BILL ANALYSIS Ó
Bill No: SB
1463
SENATE COMMITTEE ON GOVERNMENTAL ORGANIZATION
Senator Roderick D. Wright, Chair
2011-2012 Regular Session
Staff Analysis
SB 1463 Author: Wright
As Amended: June 4, 2012
Hearing Date: June 12, 2012
Consultant: Art Terzakis
SUBJECT
Internet Gambling
DESCRIPTION
SB 1463 is an urgency measure that enacts the "Internet
Gambling Consumer Protection and Public-Private Partnership
Act of 2012" for the stated purpose of authorizing,
implementing, and creating a legal system for intrastate
Internet gambling in order to: (a) protect Californians who
currently gamble online; (b) allow state law enforcement to
ensure consumer protection; and (c) keep revenues generated
from Internet gaming in California. Specifically, SB 1463:
1.Authorizes a person in California 21 years of age or
older to participate as a registered player in an
authorized game offered over the Internet provided the
player and the online wagering activities are located
within the State of California.
2.Authorizes "eligible" entities to apply to the California
Gambling Control Commission (CGCC) for a 5-year license
to operate an intrastate Internet gambling Web site(s)
offering only the play of "poker," as defined, to
registered players within California. Also, provides
that the license shall be renewed every five years and
requires the CGCC to draft necessary regulations for the
licensing renewal process.
3.Permits the CGCC, after any licensee has been providing
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authorized poker games for 5-years to renegotiate the
fees paid by the licensees, based in large part on a
specific report and recommendations of the Bureau of
State Audits (BSA) and subject to the statutory approval
of the Legislature. Each licensee shall have the
opportunity to agree to any changes in fees and continue
in partnership with the State or to relinquish its
license.
4.Provides that all initial licenses issued pursuant to
this bill will take effect on the same date, but not
later than January 1, 2014.
5.Stipulates that entities eligible to apply for, receive,
and maintain an intrastate Internet gambling license
include all of the following: (1) a licensed card club
that has been subject to oversight by, and in good
standing with, the CGCC for the 3 years immediately
preceding its application for licensure; (2) a federally
recognized California Indian tribe operating a casino
pursuant to a tribal-state gaming compact that has been
subject to oversight by, and in good standing with, the
CGCC and the Department of Justice (DOJ) for 3 years
immediately preceding its application for licensure; (3)
a racing association licensed by the California Horse
Racing Board (CHRB) that has been subject to oversight
by, and in good standing with, the CHRB for 3 years
immediately preceding its application for licensure; (4)
an operator of an online advanced deposit wagering (ADW)
site regulated by the CHRB that has been subject to
oversight by, and in good standing with, the CHRB for 3
years immediately preceding its application for
licensure; and, (5) a wholly owned subsidiary of any of
the entities described above.
6.Provides that there shall be no limit on the total number
of licenses issued by the state and permits eligible
entities to jointly apply for a license, either as a
consortium or by forming an entity comprised entirely of
eligible entities.
7.Makes it explicit that each eligible entity may have an
interest in only a single license but permits a licensee
to operate more than one Web site.
8.Allows for changes in the form of ownership during the
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prior three years, such as an individual who
incorporated. Also, stipulates that a group of eligible
entities jointly applying for a license, either as a
consortium or by forming an entity comprised entirely of
eligible entities, need not have been in existence for 3
years to be eligible for a license, provided its members
meet all other eligibility requirements.
9.Provides that criteria for evaluating a license applicant
shall include, but not be limited to, quality,
competence, experience, past performance, efficiency,
reliability, financial viability, durability,
adaptability, timely performance, integrity, security and
the applicant's subcontractors for "core functions," as
defined. Defines "subcontractor" for purposes of this
Act and provides that a license applicant for an
intrastate Internet gambling license and all
subcontractors must be a resident in California, or
organized in California, and subject to state taxation,
auditing and enforcement. Also, permits the CGCC to
establish a registration process and application for
subcontractors not performing core functions.
10.Requires a license applicant that has been deemed
eligible, to pay an application deposit to the CGCC of no
less than $1 million and no greater than $5 million, as
determined by the DOJ in consultation with the CGCC, for
reasonable anticipated costs to complete the necessary
background investigation and suitability review. All such
moneys are to be deposited into the Internet Gambling
Licensing Fund, created by this Act, and to be
administered by DOJ.
11.Permits DOJ to establish a process to conduct a
preliminary determination of suitability based on a
partial investigation of license applicants in order to
screen out applicants that do not meet the suitability
requirements of this Act. A partial investigation shall
include fingerprint-based state and federal criminal
history checks and clearances, and inquiries into various
public databases regarding credit history and any civil
litigation. A partial investigation shall also include a
review of the applicant's financial status, based on a
report prepared by a DOJ-approved forensic accounting,
audit, or investigative firm at the applicant's expense.
The report shall include the financial information to
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make a preliminary determination of suitability. A full
investigation shall be conducted of only those persons
that pass a partial investigation and that will undergo a
full investigation.
