Membership In The Club Of The Confused Or “When is a penny worth $100?”
I always thought machine gambling was a rather straight forward sort of thing even if one has or hasn’t a certain knowledge of the laws of probability. You drop a coin or two in the machine and let “lady luck” do the rest. Depending upon the odds of the game, if you win you collect your money and either continue with the game or quit, hopefully, while you are ahead. However, there is an equation involved in winning that is beyond the laws of probability which some may not be entirely aware and that is your silent, unseen partner – the tax man.
On the so-called “jackpot” winnings from gaming machines which are those winnings of $1,000 and over – a tax is due. That tax in the CNMI imposed on winnings from poker machines, pachinko, slot and other similar gaming devices is 10 percent. But that may not be the only tax due since there might also be a federal tax obligation. In attempting to determine what and when this tax might be applied, I consulted the Federal Tax Code and in particular NMTIT – 26USC, section 871. I am sorry I did so.
Here is what the law states, “In situations where the payor of monetary or non monetary proceeds pays the federal tax required to be withheld on those proceeds without deducting the tax from the proceeds, the proceeds paid to the winner are deemed to include the amount of the federal tax paid by the payor. If the payor pays all the the federal tax required to be withheld, the payor must pay, as tax deducted and withheld, an amount equal to 38.88% of the amount actually paid to the winner, less the amount of the wager. This is equivalent to 28 percent of the total amount actually paid to the winner (less the amount of the wager) plus the tax paid on the winner’s behalf. Notice 93-7, 1993 -3 IRB 14.” Now, is that clear? Mind you the above is only one small paragraph taken from 16 pages of small print in the Code addressing the subject of gambling winnings and the section contains multitudinous tangled exceptions.
The rules are more complicated than an atomic secret. So lets consider a hypothetical situation. A foreign, non English speaking tourist starts to deposit silver dollar coins in a poker machine. This person has examined the odds posted on the machine, (he can read numbers) and determines the winning payout is eleven to one, in other words $11 to every $1 placed in the machine. He places $100 in one dollar pieces in the machine, pulls the lever and all the rolling rows rest on red cherries. Beating back a heart attack, he revels in the joyous sound of bells ringing and lights flashing as hundreds of coins empty into the tray and spill over onto the floor.
The player is overjoyed. He has recovered his initial investment of $100 plus a $1,000 more. But wait. His actual winnings after payment of the 10 percent tax is only $900. And, indeed, may even be less if the federal tax qualifies for imposition. Something I haven’t been able to figure out. Upon learning that he did not actually win the $1,000 he was led to expect he accepts what he is given, walks away disappointed, and joins the rest of us as full fledged members of the club of the confused.
Should the payment of his winnings be paid out at the cashier’s window rather than at the machine he would be well advised to inform the cashier that he does not want $1,000 but will accept $999.99 and thus avoid the requirement of paying $100 in tax on the extra penny. Alas, he probably will never know this as he can’t read English and thus must remain unaware of the finer points of American tax laws. Then again, perhaps I’m wrong in that the federal laws governing gambling were first written in Chinese or Greek and later translated into the American version of the English language. I’m reasonably certain the English didn’t do it.