Opinion ID: 2001496
Heading Depth: 1
Heading Rank: 5

Heading: Reinvestment of Video Lottery Revenues

Text: Defendants cross-appeal, arguing that part C is constitutional in all respects. Specifically, they assert that the revenue distribution provision requiring reinvestment in breeding funds and for the enhancement of purses is constitutional and, even if it is not, that the reinvestment provision is severable. Part C provided for the allocation of revenue from the video lottery. The funds used to pay out prizes must be no less than 90% of video lottery sales (L 2001, ch 383, part C, § 2). Fifteen percent of the remaining revenueafter the prizes were paid  was allocated to the Division of the Lottery for administrative and operating expenses (L 2001, ch 383, part C, § 2, codified at Tax Law § 1612 [a] [5] [A]). The legislation also authorized a vendor's fee for the track operator of between 12% and 25% of the revenue remaining after prizes (L 2001, ch 383, part C, § 2, codified at Tax Law § 1612 [a] [5] [A]). [10] Further, a portion of the vendor's fee was required to be reinvested to enhance purses and for distribution to an appropriate breeding fund (L 2001, ch 383, part C, § 2, codified at Tax Law § 1612 [a] [5] [B]). Specifically, 35% of the vendor's fee for the first year, and 45% beginning the second year, was allocated to enhance purses, and no less than 5% of the vendor's fee was apportioned to an appropriate breeding fund. The statute has been very recently amended (L 2005, ch 61, part CC, § 2). [11] The repeal of the reinvestment provisions, however, does not render our consideration of this issue moot. This new legislation is prospective only, in that it shall take effect immediately (L 2005, ch 61, part CC, § 6). As a result, an actual controversy remains as to the constitutional validity of the reinvestment provision of part C of chapter 383 of the Laws of 2001, for the payments that have already been made under Tax Law § 1612 (c) (1). We hold that the reinvestment provision of part C is constitutional. The Constitution requires that the net proceeds from the sale of lottery tickets shall be applied exclusively to or in aid or support of education in the state as the legislature may prescribe (NY Const, art I, § 9 [1]). Net proceeds means gross proceeds less any appropriate charges and expenses. It is for the Legislature to determine the necessary expenses incurred in operation of the lottery and, thus, what remaining portion of the total lottery revenue will constitute net proceeds. Here, the Legislature has prescribed that net proceeds consists of all money remaining after the payment of administrative expenses, including the vendor fee. Plaintiffs misapprehend the nature of the reinvested funds. These moneys are not a separate deduction, beyond other costs and expenses, from the amount paid to the racetracks as a vendor fee. Rather, they constitute simply a part of the vendor fee itselfbut a part whose use the State has decided to regulate. Thus, with respect to the fees earned by the racetracks, the State, which heavily regulates the racing industry, has made a policy determination that the tracks cannot simply retain as profit their entire fee after payment of costs, but must reinvest a percentage back in the industry itself. Placing such restrictions on the use of the tracks' earned profits is a common practice in the racing industry. Many statutes that allow for revenues to the racetracks from various activities require that a specified portion of those permitted revenues be reinvested in this way ( see e.g. Racing, Pari-Mutuel Wagering and Breeding Law § 229 [1] [b] [50% of compensation received by nonprofit racing association or corporation from simulcasting or wagering outside New York to be distributed to purses]; § 318 [1] [a] [ii] [percentages of total pool resulting from on-track harness racing bets to be used exclusively for purses]; § 527 [3] [a] [50% of portion of retained commission on off-track pools distributed to racing associations and corporations to be used exclusively for increasing purses]; § 527 [1] [20% of breaks derived from bets on off-track bets on harness races and 50% of breaks of other races to be paid to breeders' funds]). The revenue to be reinvested belongs to the racetracks in the first instance. Since the vendor fee that must be paid to the tracks is a cost to the State, the reinvestment requirement imposes an administrative cost on the racetracks, not on the State Division of the Lottery. But net proceeds of the lottery are proceeds remaining after costs to the Division, not to the racetracks. The Legislature's decision to regulate the racetracks in this way reflects a policy determination constitutionally within its purview. The Legislature was entitled to determine first, that mandatory reinvestment of a certain percentage of the racetracks' profits in enhanced purses and breeding funds would improve the health of the racing industry, declining in recent years, [12] and second, that a revitalized racing industry would attract more visitors to the racetrackswhere VLTs were to be locatedwho would in turn participate in increased video lottery gaming, thus raising additional revenue for education. A vendor's fee, offered not only as reimbursement but also as an incentive for the vendor to offer lottery tickets for sale on the vendor's premises, is a necessary administrative cost of operating the lottery, because if there is no one to sell tickets (or operate VLTs), there will be no lottery, and ultimately no money earned for education. Indeed, part C expressly contemplated that the vendor's fee to be established would ensure the maximum lottery support for education while also ensuring the effective implementation of [Tax Law § 1617-a (authorizing the operation of the video lottery)] through the provision of reasonable reimbursements and compensation to vendor tracks for participation in such pilot program (L 2001, ch 383, part C, § 2). The policy determination by the Legislature that the enacted allocation of funds would result in the greatest benefit to education was properly its to make. It is generally not for the courts to determine whether a particular vendor's fee set by the Legislature is reasonable. While we can perhaps imagine a case where a fee was so excessive as to constitute nothing more than a flagrant end run around the requirement that the net proceeds of the lottery be applied exclusively to education, the fee at issue here does not begin to approach that standard. Every lottery ticket agent in the state receives a fee of 6% of total ticket sales ( see 21 NYCRR 2805.10), far higher than the fee paid to the racetracks under part C. Indeed, as originally enacted, the vendor fee was to be fixed by the Division of the Lottery at between 1.2% and 2.5%. [13] After conducting a study and comparing the rates with those fixed by other states, the Division set the rate at the highest permissible level2.5%. At that level, however, not a single racetrack signed up to participate in the video lottery pilot program. [14] The Legislature therefore amended the statute to allow for a fixed percentage of 2.9% (a portion of which was to be reinvested). [15] Still, New York's vendor fee remains significantly lower than that of other states offering VLTs at racetracks. Thus, we disagree with the Appellate Division that the vendor's fee set by the Legislature was inflated, and find part C of chapter 383 of the Laws of 2001 constitutional in its entirety.