Tax Policy: A Profile of the Indian Gaming Industry
Published: 1997-05-05T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Pursuant to a congressional request, GAO provided an updated profile of the Indian gaming industry, focusing on: (1) the amount of transfers to the tribes from their gaming facilities; (2) a comparison of Indian gaming revenues with the revenues generated by other legalized gaming activities; and (3) the federal tax treatment of Indian tribes and tribe members.
section_title: What GAO Found
paragraphs: GAO noted that: (1) as of December 31, 1996, 184 tribes were operating 281 gaming facilities; (2) for 178 of these facilities, operated by 126 tribes, GAO obtained and examined 1995 financial statements; (3) these 178 facilities reported generating gaming revenues (dollars wagered minus payouts) of about $4.5 billion, with 8 of them accounting for about 40 percent of these revenues; (4) the gaming facilities also reported generating over $300 million in revenues from sales such as food, beverages, and hotel rooms; (5) net income (total revenues minus expenses) reported for the 178 facilities was about $1.9 billion, representing 38 percent of the $4.9 billion total revenues; (6) according to the financial statements, about $1.6 billion was transferred to 106 tribes in 1995; (7) for 20 tribes, the financial statements did not show any transfers; (8) none of the financial statements indicated how the transfers were used by the tribes; (9) gaming revenues generated by all class II and class III Indian facilities for which GAO had financial statements equaled at least 10 percent of the estimated gaming revenues generated by legalized gaming reported by the gaming industry in 1995; (10) in the aggregate, 109 class III Indian facilities generated about the same total amount in gaming revenues as the 12 Atlantic City casinos and more than half the gaming revenues of the 213 Nevada casinos; (11) average gaming revenues for these Indian facilities were significantly less than those of Atlantic City casinos but about equal to the average for the Nevada casinos; (12) in terms of the distribution of gaming revenues among the facilities, class III Indian facilities were similar to Nevada casinos, a small proportion of the facilities accounted for a large share of the aggregate gaming revenues; (13) by contrast, the gaming revenues of the 12 Atlantic City casinos were more equally distributed; (14) the Internal Revenue Service has determined that Indian tribes are not subject to federal income tax because they are political agencies not included within the meaning of the income tax provisions of the Internal Revenue Code; (15) Indian tribes are not, however, tax-exempt organizations within the meaning of provisions of the Code that exempt certain categories of organizations from income tax; (16) individual tribe members are subject to federal income tax; and (17) payments of net revenues from gaming operations to members of Indian tribes are generally taxable, and the tribe is responsible for withholding income taxes from the payments.

section_title: Letter
paragraphs: Indian gaming activities and the revenues generated from them have grown substantially since the late 1980s. Recognizing this, Congress, as part of its deliberations on the Seven-Year Balanced Budget Reconciliation Act of 1995, debated taxing the income earned from gaming activities by Indian tribes and also by some tax-exempt organizations. Since the debate, you have asked us to provide you with information on the Indian gaming industry.
This report is a follow-up to the preliminary data we provided you in August 1996. In this report, our objectives are to provide you with (1) an updated profile of the Indian gaming industry, (2) information on the amount of transfers to the tribes from their gaming facilities, (3) a comparison of Indian gaming revenues with the revenues generated by other legalized gaming activities, and (4) a summary of the federal tax treatment of Indian tribes and tribe members.
subsections: section_title: Background
paragraphs: In the late 1970s, Indian tribes began authorizing or conducting various types of gaming activity with only tribal oversight. In 1987, the Supreme Court confirmed that Indian tribes had authority to operate gaming establishments on their trust lands without having to comply with state laws and regulations. To resolve outstanding issues between tribes and states and to provide oversight, Congress passed the Indian Gaming Regulatory Act of 1988 (IGRA).
IGRA established the following three classes of gaming to be regulated by a combination of the tribal governments, state governments, Bureau of Indian Affairs (BIA)—an agency of the Department of the Interior, and National Indian Gaming Commission (NIGC).
Class I gaming consists of social gaming for nominal prizes or ceremonial gaming. It is regulated solely by the tribe, and no financial reporting to other authorities is required.
Class II gaming includes bingo, pull-tabs, and punch-boards. Tribes can conduct only class II games that are legal under state law, and these games are regulated by the tribes and NIGC.
Class III gaming consists of all other forms of gaming, including casino games, slot machines, and pari-mutuel betting. Class III games are regulated as indicated below.
