National Media Teleconference Transcript and Audio (Waldrop, Means)

September 27, 2017 – NTRA National Media Teleconference

NEW TAX RULES FOR PARI-MUTUEL WINNINGS

I’ll start by introducing our President and CEO, Alex Waldrop.  Alex leads the NTRA’s office responsible for matters pertaining to federal legislative advocacy, among so many other initiatives at the NTRA, including racing safety and integrity, marketing and promotion of the sport, group purchasing and management of issues of all kinds of significance to thoroughbred racing.  Alex has been here at the NTRA for about 11 years, I believe, and he’s going to walk you through these new regulations and also explain why they’re so important to racing.

After that, Greg Means is going to be on.  Greg Means is with the Alpine Group.  He’s one of the co‑founders and principles of the Alpine Group; they are lobbying from Washing D.C.  Greg brings over two decades of experience on Capitol Hill to his position.  As a founder of the Alpine Group, Greg assisted a number of clients in numerous areas including energy and environment issues, internet gaming, transportation, tax and trade, and, of course, thoroughbred racing.  So we’re very appreciative of Greg’s expertise and the work that he’s done to realize these changes.

Also on the call with us today we have Alison Peak.  Alison is a partner in the law firm of Davis & Harman LLP, and Alison advises clients on a wide range of issues relating to insurance products and company taxation.  And she regularly represents clients before the Internal Revenue Service, and she also has brought a lot of expertise to this process.  So we’re very appreciative of Alison’s work, and she’s going to be on the call in case any of you have questions that are really about the technical aspect of these new regulations.  So Alison will be available for questions at the end as well.

But first we’re going to get some remarks from Alex Waldrop, President and CEO of the NTRA.  And with that I’ll turn it over to Alex.

Alex Waldrop: Thank you, Jim, and thanks for all of you for attending today’s conference call.  We’re here because, as Jim said, late yesterday afternoon we received some very good news.  It’s actually the kind of news that doesn’t come along very often.  The Treasury Department and the Internal Revenue Service announced that they will formally adopt modernized regulations regarding the withholding and reporting of pari-mutuel proceeds, the culmination of a decade-long effort to gain tax equity for horse players.  In simple terms, the amended regulations define what is commonly referred to as the amount of the wager to include the entire amount wagered into a specific pari-mutuel pool of an individual, not just the winning base unit, as is the case today.  This new definition will apply as long as all wagers made into a specific pool by the individual are made on a single totalizator ticket.  These same positive results will equally apply for ADW customers and will not impact how those wagers are currently made.  The results are expected to be powerful.

The NTRA and its legislative team have pressed for these updated regulations for many years because we understand that these changes will result in more revenue for the industry.  And why is that?  Because the existing reporting and withholding regulations were developed a generation ago before the advent of exotic wagering.  And we explained to Treasury and the IRS, in 1978 when the current regulations were developed, there was only “when, place, show” and “daily double wagering.”  And today, most wagering involves some sort of exotic wager, i.e., a multi-horse or multi-race bet, which routinely exceeds the $600 reporting threshold and the $5,000 withholding threshold.  This has resulted in an explosion of W-2G filings and enormous withholdings on a daily basis at tracks and ADWs.  By allowing horse players to get credit for the entire amount wagered into a single pari-mutuel pool and not just the base amount of the wager, the announced changes will reduce the incidence of reporting and withholding by as much as 80%, perhaps 90%.  This will allow customers to keep more of their money in their pockets and continue playing longer.

While the NTRA may have been staying the effort in D., make no mistake this was a team effort.  Our winning strategy included roundtable discussions with horse players; countless meetings and strategy sessions with our Washington DC lobbyists, the Alpine Group, Alison Peak; strategic participation by NTRA Horse PAC, the bipartisan Political Action Committee, run so astutely by PAC Chairman, Bill Farish; meetings on Capitol Hill that included congressmen; high-ranking Treasury officials; horse players such as Judy Wagner, Chris Larney; key industry executives like Kevin Flanery from Churchill Downs, Keith Johnson from AmTote, the nation’s largest totalizator company.  And there was not one but two public comment periods where thousands of horse players and others weighed in on this issue; the grassroots of the sport was critical.  And through it all, the NTRA board provided us with the resources to stay the course.  This undertaking has cost millions of dollars and we believe it was worth every penny, because these landmark regulations will have an enormous positive effect on all segments of our industry, tracks and horsemen, including owners, breeders and trainers for many years to come.