Also, provides that applicants that do not pass the partial
investigation may appeal the decision to the CGCC.
12.Stipulates that before the collection of any registered
player fee, wager, or deposit on any authorized game on
the licensee's intrastate Internet Web site, the licensee
must submit a one-time license fee in the sum of $30
million to the State Treasurer for deposit in the General
Fund. The license fee will be credited against monthly
fees (10%) imposed on the licensee's gross gaming revenue
proceeds for the first 5-years of operation.
13.Makes it explicit that only poker games, as defined,
will be offered for play on an intrastate Internet
gambling Web site pursuant to this Act and requires DOJ
to approve those games offered for play on an intrastate
Internet gambling Web site.
14.Stipulates that no artificial business constraints will
be placed on the licensee, such as limits on the
percentage of revenues that may be paid to technology
supply contractors - licensees and suppliers are free to
structure their own desired relationships without
interference from the state.
15.Provides that an applicant for an intrastate Internet
gambling license that is a federally recognized Indian
tribe or an entity that is either wholly owned by a tribe
or that consists of one or more tribes must include with
its license application an express waiver of the
applicant's sovereign immunity solely for the purposes of
investigating the suitability of the applicant and
enforcing the provisions of this Act and any regulations
promulgated thereunder, and with regard to any claim,
sanction, or penalty arising therefrom, against the
applicant as a prospective or actual licensee, and for no
other purpose.
16.Requires all employees, as defined, to be subject to
background investigation and approval by DOJ and provides
for confidentiality of proprietary information. Also,
requires DOJ to establish a fee to be paid by a licensee
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for the cost of a background investigation on employee
work permit applications submitted on behalf of that
licensee's employees. Additionally, requires DOJ and the
CGCC to establish a process for revocation or suspension
of an intrastate Internet gambling license or employee
work permit.
17.Requires DOJ to conduct a full background investigation
for a person that directly or indirectly holds a
beneficial interest or ownership interest of 10% or more
of a subcontractor or player recruiter of the licensee.
Also, with respect to a publicly traded or qualified
racing association requires DOJ to conduct a full
investigation of those persons owning 5% or more of the
outstanding shares of the publicly traded corporation.
Additionally, provides for a waiver of any investigation
of suitability for an "institutional investor," as
defined, holding less than 25% of the equity securities
of a licensee's or subcontractor's holding or
intermediary companies, provided specified factors apply.
18.Requires the BSA, 4 years after the issue date of any
license by the state, but not later than 5 years after
that date, to issue a report to the Legislature detailing
the implementation of this Act. The Auditor may advise
the Legislature on any recommendations regarding the
terms of licensure, including the consideration paid to
the state and any other issues that may be relevant to
the state's decision whether to impose modifications on
existing licensees' fees or terms of licensure.
19.Preserves the authority of the Legislature to opt out
of, or opt into, any federal framework for Internet
gambling, or to enter into any agreement with other
states or foreign jurisdictions to provide Internet
gambling.
20.Requires the licensee to provide information regarding
problem gambling on the Web site and to post on the
player's screen information related to the amount of time
the player has been playing, his or her winnings or
losses during the current session, and periodically
requires the player to confirm that he or she has read
alerts.
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21.Requires the licensee to establish a 24 hour toll free
help line and requires the CGCC to provide, by
regulation, a process for the hub operator to exclude
from play any person who has filled out an Online
Self-Exclusion Form.
22.Prohibits licensees from contracting with entities that
knowingly and willfully processed U.S. bets from persons
in the United States after December 31, 2006 (when the
Unlawful Internet Gambling Enforcement Act of 2006
ÝUIGEA] went into effect).
23. Also, prohibits licensees from utilizing any brand or
business name, trade, or service mark, software
technology, operational systems, customer information, or
other data acquired, derived, or developed directly or
indirectly from any operation that knowingly and
willfully processed U.S. bets from persons in the United
States after December 31, 2006.
24. Establishes misdemeanor penalties and fines for
offering or playing any gambling game on the Internet
that is not authorized. Also, establishes civil fines
for violation of various rules and regulations.
25.Prohibits aggregation of computers or other access
devices in a public setting for the purpose of playing
gambling games on the Internet or to promote or market
that activity.
26.Additionally, among other things, contains detailed
provisions for DOJ approval of software and other
matters, permits DOJ to outsource its regulatory
functions, as specified and exempts DOJ from applicable
provisions of the Public Contract Code and Government
Code in order to expedite implementation of this Act.
27.Requires the CGCC and any other state agency with a duty
pursuant to this Act to adopt specified emergency
regulations within 120 days after the operative date of
this Act.
28.Makes various findings, declarations and statements of
legislative intent relative to Internet gaming.
EXISTING LAW
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Article IV, Section 19, subdivision (e) of the California
Constitution permits Indian tribes to conduct and operate
slot machines, lottery games, and banked and percentage
card games on Indian land if (1) the Governor and an Indian
tribe reach agreement on a compact; (2) the Legislature
approves the compact; and (3) the federal government
approves the compact.