Tribes are required to obtain state, NIGC, and Department of Interior approval to establish and operate class III gaming facilities. IGRA requires that tribes and states negotiate a tribal-state compact to balance the interests of both the state and the tribe. The Secretary of the Interior is authorized to approve any tribal-state compact and has delegated this authority to the Assistant Secretary—Indian Affairs, who is responsible for BIA. All class II and III gaming operations on Indian lands are required to submit copies of their annual financial statement audits to NIGC.
The tribal-state compact is an agreement that may include provisions concerning standards for the operation and maintenance of the gaming facility, the application of laws and regulations of the tribe or the state that are related to the licensing and regulation of the gaming activity, and the assessment by the state of amounts necessary to defray the costs of regulating the gaming activity.
IGRA specifies that the tribal ordinance concerning the conduct of class II or III gaming on Indian lands within the tribe’s jurisdiction must provide that the net revenues from any tribal gaming are not to be used for purposes other than to (1) fund tribal government operations or programs, (2) provide for the general welfare of the Indian tribe and its members, (3) promote tribal economic development, (4) donate to charitable organizations, or (5) help fund operations of local government agencies. Tribes may distribute a portion of their net revenues directly to tribal members, provided that the tribes have a revenue allocation plan approved by BIA. This plan is to describe how tribes intend to allocate net revenues among various governmental, educational, and charitable projects, including direct payments to tribal members.
section_title: Scope and Methodology
paragraphs: We determined the number of tribes with gaming facilities by reviewing documents provided by NIGC, which identified all tribes with gaming operations as of December 31, 1996. To perform our analyses on revenues, costs and expenses, and net income, for example, we obtained 1995 financial statements that were submitted to NIGC as of November 22, 1996. The sample of facilities included in our report consists of the 178 gaming facilities represented by these financial statements. The sample is not representative of the universe of all Indian gaming facilities. Some facilities were not included in our analyses because they were new and not yet required to file financial statements, the financial statements submitted were incomplete, or the financial statements were not filed as of the date we completed our data collection (see app. I). We used Audit and Accounting Guide: Audits of Casinos, published by the American Institute of Certified Public Accountants, and spoke with industry experts for guidance in deciding what data to extract from the financial statements and what analyses to perform on these data.
We also used the financial statements to determine the amount of transfers to the tribes. The transfers as described in this report represent the amounts in the financial statements allocated to the “tribes.” The amounts could have been received by the tribal government or tribal members, but we were not able to determine this because the financial statements did not indicate how the transfers were used or who received them.
To compare Indian gaming with other legalized gaming activities, we used data reported in International Gaming and Wagering Business and financial statement data submitted to the Nevada and Atlantic City gaming commissions.
To describe the legal issues regarding the taxation of Indian gaming revenues, we reviewed relevant sections of the Internal Revenue Code and the IRS and Department of the Treasury rulings and regulations pertaining to the taxation of Indian tribes. We also interviewed officials from Treasury, IRS, and BIA. (See app. I for more details on our scope and methodology.)
We conducted our review from October 1996 through March 1997 in accordance with generally accepted government auditing standards. We obtained comments on a draft of this report from the Internal Revenue Service, the Department of the Interior, and the Chair of NIGC. These comments are discussed at the end of this letter.
section_title: Profile of the Indian Gaming Industry
paragraphs: As shown in figure 1, Indian gaming revenues have grown significantly since 1988 when IGRA was enacted. IGRA provided the regulatory framework for tribes to establish and operate gaming facilities.
subsections: section_title: More Than Half of Continental U.S. Tribes Operated Gaming Facilities
paragraphs: According to information provided by NIGC, 184 of the 555 Indian tribes officially recognized by the United States were operating a total of 281 gaming facilities as of December 31, 1996. Of the 184 tribes, 182 were in the continental United States, representing 55 percent of all continental U.S. tribes (329). The remaining two tribes were in Alaska. According to NIGC, the 226 tribes in Alaska are generally too remote or too small to operate gaming facilities.
An additional 32 tribes had been authorized to operate gaming facilities but had not opened any as of December 31, 1996, according to NIGC information. (See fig. 2 for the distribution of Indian gaming facilities in operation.)
section_title: Revenues From Indian Gaming Facilities Exceeded $4 Billion
paragraphs: From our analyses of the 178 gaming facilities’ financial statements, we found that reported gaming revenues were about $4.5 billion and revenues from other activities, such as food, beverages, and hotel rooms, were over $300 million (see table 1). Median gaming revenues for class II facilities were about $2.5 million and for class III, about $12.7 million.