Regulations go into effect no later than 14^th November.  The NTRA has been working behind the scenes since January with industry groups, including the totalizator company, advance [inaudible] wager[?] companies and racing organizations to ensure a smooth transition for customers.  We’re optimistic that the industry will be fully prepared to institute these important changes by no later than the 14^th November.

I am extremely proud of the NTRA’s legislative team for spearheading this effort, and for the contributions made by all segments of the industry on behalf of this cause.  The results of this much-needed measure will mean horse players keeping more of their winnings, racetracks generating more pari-mutuel handle, owners enjoying more purse money, breeders seeing an increased demand for their bloodstock, and even government collecting additional tax revenue while also reducing burdensome paperwork.  This is a sure bet where everybody wins.

Thank you very much, I’m happy to answer any questions.

Jim Mulvihill: Alright, thank you for that, Alex.  And, just as I would on our weekly teleconference, I’ll ask a few follow-up questions that I think would be on most people’s minds.  And then once we get finished with Greg’s remarks then we’ll open it up to the media.  But I’m wondering if you could just talk a little bit more about the difference between this coming Thursday, when the rules will be published, versus the 14^th November, which is when we say they have to go into full effect by.  That’s a 45-day waiting period that was worked into the regulation at the request of the NTRA.  Can you just talk a little bit about that 45 days from now when the rules will have to be implemented by?

Alex Waldrop: Well, the Treasury Department did something that we didn’t expect, but we certainly are appreciative of.  They gave us a 45-day period, at the end of which there will be mandatory required compliance with the new regs.  In the interim, between now and that 14^th November period, individual operators and totalizator companies will have the option to comply before then.  They will have the option to provide these benefits; if they are prepared, if they have the technology ready to do so, they can proceed anytime during that 45-day period to begin offering these benefits.  But that will be done on an operator-by-operator basis and a tote-company-by-tote-company basis.  So it actually [inaudible] we expect tomorrow.  The regs will become optionally available as of Thursday, and that optional period will last until the 14^th November when it will become mandatory.

Jim Mulvihill: I know this has been a long process for the NTRA.  It required a lot of patience and a lot of help along the way, but what are the takeaways from this finally coming to pass after such a long and grueling process that a lot of people said would never come to fruition?

Alex Waldrop: Well, I think one thing that we’ve learned is that you’ve got to always be prepared to update your strategies.  We went into this ten years ago thinking it would take a legislative change to accomplish anything of substance, and that quickly proved to be a daunting challenge, to say the least.  And Greg Means can certainly speak more to this because he brought to us the idea of pursuing a completely different strategy which instead of asking for the near impossible, which is a statutory change to a specific item of the Internal Revenue code, which is very difficult to do, we would employ a strategy of using our allies on the Hill to get Treasury and the IRS to take a different approach.  And by doing that three years ago it made all the difference.  It put us in a place that we were able to give Treasury and the IRS the ability to amend the regulations in a rational way, without asking Congress for further approval, without modifying the thresholds that are in statute, but yet give significant relief in 80-90% of the cases where today we’re being over-withheld and over-reported.  So, it’s been great to see that process work; in fact we’ve employed it in other areas going forward.  I’m going to give Greg and his team at Alpine all the credit for the strategy.  The rest of us have worked because we knew this was good for the industry.

Another takeaway is it takes time.  DC moves very slowly.  It takes time to get people interested in your issue, it takes time to get people knowledgeable about your issue, and then it takes a lot of time to get them to act on that knowledge.  And each of those phases in this case took more than a year’s time, and that’s after we decided to go directly to Treasury.  We had to educate, we had to motivate, and ultimately convince the Trump administration that it was time for these proposed regulations to be made permanent, which they did and we’re very appreciative of that.  So be willing to change, and be willing to work a long time and work hard because that’s the world we live in in DC right now.

Jim Mulvihill: Well, thank you, Alex.  And congratulations to you and your team.  I’d like to welcome in Greg Means now.  And, Greg, thanks for being with us, and congratulations to you as well.  Alex touched on this, and if you would I’d like you to kind of walk us through the history of this process.  I know we’ve been saying it’s a three-plus-year process, because that was when the change in tactics was undertaken, but it’s something the NTRA was working on even before that.  So can you give us the history?