Existing federal law, the Federal Indian Gaming Regulatory
Act (IGRA) of 1988, established the jurisdictional
framework that presently governs Indian gaming. Under IGRA,
before a tribe may lawfully conduct class III gaming (games
commonly played at casinos, such as slot machines and black
jack), the following conditions must be met: (1) The
particular form of class III gaming must be permitted in
the state; (2) The tribe and the state must have negotiated
a compact that has been approved by the Secretary of the
Interior; and (3) The tribe must have adopted a tribal
gaming ordinance that has been approved by the chairman of
the National Indian Gaming Commission.
Existing federal law, the Unlawful Internet Gaming
Enforcement Act of 2006 (UIGEA), prevents U.S. financial
institutions from processing payments to online gambling
businesses. The UIGEA does exempt three categories of
transactions: intra-tribal, intrastate, and interstate
horse racing. The UIGEA defines intrastate transactions
are bets or wagers that are made exclusively within a
single state, whose state laws or regulations contain
certain safeguards regarding such transactions, expressly
authorize the bet or wager and the method by which the bet
or wager is made, and do not violate any provisions of
applicable federal gaming statues.
The Gambling Control Act of 1997 established the California
Gambling Control Commission (CGCC) to regulate legal gaming
in California and the Bureau of Gambling Control within the
Department of Justice (DOJ) to investigate and enforce
controlled gambling activities in California. It prohibits
gambling in a city or county that does not have an
ordinance governing certain aspects of the operation of
gambling establishments, including the "hours of operation"
of gambling establishments. The Act granted the CGCC
licensing jurisdiction over the operation of card clubs and
of all persons having an interest in the ownership or
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operation of card clubs.
Existing law provides that, until January 1, 2020, if a
local jurisdiction had not authorized legal gaming within
its boundaries prior to January 1, 1996, then it is
prohibited from authorizing legal gaming. Furthermore,
until January 1, 2020, the California Gambling Commission
is prohibited from issuing a gambling license for a
gambling establishment that was not licensed to operate on
December 31, 1999, unless an application to operate that
establishment was on file with the division prior to
September 1, 2000.
Existing law authorizes and defines "advance deposit
wagering" as a form of parimutuel wagering in which a
person "establishes an account with a board-approved
betting system or wagering hub where the account owner
provides 'wagering instructions' authorizing the entity
holding the account to place wagers on the owner's behalf."
"Gambling operation" means exposing for play one or more
controlled games that are dealt, operated, carried on,
conducted, or maintained for commercial gain.
Existing law authorizes a licensed gambling establishment
to contract with a third party for the purpose of providing
proposition player services.
Existing law provides that a "banking game" or "banked
game" does not include a controlled game if the published
rules of the game feature a player-dealer position and
provides that this position must be continuously and
systematically rotated amongst each of the participants
during the play of the game.
Existing law, subject to exceptions, generally prohibits
the possession and use of a slot machine or device, as
defined, and prohibits certain other acts and transactions
pertaining to slot machines or devices. Existing law
provides varying definitions of slot machine or device for
these purposes. Violations of these provisions are
punishable by varying misdemeanor penalties.
BACKGROUND
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Purpose of SB 1463: The author points out that over the
course of the past three years, as Chairman of the Senate
Committee on Governmental Organization, he has held
numerous public hearings relative to the establishment of a
regulated and licensed Internet gaming framework to be
conducted within the borders of California. In addition,
the author references the fact that his Committee staff,
along with Senator Steinberg's staff and minority committee
consultant staff, have held countless meetings
(approximately 75-80) since the Fall of 2011 with various
stakeholders and interested parties, both supporting and
opposing the concept of Internet gaming, in an attempt to
establish a regulatory scheme and business model that will
benefit the State of California.
The author emphasizes that although not all stakeholders
and interested parties are supportive of SB 1463 it does
demonstrate that all entities have worked together in good
faith toward development of this massive undertaking. The
author also notes that many of the letters received in
opposition to SB 1463 are reflective of the contents of the
bill as introduced on February 24, 2012. The author states
that the June 4, 2012 amendments addressed a significant
number of concerns raised in those early opposition
letters.
The author makes compelling arguments why the state should
authorize intrastate Internet gaming. First, well over a
million Californians are playing Internet poker on Web
sites run by off-shore companies that are not regulated or
licensed by any U.S. government entity - these poker
players are at the mercy of unscrupulous operators who
occasionally cheat them out of their money with absolutely
no recourse. As a result, Californians who play poker on
these Web sites have no way of protecting sensitive
personal information when they use their credit card or
provide other financial information to such a site.
Secondly, hundreds of millions of dollars are leaving the
California economy, money (and tax revenues) that could
stay in the state if intrastate Internet gaming was
authorized in California. The author notes that Internet
gaming is a very lucrative industry and that such gambling
revenue for offshore companies was estimated to be $5.9
billion in 2008 from players in the U.S. and $21 billion
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from players worldwide according to certain gaming industry
consultants. Others have estimated that Americans wager
upwards of $100 billion annually online.