Total net income was about $1.9 billion, with a median of $0.6 million for class II and $4.9 million for class III facilities. About 90 percent of the facilities generated net income, and about 10 percent generated net losses. Most of the facilities were class III, and they accounted for a large majority of all gaming revenues, total revenues, and net income.
About 40 percent of all gaming revenues were generated by eight of the class III gaming facilities. Figure 3 shows the distribution of gaming revenues for the 66 class II Indian facilities represented in our analysis. More than half of all class II gaming revenues were generated by eight facilities with gaming revenues of at least $20 million.
Figure 4 shows the distribution of gaming revenues for the 112 class III Indian facilities represented in our analysis. Almost half of the gaming revenues were generated by eight facilities with gaming revenues of at least $100 million each.
section_title: Net Income Accounted for 38 Percent of Total Reported Revenues
paragraphs: In total, net income of Indian gaming facilities (class II and III) was about 38 percent of total reported revenues. Net income as a percent of total revenues was about the same for class II and class III facilities (see fig. 5).
In addition, the net income of about half of the Indian gaming facilities was at least 30 percent of their total revenues (see fig. 6).
section_title: Most Tribes Received Transfers From Gaming Facilities
paragraphs: Of the 126 tribes included in our analysis, 106 reported receiving about $1.6 billion in transfers from their gaming facilities, as shown in figure 7. These 106 tribes operated 149 gaming facilities. Ten of the tribes reported receiving transfers of at least $50 million each and accounted for more than half of the total transferred. The financial statements of 20 of the 126 tribes did not show transfers from their gaming facilities.
section_title: Comparison of Indian Gaming With Other U.S. Legalized Gaming
subsections: section_title: Indian Gaming Revenues Represented at Least 10 Percent of the U.S. Market in 1995
paragraphs: Table 2 shows that Indian gaming revenues (class II and III) were at least 10 percent of the revenues estimated to have been generated by legal gaming in 1995 and compares Indian gaming to other legalized gaming. Because our sample of financial statements did not cover all existing Indian facilities, the 10 percent market share could be higher.
Table 3 gives a breakdown of the casino segment of the gaming industry, including class III Indian gaming.
section_title: Class III Indian Gaming and Nevada and Atlantic City Casinos
paragraphs: In total, gaming revenues generated by class III Indian facilities and Atlantic City casinos in 1995 were similar, as shown in table 4. In addition, the average gaming revenues generated by class III Indian facilities and Nevada casinos were similar. The comparisons are for facilities and casinos with at least $1 million in gaming revenues because that was how data were reported for Nevada.
A small proportion of both class III Indian facilities and Nevada casinos generated significant amounts in gaming revenues and accounted for a large share of their respective aggregate gaming revenues (see fig. 8). Specifically, 13 percent of Indian class III facilities generated 59 percent of the Indian gaming revenues. Atlantic City casinos are not shown because their gaming revenues were more equally distributed. For example, 50 percent of the casinos generated about 59 percent of the gaming revenues.
section_title: Operating Income as a Percentage of Total Revenues of Large Class III Indian Facilities Was Almost Twice That of Large Nevada and Atlantic City Casinos
paragraphs: Operating income as a percentage of total revenues for large class III Indian facilities was almost twice as much as that of large Nevada and Atlantic City casinos. Table 5 shows the results of our analysis of operating income for class III Indian facilities and for Nevada and Atlantic City casinos with gaming revenues of $72 million and more. Operating income is a common measure used by industry experts to analyze and compare the profitability of businesses. It discounts the effects of capital structure and other nonoperating incomes and expenses that are not directly related to the performance of the business operations. (See the glossary for further details.)
According to industry experts, the difference in operating income margin (operating income as a percentage of total revenues) between these 14 class III facilities and these Nevada and Atlantic City casinos is explained, in part, by the different operational environments of the facilities. Specifically, the operating income shown in table 5 for Nevada and Atlantic City casinos was reduced by expenses that were not generally incurred at these Indian facilities, such as state gaming taxes and other state requirements. For example, Atlantic City casinos are subject to an 8-percent tax on their gaming revenues. Further, these Nevada and Atlantic City casinos have more competition in close proximity than the 14 class III Indian facilities.