Greg Means: Sure thing, thanks Jim, thanks Alex.  Hello everybody.  The history is kind of like this.  Each year with the NTRA, we put together an agenda, a whiteboard session, look at issues and all that.  So way back when, years ago, this was identified as an issue.  And so we originally tried to take it head-on with changing the reporting levels or eliminating the withholding levels, maybe equating them to slots and keno and bingo.  And this was at the time done in the context of some internet gaming bills.  There were some internet gaming bills that were trying to legalize online poker, so we were introducing this as an issue to just try to get it addressed in that process.  We even had legislation drafted.  We had the legislation, what we call up here “scored”, because any time you mess with the budget or mess with the tax system they have to do a scoring.  I won’t bore you with the details, but basically anytime you’re cutting taxes that’s going to cost the Federal government some amount of money.  So there was a scoring done by the appropriate government officials on our provisions.  And it was going to score something like $500 million in cost over ten years, that if we eliminated the withholding requirements and we doubled the reporting to equate it more with slots.  So you would have to come up with that money in a bill to offset that.

Obviously, this was never going to pass as a standalone bill so we were looking again at larger bills where we could quietly tuck this in the backend, like an internet poker legalization bill or tax reform bill, etc., etc.  But it became apparent over the years that those bills were not going to move.  So that’s when we started thinking about, “Is there a different way to skin this cat and not have to go through Congress?”  Congress was bogged down at the time, you can argue that it still is.  So we kind of came up with our own ‘repeal and replace’ strategy but it would be regulatory and not legislative.  And the germination of this idea – I’m a horse fan, I grew up going to the track in Oklahoma.  I grew up in Arkansas, so I was a horse fan before I was a lobbyist for the horse racing industry.  So I understood the issue and came at it as a fan.  So we looked at it as a different way to skin the cat.  And some of Steve Crist’s writings over the years about unfair taxation and all that, that’s kind of where I started or started thinking about it in a different way to do this.  And the redefining of the definition of a bet or a wager became our mantra.

So once we figured that it could be done that way, we couldn’t change the reporting level or the withholding level because that would require a statutory change.  But we could – the Service, the IRS and the Treasury, it was within their latitude to change the definition of a bet or a wager, so that’s where we started focusing our strategy on.

I think the most seminal moment in this entire process was a meeting that was put together by a couple of congressmen, Congressman John Yarmuth from Louisville, being one, in his office.  It involved a guy named Mark Mazur, who, I believe his title was Assistant Secretary for Tax at the Department of Treasury; a very senior guy.  He came in and met with myself and Mr. Yarmuth, and Mr. Yarmuth’s staff.  We had Kevin Flanery from Churchill’s/[inaudible] there to talk about it from an operational standpoint.  We had Judy Wagner, a National Handicapping Championship winner, had been on state racing commissions, involved in racing.  And Chris Laramie[?], I think I’m pronouncing Chris’s last name, who is a horse player and numbers guy.  Mazur, a very smart guy, I think a former Stanford professor.  That meeting really, to me, was the determining factor.  Mazur came in with an open mind.  We got our first lucky break, which was he grew up in New Jersey had been to Monmouth Park a couple of times.  Not a self-avowed horse player but understood it.  He listened.  He was particularly interested in some of Judy’s anecdotes and how she won the NCH.  He was also interested from the numbers side, and the technology side as well, from Kevin.  And he walked out of there basically – and also Congressman Yarmuth, who has spent more than a few days at a track.  I’ve been at the track with John.  He’s a good handicapper – a little conservative for my taste, but that’s okay – probably the only time conservative will be confused with John, but that’s alright.  And he made the Assistant Secretary understand this was important to him, it was important to the state, etc., etc.

If that meeting had not gone well and the number two guy at Treasury had walked out thinking, ‘These guys are a bunch of clowns, and this doesn’t make any sense,’ that would have been a tremendous hurdle to overcome.  But he didn’t.  We did a good job of explaining how this had become archaic, no longer relevant to the handicapping environment of today.  And that really then put us down the road and let us execute a strategy, bipartisan in nature, with House and Senate allies, meetings with Treasury, meetings with the IRS.  So everyone got to the point where they agreed that we needed to make the change; then we just had to work through the details of the change.  But that meeting was pivotal.

And the other thing I would just note is this rule was originally published last year.  It had to go through a few steps under the Obama administration, and then it was put across the finish line, completed, under the Trump administration.  So this was never a partisan issue, it was a bipartisan issue that ‘modernized,’ which was a term that we used to describe this.  And at the end of the day we got it done.

So again I’m happy to answer questions.  And I talk for a living, so it’s an occupational hazard.  So I’m going to stop there, and be happy to talk more about any specifics of it from the Washington perspective.  Thank you.

