State Comptroller Peter Franchot is warning tavern owners with video poker games, pool tables and jukeboxes that they have until next week to set up a tax account with his office or face possible audit, fraud penalties or criminal prosecution.
"Please be advised that the Comptroller's Office will take action to the fullest extent of the law to ensure that you are in compliance with ... state tax laws," Franchot stated in his Jan. 25 letter, a copy of which was provided to The Sun.
Revenue from coin-operated games, which are prevalent in Baltimore bars and neighborhood stores, is subject to an amusement tax, a 10 percent tax on gross receipts. But during a review of licensed games in Baltimore, the comptroller's office discovered that although machine owners had registered the games with the city, they had not set up tax accounts with the state.
As a result, the city, which receives tax money through the comptrollers' office, could be losing as much as $11 million in tax revenue annually, according to a 2006 study by the Abell Foundation, a nonprofit organization that focuses on poverty issues.
"We are going to try to get the city some of the revenue it deserves," said Franchot, a former state delegate from Montgomery County who bested former Comptroller William Donald Schaefer with a platform that included a crackdown on tax-evading vending businesses.
Owners of such businesses sell or lease video games and other items, including cigarette machines, to bars, restaurants, gasoline stations and other establishments. In some cases, they also make high-interest loans to clients with poor credit. Debtors use liquor licenses or other property as collateral.
The deadline for response to Franchot's letter is Feb. 8.
Efforts to ferret out delinquent game owners started under Schaefer, whose agency was criticized in the Abell report for failing to act in the matter. Initially, a Schaefer spokesman said he didn't have a large enough staff to look into the problem.
But in April, members of Schaefer's staff met with city officials to discuss the problem. When they cross-referenced the city's list of licensed machines with amusement tax account holders, they found that 116 individuals or businesses lacked tax accounts.
Of those, about 50 businesses or individuals responded to the office's first warning letter, said Daniel C. Riley, assistant director of the comptroller's compliance division, and either set up a tax account or explained why they didn't have to do so. Only those who receive profit from a machine must set up a tax account, Riley said.
"We have gotten some responses back from people who said they were not aware that there was [an amusement] tax," Riley said. "We have set them up with an account, and we are working with them to see if they owe any back taxes."
Still, Riley said it is difficult to understand why so many business owners have failed to set up an amusement tax account. Information about the tax is available to all business owners, and the comptroller's office offers a "combined registration" process that makes it possible to set up several tax accounts at once. The Abell report also exposed bar owners who had turned their establishments into mini-casinos, setting up more than a dozen video poker and other gambling-style games. The report also documented the practice of paying out on the machines, which constitutes gambling and is illegal in the state.
Many of the same bar owners were found to be in violation of city zoning code, which limits the number of devices an establishment can have based on square footage.
As a result of the report and outrage by bar owners who said they had never been told they were violating the law, the City Council introduced a bill that would, in some cases, have doubled the number of games allowed. The bill looked as if it were going to win approval, but last week, at its second reading, the council delayed a final vote and sent the legislation back to committee.
Many bar owners filed requests for hearings with the Board of Municipal Zoning Appeals in an effort to keep their machines. But most of those hearings -- 52 were requested -- were delayed in anticipation of the passage of the council legislation. David C. Tanner, executive director of the appeals board, said that most of the hearing requests, which are good for a year, will expire soon unless owners set a hearing date.
Tanner said he would probably send a letter to machine owners reminding them that their time is running out.
"For a lot of them, that year is getting close," Tanner said.
Franchot, who is monitoring developments in the city, said he doesn't expect to stop with his letter.
"This is something that you can follow over the next few months," he said.