The author states that SB 1463 would authorize
public-private partnerships between the State of California
and eligible, suitable licensees for the operation of Web
sites on which authorized games of "poker" and "poker
tournaments," approved by the California Department of
Justice (DOJ), could be played on-line for money. This
bill would also ensure that authorized games are offered
for play in a manner that is consistent with federal and
state law and provide for substantial background
investigations of licensees and subcontractors and key
employees engaged in core gambling functions.
Additionally, the bill places no limitation on the number
of licenses to be issued.
Entities that are eligible for licensure include licensed
card clubs, compacted tribal governments, horse racing
associations and ADW providers. Each of these entities are
required to have had at least a 3-year existing gaming
regulatory relationship with the State of California and be
in good standing. It is expected that each entity or
entities receiving an intrastate Internet gambling license
would form a subsidiary or new company for the Internet
license business separate and apart from the existing
land-based regulated entity. The bill also requires tribal
applicants, as specified, to provide a "limited waiver of
sovereign immunity" with respect to this gaming activity
that is being offered outside of Indian territory.
A one-time license fee in the sum of $30 million, payable
to the State Treasurer, for deposit in the General Fund,
would be required of each licensee when the licensee
actually begins operating on-line. This license fee will be
credited, for the first 5-years of operation, against
monthly fees (10%) imposed on the licensee's gross gaming
revenue proceeds. Licenses will be valid for 5-years and
renewable every five years. Additionally, applicants are
required to cover the CGCC's costs involved in licensing as
well as DOJ's costs in conducting background investigations
and suitability review (no less than $1 million and no
greater than $5 million per applicant, as determined by the
DOJ in consultation with the CGCC).
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SB 1463 requires that each licensee and its subcontractors,
as defined, be organized in California, and that
facilities, employees, player accounts, etc., be located
entirely within the state. Additionally, the bill requires
that all initial licenses shall take effect on the same
date, as determined by DOJ, but not later than January 1,
2014. This is to ensure that no licensee will have an
advantage of getting a head start on the others simply
because licensee made it through the process first.
The author points out that the bill prohibits "Internet
cafes" even though the term is not used in the bill.
Specifically, SB 1463 prohibits any person from aggregating
computers or other access devices in a public setting for
the purpose of playing gambling games on the Internet,
whether or not otherwise authorized pursuant to this bill
or to promote or market that activity. Additionally, the
ball requires CGCC and other entities involved in this
endeavor to adopt emergency regulations so that the state
realizes a minimum of $200 million of General Fund revenue
from licensing fees during the 2012-13 fiscal year.
Furthermore, SB 1463 preserves the authority of the
Legislature to opt out of, or opt into, any federal
framework for Internet gambling, or to enter into any
agreement with other states or foreign jurisdictions to
provide Internet gambling.
Arguments in Support: Proponents contend that this bill
creates a workable regulatory scheme for business
enterprises within the State to operate and offer the play
and wagering on the Internet of poker games that will
result in a very successful on-line gaming operation.
Proponents note that the bill extends the opportunity to
conduct intrastate Internet poker to entities that are
currently licensed gambling establishments - namely, card
clubs, tribal nations with gaming compacts, horse racing
associations and ADW providers. Proponents believe that SB
1463 provides these established gaming entities the freedom
to create a business model that not only works best for
them, but also manages to provide California consumers the
best available product.
Arguments in Opposition: It should be noted that many of
the letters received in opposition to SB 1463 are
reflective of the contents of the bill as introduced on
February 24, 2012. The June 4, 2012 amendments addressed a
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Page 12
significant number of concerns raised in those early
opposition letters however, opposition to SB 1463 remains.
The primary concerns are as follows: (1) restrictions for
licensure eligibility should not be placed on federally
recognized tribal governments; (2) extensive background
investigations need not be conducted for federally
recognized tribal governments and existing licensed card
clubs beyond the inquiries necessary to establish financial
viability of the applicant business; (3) horse racing
interests and ADW providers should not be allowed to
participate as eligible entities; and, (4) existing brick
and mortar operations and compacts may be jeopardized.
Some opponents argue that the legalization of intrastate
Internet gambling constitutes a huge expansion of gambling
in California that will very likely create substantial
numbers of new pathological (addicted) and problem
gamblers. Opponents argue that "such addiction to gambling
not only weakens society as a whole, but also imposes a
great burden on both gamblers and non-gamblers alike in the
form of increased taxes and social costs running into the
billions of dollars each year." Some tribal interests
believe this bill could directly threaten the business
operations of existing tribal casinos and hotels, which are
today among the largest employers in the state.
Numerous tribal interests and card clubs question the
rationale for making racing associations and ADW providers
eligible when they don't currently operate poker. These
same tribal interests question the rationale for excluding
tribes that are currently authorized to offer poker
pursuant to gaming ordinances approved by the National
Indian Gaming Commission (NIGC), including tribes that do
not have Compacts and tribes that have had compacts for
less than 3-years.