Jim Mulvihill: Very good.  Well, Greg, that’s an awesome summary.  I’ll ask you one follow-up before we open it up for the media.  I’m just wondering if you could talk about the particular challenges that come with racing issues in Washington DC.  I mean, you have represented all kinds of clients, all sorts of industries, so you’ve seen a little bit of everything.  What makes things especially challenging for racing in DC and how did any of that impact the process of this coming to fruition?

Greg Means: Well, I think on the good hand, right, you would be surprised how many – there are racing fans on Capitol Hill.  And the fact that Mark Mazur was not necessarily a devotee of going to the track but had been around it and thought it was cool, and everybody knows whose secretary it is.  It’s certainly a fun kind of sex appeal topic to be able to go up and talk about.  I can’t tell you how many meetings that I’ve been into, been in on various topics on behalf of the NTRA and the industry, and people are, “Hey, who do you like in the derby?” or, “You got a tip?”   So that’s a good thing, right.

Kind of offsetting that a little bit is, okay, but we’re up there talking about gambling, right.  And, you know, some people and some ideologies think that gambling is bad.  And in this case, this particular issue, we’re talking about trying to help people that are gambling, right, and that’s politically not always – we’re not helping the Red Cross, right, so politically that can be a little bit of a challenge.  One of the things that we did years ago, and this is before they passed the Internet Gaming Bill, was we really worked hard to show people that unlike other forms of gaming – and I’m not picking on any of those – but unlike, say, an offshore internet site, you know, we’re actually an agribusiness, big agribusiness, across this nation, employing millions of people, billions of dollars of economic footprint – oh, and we happen to have pari-mutuel wagering.  And the history of horse racing and the fact that it’s been around for a long time actually allows us to do that as well.  So it definitely had some challenges, but there are also some benefits that come with it as well.

Jim Mulvihill: Excellent.  Well, now I’d like to invite the media to ask any questions that are on their mind.  Gwen, can you prompt everybody?  And I’ll also just remind you all that we do also have Alison Peak online for any very technical questions about the rule.  So fire away media.

Frank Angst: Pretty exciting day.  Alex, the 10% spike in handle, I’m thinking that was a new estimate.  I was just curious where that came from.  It’s very encouraging obviously.

Alex Waldrop: It came from a couple of industry magazines, including your own.  There was one in January that I think was from Evan Hammonds.  And he estimated a 10% increase.  And then there was a piece, Steve Crist in 2015, Steve had a similar estimate.

Frank Angst: Yeah.  So the 45-day cushion to put things in place was a bit of a surprise, you said?

Alex Waldrop: Yeah, we asked for 45 days of implementation period just to give us time to get final approvals, and there’s a state or two where they may have to get a state okay for this change, so they asked for 45 days.  And we said – we asked the Treasury Department to give us 45 days.  So they said, “Fine, you’ve got 45 days.  But, if in the interim someone’s ready to go sooner, you can go ahead and start,” which was not what we asked for, that’s what they gave us.

Frank Angst: Yeah, that’s true.

Alex Waldrop: So it’s conceivable, and we mention it – we mentioned it’s conceivable that someone could start as early as Thursday, but I think that’s highly doubtful.  We only say that just to point out that it’s a 45-day period, in which it’s optional and not mandatory.  As of the 14^th November, it will be mandatory.

Frank Angst: And a lot has been said on the wagering side.  How big is this for tracks and ADWs in terms of a reduction in paperwork and recordkeeping?

Alex Waldrop: Well, we think it’s a huge issue for tracks and ADWs.  Of course they’ve automated to some extent many tracks, it involves a lot of interaction with patrons.  They have to provide identification.  It takes people out of mix, they have to stop gambling for some period of time and they may lose money.  But the paperwork, I can tell you, that to a person – and we’ve brought tracks and operators, tote companies up, they’ve all expressed a real concern about the amount of paperwork it requires, and urged a change for no other reason than to relieve them of that burden of compliance with so many reporting and withholding documents.

Frank Angst: Yeah.  And then my final question would be for Alison.  I was curious how these reporting and withholding standards compare with other forms of gaming.

 

Alison Peak: I mean, I think that they’re all kind of subject to the similar standards.  I mean, different thresholds can apply depending on the type of gaming.  And they are – the ask that we were asking for here was very specific to wagering transactions, so there is a little bit of a difference in that sense.

 

 

Alex Waldrop: I was just going to say that the uniqueness of pari-mutuel wagering and the way in which we calculate our odds and payouts are vulnerable for this sort of thing, unlike a casino game which is – they have higher thresholds and you don’t have the same kind of staking.  And they don’t have $1 trafficked and then $100 bet into the same pool.  We’re just very different because of the pari-mutuel aspect that don’t apply to casino games.