Another possible explanation for the differences in operating income was the nature of the tribes’ relationships with their gaming facilities: Some tribes provided goods and services to the gaming facilities free of charge or at a low cost, which would have reduced their operating expenses.
section_title: Federal Tax Treatment of Indians and Indian Tribes
subsections: section_title: Overview
paragraphs: Although no statutory provision exempts Indian tribes from income taxation, IRS has concluded that federally recognized Indian tribes and their federally chartered corporations are not subject to federal income tax. With respect to tribes, IRS based its conclusion on the determination that the tribes are political agencies that Congress did not intend to include within the meaning of the income tax provisions of the Internal Revenue Code. Indian tribes are not, however, tax-exempt organizations within the meaning of the provisions of the Code that exempt certain categories of organizations from income tax. With respect to the tribes’ federally chartered corporations, IRS takes the view that no taxable entity separate from the tribes exists. IRS has also found that individual tribe members are U.S. citizens and are subject to federal income tax unless a specific exemption can be found in a treaty or statute.
IRS has found, however, that Indian tribal governments have no inherent exemption from federal excise taxes and, absent a specific statutory exemption, must purchase taxable articles or services on a tax-paid basis and must pay tax on their sale or use of taxable articles or services.
Section 7871 of the Code, enacted in 1982, provides an exemption from certain excise taxes. In addition, Indian tribes that are employers must pay federal employment taxes on wages paid to employees.
A provision included as part of the House-passed Seven-Year Balanced Budget Reconciliation Act of 1995 would have made the tribes subject, under section 511(a) of the Code, to the unrelated business income tax on revenues from class II and class III gaming. The unrelated business income tax currently applies to the income from the business activities of tax-exempt organizations that are not substantially related to the organizations’ exempt function. The proposed tax would have been the first explicit federal income tax applied to an Indian tribe. A memorandum prepared by the Congressional Research Service, dated October 10, 1995, concluded that the proposal did not seem to be invalid on any constitutional ground.
section_title: Historical Perspective
paragraphs: Before enactment of the Indian Reorganization Act of 1934 (IRA), congressional policy had been directed toward the assimilation of Indian tribes and the allotment of Indian lands to individual tribe members. IRA ended the practice of allotment as it applied to tribally owned lands. The act was designed to further tribal self-government by providing for tribal organization.
IRA section 16 provided that any tribe may adopt a constitution and bylaws, and it established a procedure for ratification by tribal members and approval by the Secretary of the Interior. Section 16 also provided that the constitution adopted by the tribe vested certain rights and powers in the tribe, including the right to prevent the sale and disposition of tribal lands and the right to negotiate with federal, state, and local governments.
Section 17 provided for the formation of a business corporation and established procedures for petition and ratification. Thus, IRA allowed for a dual mechanism by which the governmental affairs of an Indian tribe are conducted under a constitution and bylaws adopted under IRA section 16 and the commercial matters are handled by a business corporation organized under section 17.
IRA section 16 provided that “In addition to all powers vested in any Indian tribe by existing law, the constitution shall also vest in such tribe or its tribal council .” An early opinion of the Solicitor for the Department of the Interior considered the issue of what powers are incorporated in the constitution and bylaws of an Indian tribe by this reference to “powers vested in any Indian tribe or tribal council.” The opinion concluded that the vested powers are those powers of local self-government that have never been terminated by law or waived by treaty, including the power to: (1) adopt a form of government, create offices, and prescribe the duties thereof; (2) regulate the domestic relations of tribal members; (3) levy dues, fees, or taxes upon tribal members; and (4) regulate the use and disposition of all property within the jurisdiction of the tribe.
The opinion noted that the list was based on general legislation and judicial decisions of general application and was subject to modification with respect to particular tribes, in light of particular powers granted or particular restrictions imposed by special legislation. “a striking indication on the part of Congress and the executive department of the Government charged with administering various Indian laws that Indian tribes as such have been recognized as political agencies and have never lost their inherent powers of limited sovereignty . . .  an Indian tribe, as such, is not a taxable entity within the purview of the income tax provisions of the Internal Revenue Code.”
This principle forms the basis for the IRS policy on the income tax status of Indian tribes, as set forth in the series of revenue rulings. IRS has determined, however, that although Indian tribes are governments, they are not political subdivisions of the United States, individual states, or territories for purposes of the Code provisions that apply special tax treatment to these governmental units. These include the state exemptions from excise taxes, the income tax exemption for interest on municipal bonds, and the deduction of charitable contributions to governmental units for estate tax purposes. In 1982, Congress enacted the Indian Tribal Tax Status Act (Tribal Tax Act), treating tribal governments as states for a number of specified tax provisions, including provisions relating to tax-exempt bonds, charitable contribution deductions, and certain excise tax provisions. The treatment is generally available in transactions in which tribes exercise essential governmental functions.
section_title: Summary of Taxation of Indian Business Activities
paragraphs: The following sections outline the federal income tax treatment that applies to the various structures that generally can be used by tribes to carry out business activities. IGRA provides that unless a tribe elects to license individual owners, the tribe must have the sole proprietary interest and responsibility for the conduct of the gaming activity. Thus, gaming operations must generally be operated by an entity owned by the tribe, or as an arm of the tribe itself. Payments to tribe members and the application of other federal taxes are also discussed.
