New Jersey Appeals Court to Rule on $55M Casino Taxation Dispute

The legal battle between the Garden State and Atlantic City is finally coming to an end, with the New Jersey appeals court set to determine whether the state should pay up millions in taxes. As a result, local funding worth at least $55 million, which is to be divvied among Atlantic City, its school district, and the larger Atlantic County, is hanging by a thread.

This ruling will establish whether NJ is obliged to pay off the $55 million to Atlantic County, an amount that should have been generated as tax revenue from casinos. Similarly, it will determine whether the Atlantic City gaming industry should part with millions more in local taxes payable to Atlantic County over the next four years.  

The legal battle kicked off early last year when Liberty & Prosperity 1776 Inc, a conservative nonprofit organization, sued New Jersey and claimed that the state’s constitution prohibits preferential tax treatment. A revised version of the local taxing regulation known as PILOT (payment in lieu of property taxes) came into effect in 2021, slashing how much taxes Atlantic City casinos paid rather than paying property taxes.

An initial ruling from a lower court had, in effect, postponed this decision and would have meant that the casinos would have had to cough up more money. That said, the state got a temporary reprieve when the Supreme Court of New Jersey Appellate Division issued a motion for an indefinite stay.

The PILOT program meant that the Atlantic City gaming scene paid $55 Million less last year than it had to pay in the previous years. With this order, the appellate court has saved the gaming industry millions of payments, at least in the interim, until the lower court’s ruling is upheld.

The Original PILOT System

Originally, the PILOT system calculated the amount due for taxation by each casino based on three parameters; gross gaming revenue (money from online gambling was included in this arrangement), number of hotel rooms as well as acreage. However, in 2021, the casinos wisely and successfully pushed to change the PILOT system, which excluded online gaming from the calculation.

The reason given by the gaming industry was the scourge of COVID-19, and the participants argued that the inclusion of only gambling in the system would put many casinos at risk. As such, the amended version of the PILOT system came into effect. However, the revised measure faced an unmoved adversary in Atlantic County Superior Court, Judge Michael Blee. Rendering his judgment on the amended PILOT system, he opined:

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“There is no evidence to suggest that casinos could not meet their financial obligations under the Original Act.”

Further, in his judgment, Judge Blee concluded that the system was amended to help what was essentially a resurging industry that had been hit hard by the pandemic. His ruling was backed by Press of Atlantic City and ProPublica, which found that the industry was poised for a remarkable recovery despite asking for some tax relief.

The Garden State’s Appeal

The state is appealing Judge Blee’s decision which is one of two by the lower courts that the state found issue with. In the second ruling, Atlantic County argued that the new pilot system violated a 2018 contract with the state, allocating specific taxes to go the way of the county. Blee delivered another blow to the state by upholding his predecessor’s ruling that the state had breached its contract with Atlantic County.

The Atlantic County estimates that this new agreement would see it lose close to $19.3 million in the next 5 years, with the PILOT system set to end in 2026. This amount would benefit it massively should the original PILOT system be reverted to its initial version. The state’s appeal was filed in January, maintaining that the original PILOT system is of greater good to the public.

A brief filed on February 13th in the Appellate court also introduced a new twist in the case. The state fronted that legislators could’ve changed the PILOT formula because the 2018 agreement did not expressly say that Atlantic County’s portion was based on the statute as ‘currently written.’

In a rebuttal to the state, Atlantic County Counsel James F. Ferguson questioned the state’s interpretation of the original contract. Ferguson noted that transcripts of the original agreement showed no disparity of opinions as to the actual understanding of the arrangement. The county maintains that if the state truly intended to change the PILOT formula, it should have included the words, ‘as amended from time to time.’

All Eyes on the NJ Appeals Court

As fronted by the state, the new law brings forth the potentially ‘stranded’ Investment Alternative Tax Revenue to Atlantic City. At the same time, it also forestalls a tax that the state deems unbearable to the industry.

This very point has been argued against by Liberty & Prosperity. Seth Grossman, Liberty & Prosperity’s attorney, pointed out that online gaming in NJ is offered by licensed operators tied to a physical casino. In that capacity, online gaming activity introduces new value to the real estate. So, if a new value is added to the real estate, tax must be imposed on the additional value.

As it stands, it remains to be seen who will get the last laugh in this case. As we speak, the Appellate Division hasn’t scheduled a hearing date for both cases.