Tom LaMarra: This is for Greg and probably Alex too.  This is a follow-up on when you were talking about the change in strategy like three years ago, and why it changed and that kind of stuff.  But this was not really like an explosive issue in the racing industry.  It wasn’t divisive at all and it still took three years to get done, and, as you pointed out, a major investment, a few million dollars and stuff like that.  So could you just talk concerning this issue and just about whatever issues comes along about how important it is to have a very clear, unified voice within the industry to get things passed on the Federal or state level?

Greg Means: It’s very important to be unified, right.  So, and I’m speaking purely from a political perspective.  If I go up to Capitol Hill – and also as a former Capitol staffer and Chief of Staff years ago, one of the first questions you get asked, irrespective of the issue or the client, whoever’s issue I may be up there talking about, one of the first things they’re going to ask is, “So, where’s the rest of the industry?”  Because the last thing a politician, in this case a member of Congress, or anybody else, wants to get in the middle of is kind of a family feud, right.  So if part of the industry is supportive and another part of the industry is not supportive, then if your Congressman X or Congresswoman Y or Senator Z, the easy instructions back are, “Well, you all get your act together and come with a unified position that helps the entire industry and then I’ll be interested.  But I’m not going to pick sides in the meantime.”  So without that kind of message that’s another significant barrier.

And on this issue, yeah, there’s really – I guess the only people who would be opposed to it are what they call the “10 percenters”, right, the guys that will run tickets and then cash them for you.  So, and if they need a lobbyist, you can tell them to give me a holler.  In this case we also did a good job though, and the NTRA does a good job of listening to our stakeholders, identifying the issues, reaching out, putting together a team, right.  So, Alex should get credit for this, I should get credit for this, but a host of other people should get credit for this, including the aforementioned three people that came to Washington for that very important meeting, and on down the line, right.  So we put together, Keith’s working with the players in a handicapping coalition, really important grassroots effort.  So, yes, on the one hand, Tom, it’s easy to see that everybody would be for this.  But there’s always somebody nit-picking at it; that’s why we went through these comment periods.  We made sure to, for lack of a better phrase, stuff the ballot box and make sure that there were overwhelming positive comments, as opposed to some outliers.

So it is very – I’m not going to say it’s not impossible to get something done on Capitol Hill if there is not this kind of unification in an industry, but it makes it so much harder to do.  It doesn’t take much to stop something on Capitol Hill, and that’s an easy thing to stop something is division within an industry.  And here I think people in DC kind of recognize NTRA’s leadership up here and were able to present that unified voice.  But we also put our stakeholders together and listen to them as we formulate plans, etc., etc.

Bill Gottimer: Hi, good afternoon and congratulations on a job well done.  It may have been covered, and I apologize if it has been, but most of the states withholding policies piggyback on the Federal withholding.  Has there been a decision state by state as to whether that will follow through, or will each state make its own decision?

Alex Waldrop: I’ll tell you what we have discussed with the tote companies and I’ll let Alison chime in.  For the most part, states simply rely on the W-2Gs that are filed by the tracks with respect to the Federal requirements…  So if the W-2Gs aren’t created, they won’t be submitted.  And it’s our understanding that all but two states are prepared to follow the Federal lead here – I think Massachusetts is one of those, Illinois is another; they have unique aspects.  Tote companies are looking at this, however.  At this point in time I think they’ve concluded that those are the two states where there may be issues that may need to be resolved further.  But by and large states follow the Federal lead on calculation on full reporting and withholding.

Alison Peak: I think I would echo what you had to say.  I think that – I mean, in general most of the states do seem to follow the Federal rules for withholding and reporting, although there could be some outliers, as Alex mentioned.

Jim Mulvihill: I’d like to thank Alex and Greg and Alison for taking some time today.  And thanks to Tom and Frank and Bill for their questions.  Those are some media folks that I’m hoping will benefit personally from these regulations down the road.

As always, there will be an audio file of this call on our website later today and a transcript up there tomorrow.  There’s a lot of background information that goes with this entire story and a lot of that is on our website.  If you look on the Legislative page there’s a ton of information there that goes back to all the letters that were written by congressmen in support of the effort, all the releases from every step of the process.  And then on our online press box, I’m going to post images and video from today’s press conference for anybody that needs those to go with their story.  So, thanks again, everybody.  A big day for the NTRA, and we thank you for your coverage.