted.  Taxable amusement includes “[g]ames of skill, games of chance, raffles, and bingo.”  701 IAC 16.26.  A “wager” on a game of chance is a “sale” in this context. 

 

The gross receipts from gambling games operated by excursion boat licensees are subject to a wagering tax and are explicitly exempted from sales tax to avoid duplicate taxation.  Iowa Code §§ 99F.10(6), 99F.11 (1997); 701 IAC 16.25; Dubuque Casino Belle, Inc. v. Bair, 562 N.W.2d 605, 608 (Iowa 1997) (holding that excise tax exemption subsection 99F.10(6) was intended to exempt excursion boat admissions and gambling receipts from “taxes that would duplicate the taxes imposed by chapter 99F”).  This explicit sales tax exemption for revenue from gambling games would be wholly unnecessary if amounts spent for game play – wagers on EGMs - were not taxable sales.  

 

(ii)  EGMs and Player Tracking units constitute point of sale equipment.  Department rule 71.1(7) defines point of sale equipment as:  “input, output, and processing equipment used to consummate a sale and to record or process information pertaining to a sale transaction at the time the sale takes place and which is located at the counter, desk, or other specific point at which the transaction occurs.”  Having found that a wager on an EGM is a “sale” in this context, it follows that EGMs are point of sale equipment. 

 

The sale transaction happens when a customer inserts money, tokens, or credits into the machine and initiates game play.  The EGM is the equipment used to consummate and record information pertaining to the sale: the transaction happens at the EGM, and the EGM records information pertaining to the transaction, including the number of plays, amount wagered, and amount paid out.  See Iowa Dept. of Revenue Policy Letter, Computers – Doc. Ref. No. 00300094 (7/12/2000) (informal opinion advising that arcade-style computer video games are classified as point of sale equipment and fall within the exception to the sales tax exemption for computers).

 

Summary:   EGMs and Player Tracking units are computers, as that term is defined for purposes of applying the section 422.45(27) sales and use tax exemption.  The purchase and lease of EGMs prior to July 1, 1997 did not qualify for the exemption because the EGMs are not used primarily to store and process data or information.  EGM purchases made on or after July 1, 1997 could qualify for the exemption, if the machines were not point of sale equipment.  But EGMs and Player Tracking units are point of sale equipment and fit within an exception to the sales and use tax exemption.  

 

Therefore, the Department was correct in denying The Connolly Group’s request for refund of sales and local option tax paid for the purchase or lease of EGMs, Player Tracking units, and replacement parts.

 

Order

 

The Department’s decision denying The Connelly Group’s claims for the refund of sales and local option tax is found to be correct and AFFIRMED.    

 

Issued on October 7^th, 2011.

Christie J. Scase

Administrative Law Judge

Telephone:  515-281-7114

Facsimile:  515-281-4477

 

CC:       The Connelly Group, d/b/a President Riverboat Casino

            Bruce W. Baker and K. Dwayne Vande Krol, Attorneys for the Taxpayer

            Valencia Voyd McCown and Theresa A. Dvorak, Assistant Attorneys General