Opponents argue that holders of existing licenses (card
clubs) and federally recognized tribes that can offer poker
on their Indian lands should not need new investigations -
they should be presumed suitable , although software and
certain suppliers may need approval. Opponents claim those
entities and persons have already been investigated and
licensed and should not have to produce all their business
records and go through a repetitive process, except for
documents for new entities formed for the license.
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One tribe in particular has expressed concern that "tribes
may not receive any licenses" in light of the fact that the
State is given significant discretion to decide which
entities to license through a process to determine the
suitability of potential licensees. This process requires
investigation of the owners, officers and affiliates of any
license applicant - a concern is that it is not clear how
this would work in the context of an Indian tribal
government. The tribe references the fact that the bill
clearly stipulates that "financial viability" is one of the
factors to be considered in evaluating an applicant and
that such a review "could result in the exclusion of tribes
that have suffered financial difficulties in recent years,"
thus there is no guarantee that any tribe would actually
receive a license from the State.
Some opponents have expressed concern that technology
vendors could in fact become de facto owners of licensed
sites and "open the door to market domination by commercial
gaming interests." These opponents claim that the bill
would permit a subcontractor to finance the operation and
receive the majority of the economic benefit.
Concern has also been raised by opponents with respect to
how the State can score $200 million for the 2012-13 fiscal
year if the common start date is to be January 1, 2014.
Furthermore, opponents are unclear how the "Internet café"
prohibition will be enforced. Some argue that it could
result in an enforcement nightmare that could result in
years of litigation, during which time hundreds of de facto
Internet cafes could be allowed to operate.
Staff Comments:
Various stakeholders contend that SB 1463 suffers from
numerous flaws and does nothing to address the true
underlying problem related to the unlawful operations of
Internet gaming in violation of the Unlawful Internet
Gambling Enforcement Act of 2006. Specifically, these
interests have raised the following issues:
"The Bill is a Trojan Horse for Massive Gaming Expansion
Including Internet Poker at Race Tracks."
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Staff Response: SB 1463 does not "authorize internet poker
at racetracks" that do not currently offer live poker games
- it simply authorizes racing associations licensed by the
California Horse Racing Board to be licensed to offer poker
on the internet, but not in an aggregation of devices in a
public setting. It also would authorize gaming tribes with
compacts that do not offer live poker to receive a license.
The rational basis for including (and excluding) entities
is that eligible potential licensees must have a clean
regulatory relationship with the state. That is a clear
standard, and it must be maintained in order for the
California statute to pass muster under the U.S.
Constitution. As amended, June 4, 2012, SB 1463 allows for
the play of only poker , as defined.
"The Bill Violates the California Constitution and Tribal
Compacts Including Exclusivity and Additionally Authorizes
a Computer to Become a Slot Machine."
Staff Response: SB 1463 does not "open the door" to games
that would not be legal under the California Constitution.
The California Supreme Court (Western Telecom, Inc. v.
California Lottery) has drawn a bright line distinction
between banked (casino style) games and non-banked games
such as poker, horse racing, pari-mutuel games and bingo.
The prohibition on banked games and those games prohibited
in the Penal Code in 1984 was elevated to constitutional
status when the provision prohibiting casinos of the type
operating in Nevada and New Jersey was added to the
California Constitution by the voters. Once again, as
noted above, SB 1463 allows for the play of only poker .
Additionally, it is staff's belief that SB 1463 does not
authorize a computer to become a slot machine. The Penal
Code definition of a slot machine is narrow:
(f) A slot machine or device within the meaning of
Sections 330.1 to 330.5, inclusive, of this code is
one that is, or may be, used or operated in such a way
that, as a result of the insertion of any piece of
money or coin or other object the machine or device is
caused to operate or may be operated or played,
mechanically, electrically, automatically, or
manually, and by reason of any element of hazard or
chance, the user may receive or become entitled to
receive anything of value or any check, slug, token,
SB 1463 (Wright) continued
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or memorandum, whether of value or otherwise, which
may be given in trade, or the user may secure
additional chances or rights to use such machine or
device, irrespective of whether it may, apart from any
element of hazard or chance, also sell, deliver, or
present some merchandise, indication of weight,
entertainment, or other thing of value.
SB 1463 judiciously prohibits the aggregation of internet
connected devices in a public setting so that virtual slot
parlors cannot be created. (Page 15, lines 19-23 of the
bill)
Staff believes that SB 1463 would not violate the
exclusivity provisions of any tribal-state gaming compact.
The compacts were not intended to prohibit the use of a
gaming system or an internet access device to play
non-banked games not subject to the terms of the compacts,
including internet poker games played by an individual at
home. The definition of "gaming device" referenced above
is pulled from the 1999 compacts out of its context. The
drafters in 1999 were contemplating aggregated, banked
gaming machines at a casino on Indian lands. SB 1463 deals
only with poker which is not subject to a tribal-state
compact under IGRA.