Federally Recognized Indian Tribes Are Exempt From Federal Income Taxation. According to IRS, federally recognized Indian tribes are not subject to federal income taxation. Rev. Rul. 67-284 states that “income tax statutes do not tax Indian tribes. The tribe is not a taxable entity.” Any income earned by the tribe is not subject to income tax, regardless of whether the business activity is inside or outside of Indian-owned lands.
The Senate Finance Committee Report on legislation that later became the Tribal Tax Act recognized IRS’ position that sections 1 and 11 of the Internal Revenue Code do not reach Indian tribes as set forth in Rev. Rul. 67-284 and stated that the proposed legislation did not amend this treatment.
Federally Chartered Tribal Corporations Are Not Subject to Federal Income Taxation. IRS has determined that federally chartered tribal corporations organized under IRA section 17 are not subject to federal income taxation, regardless of where the income is earned. In Rev. Rul. 81-295, IRS found that a federally chartered Indian tribal corporation has the same tax status as the tribe and is not taxable. The revenue ruling described a particular federally chartered Indian tribe. The tribe was formally organized under a constitution and bylaws pursuant to IRA section 16. In addition, at the time of formal organization, the tribal members had ratified a corporate charter as permitted by IRA section 17. The Secretary of the Interior had approved the tribe’s constitution and bylaws and the corporation’s charter. This principle was affirmed in Rev. Rul. 94-16.
Further, in Rev. Rul. 94-65, IRS concluded that a tribal corporation organized under the Oklahoma Indian Welfare Act section 3 is not subject to federal income taxation on the income earned in the conduct of commercial business in or outside of Indian-owned lands.
State-chartered Tribal Corporations Are Subject to Federal Income Tax. IRS has determined that a corporation organized by an Indian tribe under state law is subject to federal income tax regardless of the location of the activities that generate the income. In Rev. Rul. 94-16, IRS reasoned that a corporation organized by an Indian tribe under state law is not the same as an Indian tribal corporation organized under IRA section 17 and does not share the same tax status as the tribe for federal income tax purposes.
Wholly-owned Tribal Law Corporations Generally Have Not Been Subject to Administrative Attempts to Impose Income Taxes. Although IRS has addressed the tax status of federally recognized Indian tribes and federally chartered corporations, it has not issued a published ruling on the tax status of wholly-owned corporations chartered under tribal law. Many Indian tribal governments have organized wholly-owned tribal corporations to conduct business operations rather than obtain a state or federal charter. Although IRS has not issued published rulings, IRS officials are not aware of any administrative attempt to date to impose federal income taxes on wholly-owned tribal corporations.
Payment of Other Federal Taxes. IRS has determined that Indian tribal governments have no inherent exemption from excise taxes, but section 7871 of the Code provides them with a limited exemption. In Rev. Rul. 94-82, 1994-2 C.B. 412, IRS cited Confederated Tribes of the Warm Springs Reservation v. Kurtz, in which the court found that an Indian tribe did not fit within the excise tax exemption for “any State, any political subdivision of a State, or the District of Columbia.” The court reasoned that since the tribe did not derive authority from the state, the state government exemption is not applicable to the tribe.
Section 7871 specifically provides that a tribal government is to be treated as a state for purposes of certain excise taxes if the transaction involves the exercise of an essential governmental function. Consequently, Indian tribes performing essential governmental functions share the same excise tax exemptions as states for many excise taxes. However, both Indian tribes and states are subject to wagering excise taxes. The states are, however, exempt from excise taxes on lotteries.
Payments to Tribal Members Are Taxable. No provision of the Internal Revenue Code exempts individual Indians from the payment of federal income tax; thus, exemptions must be based on a treaty or an act of Congress. In some cases, a tribal member may receive general welfare payments from the tribe. Although amounts paid for general welfare may not be taxable, payments made pro rata to all tribal members are evidence that the payments are not based on need and, thus, probably will not qualify for the general welfare exclusion.
The Indian Gaming Regulatory Act of 1988 provided that the net revenues from any tribal gaming are not to be used for purposes other than to (1) fund tribal government operations or programs, (2) provide for the general welfare of the Indian tribe and its members, (3) promote tribal economic development, (4) donate to charitable organizations, or (5) help fund operations of local government agencies.
