Sales Tax Rate to 9.75%: Final Nail in the Claiming Coffin?

by Jerry McMahon

For a variety of reasons nearly every U.S. racing secretary will say that claiming is the heart of the racing industry in this country. That’s why alarm bells are ringing as a result of significant (as much as 66%) declines in claiming activity at the current Hollywood Park meet. The downturn in Southern California has generally been attributed to the weak economy, and with the indicators being what they are, no one can really dispute that conclusion. I for one, however, think that the 1% state-wide sales tax increase that went into effect April 1, 2009 is a major contributing factor to the decline. And if that’s the case, what happens when the L.A. County rate rises to 9.75%, as it is set to do on July 1st?

I have to admit that my concern on the subject began years ago while running local auction companies and watching almost every expensive horse purchased being sent out of state. The reason? Nobody wanted to write a check to the state for $8,250 for every $100,000 horse that they bought. Because of this, local owners with top-tier tastes are usually out-bid by foreign and out-of-state buyers. After July 1st, L.A. County auction buyers wanting to keep their purchases in California will effectively be 9.75% behind their out-of-state competitors during the bidding process. The only way for local owners to get around this is to immediately ship their purchases out-of-state, and to make sure that they remain there for at least 60 days. The problem with that loophole for local racing secretaries is that many of these horses never make it back to California.

Now let’s get back to the issue as it relates to the claiming business. Let’s say a claiming stable begins the year with a $200,000 pot to finance claims. During the course of the year, they make 10 claims for an average price of $40,000, while of course losing several of their horses to other claiming stables along the way. That amounts to $400,000, times 9.75% for a total tax of $39,000. The stable claiming pot has been reduced to $161,000, WITHOUT paying one bill or losing a horse to injury! Disturbingly, and unlike procedures in some other racing states, you could claim the SAME horse three times, and still pay the full tax each time! As one prominent claiming owner told me, “The financial model here is already broken, and the sales tax rise will only make it worse.”

During the past few decades, the sales tax issue has been brought up by industry leaders on numerous occasions, only to have political consultants call any reform ideas D.O.A. with respect to California lawmakers. Not surprisingly, the California boating industry has effectively preserved more favorable sales tax rules during the same time period, despite the fact that relatively few boats are actually built in the Golden State.

From time to time the industry has had opportunities for legislative relief in various categories. This was recently evidenced earlier in the year during the tense budget negotiations that that resulted in significant racing license relief, as well as purse benefits for horsemen. I would strongly suggest that industry sales tax relief be thrown in the hopper in the unlikely event that a similar opportunity comes along again.

For the record, it should be noted that the additional 1% tax instituted in April is scheduled to sunset in 2011. Given the state of the state, I wouldn’t hold my breath on that actually happening.

Previous posts by McMahon: Stud Fees, Auction Prices Good Handicapping Tools, and Commercial Bloodstock Markets: Supply's the Key.

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