OLR Research Report


December 11, 2008

 

2008-R-0673

STATE INCOME TAX ON NONRESIDENTS' GAMBLING WINNINGS

By: Judith Lohman, Chief Analyst

You asked (1) whether legislation has been proposed recently to impose the state income tax on nonresidents' gambling winnings at Connecticut casinos; (2) if so, which legislators proposed the bills; and (3) whether other states with casinos impose their income taxes on nonresidents' gambling winnings.

SUMMARY

Under current law, nonresidents who have gambling winnings from Connecticut are subject to Connecticut income tax on those winnings only if they win the money in Connecticut's state-run lottery. Nonresidents' casino and pari-mutual winnings are not subject to the state income tax.

Bills to subject nonresidents' Connecticut casino winnings to the state income tax were proposed in 2005, 2007, and 2008. All three were sponsored by Rep. Shawn Johnston. All were referred to the Finance, Revenue and Bonding Committee, which did not act on them. In 2002, the General Assembly passed a law to impose Connecticut income tax on nonresidents' casino winnings over $5,000, but it repealed the provision a short time later before it could take effect. The 2002 laws were included in large emergency certified budget implementing bills.

A computer survey of 16 selected states with both state income taxes and casino or pari-mutuel gambling found that 15 impose state income taxes on nonresidents' winnings in those states. Of the states surveyed, only New York follows Connecticut's example in excluding nonresident casino and pari-mutuel winnings from its state income tax.

CONNECTICUT INCOME TAX TREATMENT OF NONRESIDENTS' GAMBLING WINNINGS

People who are not Connecticut residents do not have to pay Connecticut income taxes on non-lottery gambling winnings in the state. By law, nonresidents owe Connecticut income tax only on Connecticut state lottery winnings exceeding $5,000. Winnings from all other types of gambling in the state are tax-exempt for nonresidents, including winnings from casino games, slot machines, pari-mutuel wagering, raffles, or other types of gambling occurring in Connecticut (CGS 12-711 (b)). By law, such winnings are not considered to be derived from Connecticut sources for purposes of imposing the state income tax on those who do not live here (Department of Revenue Services, Informational Publication, IP 2005 (15), issued 10/20/05).

RECENT LEGISLATION ON NONRESIDENTS' CASINO WINNINGS

The distinction between nonresidents' Connecticut income tax liability for Connecticut lottery winnings and other types of gambling income has existed since 2001. PA 01-6, June Special Session, imposed the Connecticut income tax on a nonresident's winnings of more than $5,000 in a lottery run by the Connecticut Lottery Corporation. The change took effect on July 1, 2001 and applied to tax years beginning on or after January 1, 2001. Until that time, nonresidents were not subject to Connecticut's income tax on any Connecticut gambling winnings. The 2001 change was passed as part of a large emergency certified bill that included many tax changes.

In the May 9 Special Session in 2002, the General Assembly at first extended the income tax to also cover nonresidents' winnings over $5,000 from all other gambling activities that take place within Connecticut's borders, including at casinos on Indian reservations within the state (PA 02-1, May 9 Special Session, 81). It changed its mind a short time later and passed another act to repeal the extension (PA 02-4, May 9 Special Session, 17). Both sections were included in emergency certified bills implementing the state budget.

Since 2002, three proposed bills have been introduced to extend the income tax to the casino winnings of nonresidents. All were introduced by Representative Shawn Johnston of the 51st district. The bills were:

● HB 5949 (2005 Session) - An Act Concerning Taxation Of Out-Of-State Residents' Casino Winnings (co-sponsor: Rep. Nafis, 27th district)

● HB 6238 (2007 Session) - An Act Concerning Taxation Of Out-Of-State Residents' Casino Winnings

● HB 5408 (2008 Session) - An Act Concerning Taxation Of Out-Of-State Residents' Casino Winnings

All three bills were referred to the Finance, Revenue and Bonding Committee, which took no action on them.

OTHER STATES

A computer survey of income tax provisions of 16 selected states shows that 15 impose state income tax on nonresidents' non-lottery gambling winnings from within their states (see Table 1). According to the American Gaming Association's (AGA) 2008 Survey of Casino Entertainment, 13 of these states have casino gambling at commercial or racetrack casinos, Indian tribal casinos, or in the form of video lottery terminals. The other three states have noncasino forms of pari-mutuel wagering, such as horseracing. The only state in our survey that does not tax nonresidents' winnings from these forms of gambling is New York. The remaining states tax winnings, although some require winnings to exceed a certain threshold or allow nonresidents to offset winnings with losses.

The state with the highest number of casinos according to the AGA survey is Nevada, which is not included because it has no state income tax.

Table 1: State Income Tax on Nonresidents' Non-Lottery Gambling Winnings

State

Number of Casinos*

Casino Types*

Other Non-Lottery Gambling*

State Income Tax on Nonresident Winnings from Casinos or Other Non-Lottery Gambling+

Arizona

25

Tribal

Pari-mutuel

Yes. Winnings subject to state withholding at 20% of federal withholding. Losses are deductible from winnings.

Connecticut

2

Tribal

Pari-mutuel

No

Iowa

20

Commercial

Racetrack

Tribal

Pari-mutuel

Yes, if winnings are greater than $1,000 and gross income is greater than $9,000 if single and $13,500 if married filing jointly.

Louisiana

25

Commercial

Racetrack

Tribal

Pari-mutuel

Yes

Maryland

0

NA

Pari-mutuel

Yes, if the amount is greater than $500. Maryland withholding tax applies to winnings that are greater than $5,000. State withholding on nonresident winnings is 6.75%. Losses are not deductible from winnings.

Massachusetts

0

NA

Pari-mutuel

Yes. Losses are not deductible from winnings.

Michigan

22

Commercial

Tribal

Pari-mutuel

Yes

Minnesota

35

Tribal

Card room

Pari-mutuel

Yes. Losses are deductible from winnings.

Mississippi

31

Commercial

Tribal

None

Yes. A nonrefundable 3% tax is withheld from all nonresidents' winnings required to be reported to the IRS.

New Jersey

11

Commercial

Pari-mutuel

Yes. New Jersey losses are deductible from New Jersey winnings.

New Mexico

26

Racetrack

Tribal

Pari-mutuel

Yes. Winnings are subject to state withholding equal to 6% of federal withholding. Losses are deductible from winnings.

New York

16

Racetrack (video lottery terminals)

Tribal

Pari-mutuel

No

North Dakota

6

Tribal

Pari-mutuel

Yes

Pennsylvania

11

Commercial

Racetrack

Pari-mutuel

Yes

Rhode Island

2

Racetrack (video lottery terminals)

Pari-mutuel

Yes

Virginia

0

NA

Pari-mutuel

Yes, if the wager is placed or paid from a Virginia location.

Wisconsin

28

Tribal

Pari-mutuel

Yes. Expressly includes winnings from a casino or bingo hall located in Wisconsin and operated by a Native American tribe or band.

* Source: American Gaming Association

+ Source: State tax department websites

JL:ts