IGRA also provided that net revenues from gaming may be used to make per capita payments to members of the Indian tribe, but only if the tribe has prepared a revenue allocation plan to allocate revenues to uses authorized by IGRA. The plan must be approved by the Secretary of the Interior as adequate, particularly with respect to the funding of tribal government operations or programs and promoting tribal economic development. IGRA also required that the interests of minors and other legally incompetent persons entitled to receive any of the payments be protected and preserved. Because the payments are per capita distributions of gaming proceeds, they are generally subject to taxation when distributed. Additionally, IGRA itself provides that the per capita payments are subject to federal taxation, and the act requires that tribes notify their members of the tax liability when payments are made.
Section 3402(r) of the Internal Revenue Code provides that every person making a payment to a member of an Indian tribe from the net revenues from class II or class III gaming activity must withhold income taxes from the payment. The withholding is capped at 31 percent. Tribal governments must report the total amount of taxable per capita payments made to each tribal member on Form 1099-Misc. Tribal governments are to report any federal income tax withheld on per capita payments on Form 945, Annual Return of Withheld Federal Income Tax, and make any necessary federal tax deposits.
section_title: Agency Comments
paragraphs: We provided a draft of this report to the Internal Revenue Service, Department of the Interior, and National Indian Gaming Commission. IRS’ Office of Chief Counsel generally agreed with our presentation of the federal tax treatment of Indian tribes and their members and provided some technical comments. We have incorporated those comments where appropriate. Interior’s Director of Audit and Evaluation provided a technical comment regarding the authority to approve class III gaming and tribal-state compacts, which we incorporated.
NIGC provided a number of technical comments that we incorporated as appropriate. Two of the comments warrant further discussion. First, the NIGC Acting Chair indicated that our number of tribes and facilities did not agree with NIGC’s records. In an April 18, 1997, meeting with NIGC officials, we discussed the number of tribes and facilities and made changes to the report where appropriate. However, our final figures and list of facilities are not the same as NIGC’s because of differences in the methodology used to identify and count facilities. NIGC officials acknowledged the differences in methodology and agreed with our final figures and list of facilities.
Second, the NIGC Acting Chair also indicated that we should not include state gaming taxes and other payments to the state as examples of expenses incurred by Atlantic City and Nevada casinos but not by Indian gaming facilities. She stated that some tribal-state compacts may include payments from either the tribe or the gaming facility to states. We told NIGC officials that information provided by industry specialists and in the financial statements of the gaming facilities included in our analysis of operating income showed no payments of taxes or other fees to the state. We also explained to NIGC officials that this information is not meant to indicate that tribes or their gaming facilities pay no taxes or fees to states but to explain some of the differences in the operating income between Indian gaming facilities and Atlantic City and Nevada casinos. NIGC officials accepted this explanation.
Interior’s Assistant Secretary—Indian Affairs provided additional written comments. The Department agreed with our presentation of the federal tax treatment of Indian tribes and their members. It suggested that our report should also compare revenues of Indian gaming facilities with revenues of the various states lotteries. The letter stated that it is Interior’s position that tribes are governments, like states, and that it is therefore more appropriate to compare the gaming revenues of governmental entities rather than to compare gaming revenues of Indian tribes with those of privately owned casinos. We compared revenues from class III gaming (primarily table games and slot machines) with revenues from like gaming activities in Atlantic City and Nevada casinos. We did not compare Indian gaming revenues with state lottery revenues because Indian gaming does not include lotteries; therefore, such a comparison would be inappropriate.
As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from the date of this letter. At that time, we will send copies to the Ranking Minority Member, House Ways and Means Committee; the Senate Finance Committee Chairman and Ranking Minority Member; the Commissioner of Internal Revenue; the Secretary of the Interior; the Chair of the National Indian Gaming Commission; and to other interested parties. We will also make copies available to others upon request.
Major contributors to this report are listed in appendix III. If you have any questions or we can be of further assistance, please call me at (202) 512-9110.
section_title: Objectives, Scope, and Methodology
subsections: section_title: Objectives
paragraphs: Our objectives in this report were to provide (1) an updated profile of the Indian gaming industry, (2) information on the amount of transfers to the tribes from their gaming facilities, (3) a comparison of Indian gaming revenues with the revenues generated by other legalized gaming activities, and (4) a summary of the federal tax treatment of Indian tribes and tribe members.
section_title: Scope and Methodology
subsections: section_title: Profile of the Indian Gaming Industry
paragraphs: To determine the number of tribes with gaming facilities, we reviewed documents provided by NIGC identifying all tribes with gaming operations as of December 31, 1996. This information included only class II and class III gaming facilities. Information on the number of tribes with class I facilities was not readily available because class I gaming consists of social gaming for nominal prizes or ceremonial gaming, which is regulated solely by the tribes.
