Midwest Gaming Win Reinforces Division Between Police And Taxing Powers

In United States v. Doremus, 249 U.S. 86 (1919) the Supreme Court held that a tax law "may not be declared unconstitutional, because its effect may be to accomplish another purpose as well as the raising of revenue." That other purpose besides raising revenue was found to be absent when, on August 27, 2014, Midwest Gaming & Entertainment, LLC ("Midwest") obtained a permanent injunction enjoining the imposition and enforcement of Cook County's Gambling Machine Tax (the "Tax").1 The Circuit Court of Cook County granted Midwest's motion for summary judgment, and denied Cook County's cross-motion for summary judgment, ruling that (1) the Tax improperly interfered with the exclusive jurisdiction for the Illinois Gaming Board (the "IGB") created by the Illinois Riverboat Gambling Act (the "RGA"); (2) the Tax was an impermissible tax on occupations as prohibited by the Illinois Constitution; (3) the Tax was an illegal license for revenue; and (4) the Tax violated the Illinois Constitution by creating two arbitrary categories of taxpayers: operators of gambling devices and operators of video gaming terminals.

As state and local governments increasingly turn to taxes on gaming, marijuana, and other traditionally regulated products and activities, the Midwest Gaming decision is a timely reminder to taxpayers that many of these "sin taxes" may be vulnerable to challenge, because they do not represent a valid exercise of the police power, and are merely a veiled attempt to raise revenue.

Background

On November 9, 2012, the Cook County Board of Commissioners enacted the Gambling Machine Tax Ordinance (Cook County Ordinance 12-O-62), which imposed the Tax, effective June 1, 2013. As enacted, the Gambling Machine Tax Ordinance imposed a $1000 annual tax upon each gambling device and a $200 annual tax upon each video gaming terminal.

Midwest filed the lawsuit alleging the Tax is invalid because (1) the RGA prohibits the imposition of the Tax; (2) the Tax is an impermissible "occupation tax"; (3) the Tax is a prohibited "license for revenue"; and (4) the Tax does not "treat all gambling machines uniformly."

RGA Provision Barring Taxation by Home Rule Units

Midwest argued that the RGA created exclusive jurisdiction for the IGB, and the Tax improperly interfered with that jurisdiction. The RGA provides that licensees "shall not be subject to any . . . occupation tax . . . which is imposed exclusively upon the licensee by the State or any political subdivision...