SB 1463 (Wright) continued
Page 16
"The Bill Violates Tribal Sovereignty and the Right to
Self-Regulation."
Staff Response: Simply put, if any tribe desires to offer
internet games to people who are physically located on
their trust land , they could do that consistent with
federal law, and they could regulate it. Staff firmly
believes that SB 1463 does not diminish that right. In
addition, a tribe has a choice to exercise its sovereign
immunity to participate in state-authorized internet poker
outside its trust lands and comply with the state's rules -
or not. It should also be noted that, as amended June 4,
2012, SB 1463 provides for a "limited waiver of sovereign
immunity ," as specified.
Simply stated, SB 1463 is not Indian gaming , and it is not
gaming activity within the territory of an Indian tribe.
Tribes have no inherent right to offer gambling outside of
that covered by IGRA. The betting, by definition, would
come from all over California. Tribes are being offered
the opportunity to be among a restricted group of eligible
licensees, not because they are federally recognized tribes
but because they have a gambling operation with a clean
record under the supervision of a state regulatory regime.
They will have to compete on the same playing field as the
other non-Indian entities within the eligible categories.
On numerous occasions, the author of SB 1463 has also
expressed concern about adding any language to this
legislation that would award a preference to tribal gaming
interests - it is his belief that such language may very
well violate the equal protection clause of the state and
federal constitutions.
"The Bill Imposes a Tax on Tribal Governments."
Staff Response: SB 1463 imposes a monthly fee of 10% of
the licensee's gross revenue payable to the state.
However, as mentioned above, this is not Indian gaming - it
is a business opportunity for a tribe or, much more likely,
a corporation owned by a tribe. If a tribe doesn't want to
pay so-called "illegal" taxes, it can reasonably be argued
that the solution is to not participate in the business
opportunity.
"The Bill Places Tribal Payments to the General Fund under
the Renegotiated Compacts at Risk."
SB 1463 (Wright) continued
Page 17
Staff Response: It is staff's belief that SB 1463 would
not trigger a breach of the tribal-state compact because it
only authorizes what would be Class II gaming under IGRA,
which is not subject to a compact. Current tribal payments
to the state's general fund may already be at risk due to
the Rincon decision, which said that the state cannot
impose a requirement for such payments. In fact, some
tribes may already be moving toward renegotiating their
payments to the state in favor of substantially larger
mitigation payments to local government entities.
"The Bill Allows Internet Gaming Revenues to Flow Outside
the State."
Staff Response: It's a big world, particularly when it
involves the Internet. Nothing is fully California-based,
or U.S. based - the taxes stay here and the jobs stay here
under the terms of SB 1463. Specifically, SB 1463 would
require any out-of-state business (subcontractors) to
incorporate in California and pay state taxes. Other than
that, it would be impossible for every entity involved in
the business to be completely indigenous to California.
Besides, for the state to realize as much revenue as
possible from the enterprises, it is in the state's
interest to have the best, most appealing operations
possible otherwise, there may be player "leakage" to sites
outside the state.
Indian Gaming Regulatory Act (IGRA)
In 1988, Congress enacted the Indian Gaming Regulatory Act
(IGRA) to provide a statutory basis for the operation and
regulation of gaming on Indian lands. IGRA provides that
an Indian tribe may conduct gaming activity on Indian lands
if the activity "is not specifically prohibited by federal
law and is conducted within a State which does not prohibit
such gaming activity."
The statute divides gaming activities into three classes
(Class I, Class II, and Class III), each subject to
different regulations. Class III gaming includes such
things as slot machines, casino games and banked card games
such as black jack and baccarat. Class III gaming may only
be conducted under terms of a compact negotiated between an
Indian tribe and a State. Class II gaming is defined to
SB 1463 (Wright) continued
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include bingo and card games that are explicitly authorized
by the laws of the state, or that are not explicitly
prohibited by the laws of the state and are played at any
location in the State, so long as the card games are played
in conformity with those laws and regulations.
IGRA was enacted against a legal background in which Indian
tribes and individuals generally are exempt from state
taxation within their own territory. IGRA provides that
with the exception of assessments permitted under the
statute, to defray the State's costs of regulating gaming
activity, IGRA shall not be interpreted as conferring upon
a State authority to impose any tax, fee, charge, or other
assessment upon an Indian tribe to engage in Class III
activity. Nor may a State refuse to enter into
negotiations based on the lack of authority to impose such
a tax, fee, charge, or other assessment.
When a tribe requests negotiations for a Class III compact,
IGRA requires the State to negotiate with the Indian tribe
in good faith. IGRA provides a comprehensive process to
prevent an impasse in compact negotiations, which is
triggered when a tribe files suit alleging that the State
has refused to negotiate or has failed to negotiate in good
faith.