To develop a comprehensive list of tribes and gaming facilities, NIGC contacted all tribes except for those in Alaska, where it contacted only the tribes that were known to be attempting to open gaming facilities. According to NIGC, most of the 226 tribes in Alaska are not operating gaming facilities, primarily because of the remoteness and small size of the tribes’ membership. (A list of tribes and their known gaming facilities as of December 31, 1996, appears in app. II.)
IGRA categorizes gaming activities as class II or class III. For purposes of our analysis, however, we categorized facilities based on whether they had approved tribal ordinances and tribal-state compacts. We categorized gaming facilities without compacts as class II facilities, even though they may operate class III games. We treated gaming facilities with class III games and compacts in place, per BIA listing of compacts as of December 14, 1995, as class III facilities. NICG told us that in several states, tribes and states may no longer have valid compacts in place.
To perform our analyses on revenues, costs and expenses, and net income, for example, we used data contained in 1995 financial statements that were submitted to NIGC as of November 22, 1996. This was the date on which we ended our data gathering to begin our analyses. For this time frame, NIGC had financial statements from 126 tribes representing 178 facilities. The financial statements of 174 of these facilities were independently audited, and the majority received unqualified opinions.We also verified our listings of financial statements received with NIGC officials to ensure that we had received all of them. (See app. II, footnote a.)
The sample of facilities included in our report consists of the 178 gaming facilities represented by these financial statements. The sample is not representative of the universe of all Indian gaming facilities. Table I.1 represents the 1995 financial statement submission status of all gaming facilities existing as of December 31, 1996, according to information provided by NIGC. We verified this information with NIGC officials to clarify questions and inconsistencies. We do not know the characteristics of those gaming facilities for which we did not analyze the financial statements. We did not determine why some tribes did not submit financial statements beyond what is indicated in table I.1 because such an analysis, although important for compliance purposes, was outside the scope of this report.
Filed and included in our analysis Filed but not included in our analysis because financial statements were incomplete or submitted after the completion of our data gathering Did not file or received filing extensions Not required to file because they were not operating for one year as of 1995 or were opened in 1996 Included in our analysis but closed by December 31, 1996 (7)
For those facilities included in our analyses, we extracted information that allowed us to determine gaming revenues, total revenues, costs and expenses, operating income, and net income. We used Audit and Accounting Guide: Audits of Casinos, published by the American Institute of Certified Public Accountants, and spoke with industry experts for guidance in deciding which data to extract from the financial statements and what analyses to perform on these data. (See the glossary for the accounting terms we used throughout this report.)
Our analyses do not include data from the balance sheet or statement of cash flows, such as assets, liabilities, equity, or debt payments, because this information was not reported consistently by the different facilities.
section_title: Transfers to the Tribes
paragraphs: To determine the amount of transfers to the tribes, we analyzed information contained in the financial statements. The transfers as described in this report represent the amounts in the financial statements allocated to the tribes. IGRA provides that net revenues from tribal gaming must be devoted to certain uses, including funding tribal government operations. Net revenues is defined as gross gaming revenues minus prizes and gaming-related operating expenses, not including management fees. In figure I.1, we depict, in general, how the transfers flow from the gaming facility to the tribe as indicated in the financial statements.
As noted in the Background section of this report, IGRA limits how these transfers can be used. The transfers as described in this report represent the amounts in the financial statements allocated to the “tribes.” The amounts could have been received by tribal government or tribal members, but we were not able to determine this because the financial statements did not indicate how the transfers were used or who received them. In addition, to determine the economic impact of gaming on the tribes, several factors would need to be considered, such as poverty levels and other revenues generated by the tribes; we did not address these factors because they were beyond the scope of this report. We obtained information on the amount of items, such as taxes and fees, rent and other charges, and cost reimbursements, from the financial statements to the extent such amounts were reported.
section_title: Comparison of Indian and Non-Indian Gaming Revenues
paragraphs: To compare Indian gaming revenues with the gaming revenues of other legalized gaming, we used data reported in International Gaming and Wagering Business and financial statement data submitted to the Nevada and Atlantic City gaming commissions. We obtained the financial data on Nevada casinos from Nevada Gaming Abstract, a report prepared by the Nevada State Gaming Control Board for fiscal year data as of June 30, 1995. The information presented in the Abstract comes from unaudited standard financial statements that licensees whose gaming revenues are $1 million or more are required to file. We obtained the Atlantic City financial data from unaudited standard financial statements that all New Jersey casinos are required to file and from financial analyses prepared by the New Jersey Casino Control Commission as of June 30, 1995. We did not independently verify the data included in these reports.
