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Posted by WI DOR: April 2020

The department’s auditors and Alcohol and Tobacco Enforcement agents (A&T) are working together to ensure compliance with Wisconsin laws as they apply to video gambling machines. Auditors routinely verify whether the correct amounts of Wisconsin income, franchise, sales and use taxes are reported and remitted on income and sales price from the operation of such machines. Auditors may request assistance from A&T agents for determining the sales price from admissions to video gambling machines and whether violations of Wisconsin video gambling laws have occurred.

Video Gambling Law Violations

The operation of video gambling machines is a violation of Wisconsin law. The department has sole authority to investigate video gambling violations on the premises of persons holding “Class B” liquor and wine licenses and/or Class “B” fermented malt beverage licenses (Class B premises) with five or fewer video gambling machines.* The presence of five or fewer video gambling machines on Class B premises is a violation subject to civil forfeiture. Penalties include seizure of the machines and/or money in the machines, and a $500 fine per machine.

If video gambling machines are located on non-Class B premises (such as gas stations, laundromats, etc.), the violations are more severe. Penalties may include fines up to $10,000, seizure of the machines, revocation of alcohol licenses, discontinuation as a lottery retailer, and closure of the business as a nuisance. District attorneys may prosecute all gambling violations, even though local law enforcement may not investigate the violations occurring on Class B premises.

A gambling machine is a contrivance which, for a consideration, affords the player an opportunity to obtain something of value, the award of which is determined by chance, even though accompanied by some skill and whether or not the prize is automatically paid by the machine. A “gambling machine” does not include any of the following:

• A device used in conducting a bingo occasion or raffle event under ch. 563, Wis. Stats., used in conducting a lottery under ch. 565, Wis. Stats., or used in conducting a race under ch. 562, Wis. Stats.
• Any amusement device if it rewards the player exclusively with one or more non-redeemable free replays for achieving certain scores and does not change the ratio or record the number of the free replays so awarded.
• An amusement device involving skill, if it rewards the player exclusively with merchandise contained within the amusement device itself and limited to prizes, toys and novelties, each having a wholesale value not more than seven times the cost charged to play the amusement device once or $5, whichever is less.
• “Skill” means, within an opportunity provided for all players fairly to obtain prizes or rewards of merchandise, a player’s precision, dexterity or ability to use his or her knowledge which enables him or her to obtain more frequent rewards or prizes than does another less precise, dexterous or knowledgeable player.

*Cities, towns, and villages have the authority to prohibit by ordinance all forms of gambling and seize anything devised solely for gambling or used for gambling. Local law enforcement investigates and enforces these local ordinances.

Income and Franchise Taxes

The gross income from gambling machines must be reported with other income from an operator’s business. An operator is entitled to deductions from income for ordinary and necessary business expenses related to the gambling machines in the same manner as other business expenses (for example, pay outs, lease payments, depreciation, supplies, etc.). Income and expenses are reported on the operator’s federal and Wisconsin income or franchise tax returns.

Wisconsin Sales and Use Taxes

The sales price from providing access to or use of video gambling machines in Wisconsin are subject to Wisconsin sales tax. The person responsible for reporting and remitting the sales tax to the department is the “operator” of the machine. The machine operator is subject to Wisconsin sales or use tax on its purchase, lease, or rental of the machine.

The machine operator may not purchase, lease, or rent the machine without tax for resale because the machine operator is using the machine to provide amusement, recreation, or entertainment.

The following flowcharts illustrate the sales and use tax treatment.

Recordkeeping

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Records must be kept to verify Wisconsin income or franchise taxes and sales and use taxes reported and remitted. These records include all the following (this list is not all-inclusive):

• Original tickets, tapes, or similar documents produced by the machine that shows the money deposited into the machine, credits issued and used, and pay outs.
• Collection report for each establishment that shows the establishment’s name, type of machines, and number of machines on the premises. This report should show the following for each machine at the establishment: credit value stated in dollars, starting credits-in, ending credits-in, net credits-in, starting credits-out, ending credits-out, net credits-out (pay outs), taxable sales, sales tax amount, net profit before sharing/allocation, and establishment’s share of the net profit. A copy of this collection report should be given by the operator to the establishment to keep in its records.
• Recipient name and address for each pay out.
• Copies of completed federal Form W-2G, Certain Gambling Winnings, if federal law requires reporting the pay out to the recipient, including the taxpayer identification number (TIN) of the recipient.
• Copies of completed federal Form 1099-MISC, Miscellaneous Income, if federal law requires the reporting of the rent paid to the recipient, including recipient’s TIN.
• Records of commissions paid by distributors for placement of machines at any establishment, including the name and address of the payor and payee, amount paid, and date of payment, and a copy of any federal Form 1099 as required by federal law.
• Sales invoices or lease agreements for machines, maintenance, supplies, and any other expenses.
• Machine inventory reports by year: This report should show machine name, machine number, location of machine (inventory, scraped for parts, premise location).

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If proper records are not maintained, gross receipts and income subject to tax may be determined by the department through income reconstruction methods and income tax deductions may be disallowed for lack of substantiation. If an operator files an incorrect income or franchise tax and sales or use tax returns due to negligence or fraud, penalties and interest may be assessed, and the operator’s seller’s permit may be revoked. The interest rate on delinquent taxes is 18% per year. Civil penalties can be as much as 100% of the amount of tax not reported on the return. Criminal penalties for failing to file or filing a false return include a fine up to $10,000 and imprisonment.