Before 2000, The California Constitution prohibited Class
III gaming. In 2000, California voters approved
Proposition 1A which had been proposed by the Governor and
passed by the Legislature. Proposition 1A amended the
California Constitution to permit the State to negotiate
compacts with federally recognized Indian tribes for
certain Class III gaming activities. Because non-Indian
parties were still forbidden from operating gaming
facilities, Proposition 1A granted Indian tribes a
"constitutionally protected monopoly on most types of Class
III games in California.
Rincon Decision
The U.S. Supreme Court in July of 2011 refused to consider
the decision of the Ninth Circuit Court rejecting a Class
III Tribal-State Gaming Compact negotiated by Governor
SB 1463 (Wright) continued
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Schwarzenegger with the Rincon Band of Luiseno Mission
Indians. The issue of this case's impact on Indian gaming
throughout the country is a topic of great debate.
As noted above, IGRA authorizes states to receive
compensation for costs related to tribal gaming such as
regulation and gaming addiction, and to offset the effects
of casinos on surrounding communities. However, states are
prohibited from assessing taxes on tribal casino revenues,
so unjustified payments to a state's General Fund are no
longer permissible unless the tribes are getting something
in return for the required payments, such as those
authorized by IGRA.
Another vehicle for state receipt of casino payments above
those payments must be in exchange for some benefit deemed
"exclusive" to the tribe. To this end, it is fact that a
number of other state (Governors) have attempted to create
"exclusive grants" in favor of Compact signatory tribes in
return for payments to the state treasuries.
The Rincon Band challenged the legality of California's
"second generation" Compacts pursuant to which the
signatory tribes would be entitled to increase their slot
machine count in return for paying percentages of the new
slot machine revenue to the state's General Fund. The
Ninth Circuit had affirmed a lower court decision that the
new financial concessions were nothing more than a state
tax on tribal casino revenues which is prohibited by IGRA.
Rincon had refused to sign the amended Compact which
already had been executed by several other tribes choosing
instead to demand that it be given the expanded gaming
opportunity without making the new financial concessions.
The Ninth Circuit Court concluded that a "non-negotiable,
mandatory payment of 10% of net win into the State treasury
for unrestricted use yields public revenue, and is
Ýtherefore] a tax, and that the court was therefore
required to consider the State's demand as evidence of bad
SB 1463 (Wright) continued
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faith under IGRA's statutes."
The court noted that "the State could rebut the presumption
of bad faith by demonstrating that the revenue demanded was
to be used for the public interest, public safety,
criminality, financial integrity, and adverse economic
impacts on existing activities, but the State's need for
general tax revenue was insufficient to demonstrate good
faith."
The Rincon decision brings into question the legality of
all tribal financial concessions above and beyond the
reimbursement of actual costs incurred by the states.
Unlawful Internet Gaming Enforcement Act of 2006 (UIGEA)
UIGEA prevents U.S. financial institutions from processing
payments to online gambling businesses. The UIGEA does
exempt three categories of transactions: intra-tribal,
intrastate, and interstate horse racing. The UIGEA defines
intrastate transactions as bets or wagers that are made
exclusively within a single state, whose state laws or
regulations contain certain safeguards regarding such
transactions, expressly authorize the bet or wager and the
method by which the bet or wager is made, and do not
violate any provisions of applicable federal gaming
statues.
UIGEA put the fear into publicly traded Internet gambling
companies and they subsequently dropped out of the U.S.
market - even privately held internet operators
restructured, separating their operations so that U.S.
executives would have nothing to do with the gaming side of
the operation.
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The Wire Act
The Wire Act was passed in 1961 as part of a Kennedy-era
push against organized crime. It reads in relevant part:
"Whoever being engaged in the business of betting or
wagering knowingly uses a wire communication facility for
the transmission in interstate or foreign commerce of bets
or wagers or information assisting in the placing of bets
or wagers on any sporting event or contest, or for the
transmission of a wire communication which entitles the
recipient to receive money or credit as a result of bets or
wagers, or for information assisting in the placing of bets
or wagers, shall be fined under this title or imprisoned
not more than two years, or both."
The Justice Department had long maintained that, despite
the reference to "sporting event or contest," the Act
effectively prohibits any telecommunicated wager placed or
received by a person located in the United States. DOJ had
also maintained that even Internet wagers placed and
accepted within the same state violated the Wire Act,
arguing that the publicly-switched telephone network and
the Internet are inherently interstate media.
From 1996-2006, Congress tried on several occasions to
update and clarify the Wire Act as to what it did and did
not prohibit; each of these efforts failed primarily
because of disagreement between various gaming sectors
(e.g., commercial vs. tribal, horse vs. dog racing,
lotteries vs. convenience stores). In 2006, Congress
abandoned efforts to update the Wire Act, and instead
passed the Unlawful Internet Gambling Enforcement Act
(UIGEA), referenced above, which prohibited the acceptance
or processing of a financial instrument for the purpose of
"unlawful Internet gambling" but did not directly define
that term, instead relying on other federal and state laws
as to what wagers were illegal. UIGEA did include certain
exceptions from its enforcement mechanism, including wagers
accepted by a state-licensed entity from individuals in the
state where it was licensed, but UIGEA made clear that it
did not intend to legalize those wagers.