We used data published in International Gaming and Wagering Business to determine the gaming revenue shares of legalized gaming as a whole and also the casino segment in particular. The legalized gaming categories we included are those used in this publication. We substituted the amounts of Indian gaming revenues for the amounts used in this publication only for consistency with our analyses in the rest of our report. The amounts published for Indian gaming, however, were similar to the amounts we determined from the financial statements.
We used the financial data of Nevada and Atlantic City casinos only to compare class III facilities. Class III facilities relied primarily on casino games and slot machines, and this was also the case for Nevada and Atlantic City casinos. We included only facilities with gaming revenues of $1 million and more because the Nevada financial data were aggregated and included only facilities with these gaming revenues. To make valid comparisons of revenues among the Indian facilities and casinos, we subtracted the amount of promotional allowances (free food, hotel rooms, and so on given to customers as incentives) from “other revenues” for those facilities and casinos that reported such amounts as “revenues.”
We used operating income to compare the results of these operations because operating income is a common measure used by industry experts to analyze and compare the profitability of businesses. It discounts the effects of capital structure and other nonoperating incomes and expenses that are not directly related to the performance of business operations.
section_title: Summary of Legal Issues Pertaining to the Taxation of Indian Tribes
paragraphs: To describe the legal issues regarding the taxation of Indian gaming revenues, we reviewed relevant sections of the Internal Revenue Code and the IRS and Department of the Treasury rulings and regulations pertaining to the taxation of Indian tribes. We also interviewed officials from Treasury, IRS, and BIA.
section_title: Tribes and Known Gaming Operations as of December 31, 1996a
paragraphs: Coyote Valley Band of Pomo Indians (continued)
Seminole Gaming Palace - Immokalee* Coeur d’Alene Tribal Bingo/Casino* Kootenai River Inn and Casino* (continued)
Bois Forte Band of Chippewas Fond du Lac Reservation Business Committee Grand Portage Band of Chippewa Indians Leech Lake Band of Chippewa Indians (continued)
Avi Casino Enterprise, Inc.
Inn of the Mountain Gods** Cities of Gold Sports Bar (continued)
Eastern Shawnee Tribe of Oklahoma Bingo Operations* (continued)
Foxfire Bingo Casino, Inc.
Cheyenne River Sioux Tribe Bingo Children’s Village Bingo (continued)
BJ’s Enterprises, Inc.
Bad River Band of Lake Superior Chippewa Indians (continued)
A single asterisk denotes the facilities included in our analyses (178), the names of which were taken from the financial statements submitted to NIGC. Other facility names were obtained from other NIGC data. A double asterisk denotes the facilities included in our analyses that were not operating on December 31, 1996.
section_title: Major Contributors to This Report
subsections: section_title: General Government Division
section_title: Office of General Counsel
section_title: Kansas City Field Office
section_title: Glossary
subsections: section_title: Costs and Expenses
paragraphs: Payroll, management fees, depreciation, amortization, the interest portion of debt payments, and others. Under generally accepted accounting principles, the principal portion of the debt payments is not an expense and thus is not included in costs and expenses.
section_title: Gaming Revenues
paragraphs: Dollars wagered minus payouts.
section_title: Net Income
paragraphs: Total revenues minus all costs and expenses.
section_title: Net Revenues
paragraphs: IGRA defines “net revenues” as gross gaming revenues minus prizes and gaming-related operating expenses, not including management fees.
section_title: Operating Income
paragraphs: Revenues minus costs and expenses that were related to the primary business activities, such as salaries, advertisements, rents, and other expenses. It did not include revenues or expenses that were not related to the primary business activities, such as interest income; gains on sales of assets; and depreciation, amortization, and interest expenses.
section_title: Other Revenues
paragraphs: Sales such as food, beverages, and hotel rooms.
section_title: Total Revenues
paragraphs: Sum of gaming revenues and other revenues.
The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent.
U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000  or by using fax number (301) 258-4066, or TDD (301) 413-0006.
Each day, GAO issues a list of newly available reports and testimony.  To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone.  A recorded menu will provide information on how to obtain these lists.