U.S. Department of Justice (DOJ) Memorandum Dated December
23, 2011
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On December 23, 2011, the DOJ released a memorandum
responding to two different inquiries - one from two state
lotteries and one from two U.S. Senators - about the
applicability of the Wire Act to intrastate sales of
lottery tickets on the Internet. In a 180-degree reversal,
the DOJ memo takes the position that the Wire Act does not
apply to non-sports betting. This change in position has
wide-ranging implications for the Internet gaming landscape
in the U.S. Of particular interest, it means that DOJ will
no longer contend that states cannot license intrastate
Internet gambling, provide lottery games over the Internet
or compact with each other to provide interstate gaming.
Some (particularly lottery interests nationwide) argue that
the new DOJ position means no federal legislation is
needed. Others (mainly Nevada gaming interests) argue that
it means federal legislation is needed now more than ever.
What does the new DOJ position mean?
States can now pass laws authorizing the licensure
of intrastate Internet gambling. It also may be that
states could compact with each other to allow
interstate provision of such games based on a
revenue-sharing formula, similar to the multi-state
lottery offerings like Powerball and Mega Millions.
States can now sell lottery tickets on the
Internet, and several states, including New York and
Illinois, have laws in place that allow this.
Federal Legislation
Several bills have been introduced in Congress to license
and regulate Internet gaming. In the current Congress, H.R.
1174 (Campbell-Frank) would have the Treasury Department
license and regulate all forms of Internet gaming except
sports betting.
H.R. 2266 (Barton) would have the Commerce Department
approve state gaming commissions to issue licenses to
accept Internet poker bets, such that any operator licensed
by an approved state could take play from any state that
hadn't opted out of the federal system.
PRIOR/RELATED LEGISLATION
SB 1463 (Wright) continued
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SB 1390 (Wright) 2011-12 Session. Would legalize sports
betting in California by authorizing a currently licensed
owner or operator of a gambling establishment, horse racing
track, or satellite wagering facility to conduct wagering
on professional and collegiate sports or athletic events by
applying to its respective licensing authority to add
sports wagering to the gambling activities for which they
are currently licensed. Also, would expressly authorize
federally recognized Indian tribes to conduct sports
wagering, consistent with the requirements of IGRA.
(Pending in Assembly G.O. Committee)
SB 45 (Wright) 2011-12 Session. Identical to SB 1485
(Wright) of 2010. (Held in this Committee at author's
request)
SB 40 (Correa) 2011-12 Session. Would have added a new
Chapter to the Gambling Control Act authorizing intrastate
Internet poker in California, as detailed, and provided for
a licensed entity, as defined, to operate an intrastate
Internet poker web site. (Held in Committee at author's
request)
SB 1485 (Wright) 2009-10 Session. Would have enacted the
"Internet Gambling Consumer Protection and Public-Private
Partnership Act of 2010" for the stated purpose of
authorizing, implementing, and creating a legal system for
intrastate Internet gambling in order to protect the
millions of Californians who gamble online, allow state law
enforcement to ensure consumer protection, and to keep the
revenues generated from Internet gaming in California.
(Held in this Committee at author's request)
AB 2026 (Levine) 2007-08 Session. As introduced, this bill
directed the CGCC, in conjunction with the DOJ, to perform
a study and report its findings to the Legislature
regarding authorizing intrastate Internet poker. Soon
after a favorable vote on the Assembly floor, AB 2026 was
amended in the Senate to authorize the intrastate play of
various Internet poker games to be offered by licensed
gambling establishments (cardrooms) registered with the
CGCC. Changing the bill from a study bill to an
authorization bill was intended to flush out the opposition
- and it did. AB 2026 was amended again in this Committee
to become an Internet poker "study" bill - it was
SB 1463 (Wright) continued
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eventually gutted late in the Session and became a state
property issue.
SUPPORT: As of June 8, 2012:
California Grand Casino
Churchill Downs and California affiliates Twin Spires and
U-Bet
Del Mar Thoroughbred Club
Golden Gate Fields
Hollywood Park
Oak Tree Racing Association
Rincon Band of Luiseno Indians
Santa Anita Park
Scientific Games
United Auburn Indian Community
OPPOSE: As of June 8, 2012:
California Coalition Against Gambling Expansion (CCAGE)
Agua Caliente Band of Cahuilla Indians
Barona Band of Mission Indians
California Nations Indian Gaming Association (CNIGA)
California On-Line Poker Association (COPA)
California Tribal Business Alliance (CTBA)
Habemotolel Pomo of Upper Lake
Lytton Rancheria
Paskenta Band of Nomlaki Indians
Pechanga Band of Luiseno Indians
SEIU of California
Table Mountain Rancheria
Tribal Alliance of Sovereign Indian Nations
Viejas Band of Kumeyaay Indians
Yocha Dehe Wintun Nation
FISCAL COMMITTEE: Senate Appropriations Committee
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