Updated on 09/17/2011 10:52AM

Maryland taxes a tough beat

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Horseplayers are subjected to so many indignities that they usually accept ill treatment stoically. But even the most passive bettors were surely incensed by the policy that went into effect at Maryland's racetracks Tuesday.

The state began withholding taxes from certain gambling winnings, forcing both residents and nonresidents to contend with a potential mountain of paperwork. The rationale is to generate more revenue for Maryland's coffers, but the effect will be to deter sensible gamblers from putting their money through the windows at Laurel, Pimlico, and Rosecroft.

The withholding-tax measure was part of the Budget Reconcili-ation and Financing Act of 2003, and it was passed without notice by anybody in the state's horse industry. Racetrack executives didn't know about the new law until representatives of the state comptroller's office showed up at the June meeting of the Maryland Racing Commission to remind everybody of the change that would take place July 1. On that date, the state's tax collectors would take note of the same transactions that are now subject to federal reporting requirements.

When a bettor hits a payoff at 300-1 or more and collects more than $600, he must fill out IRS Form W2-G before collecting his money.

If the payoff exceeds $5,000, Uncle Sam withholds 28 percent.

Now Maryland will get into the act, too, withholding from the same payoffs 7 percent for Maryland residents and 4.75 percent for nonresidents.

Thus a Marylander who gets lucky and hits a $5,000 trifecta will wind up with only $3,250 in his pocket, after surrendering $1,400 to the IRS and another $350 to the state.

The withholding tax generates more annoyance that it does actual revenue. A person owes tax on gambling winnings only if he makes a net profit during the year - and very few horseplayers do. But even a losing bettor will probably cash some payoffs requiring him to fill out IRS forms.

He must then list these winnings on his federal tax return, show offsetting losses as an itemized deduction and maintain a yearlong record of his wagers to back up that deduction.

If an out-of-state resident goes to a Maryland track and hits a single payoff above the IRS threshold, he has a whole new burden with which to contend. He is required to file Form 505, the Nonresident Maryland Tax Return, a 54-line form where he lists his Maryland gambling activities and other details from his federal return. I have had some first-hand experience with this complicated document; even my accountant couldn't figure out how to handle it until he corresponded with Maryland tax authorities. Other difficulties arise when the bettor files his usual tax return in the state of his residence. Because he has already accounted for his Maryland gambling transactions on that state's tax form, he must then separate all his non-Maryland betting and account for that on his usual tax return.

That's not all. A brochure being distributed to racetrack patrons, "Gambling Winnings and Your Maryland Tax Obligations," tells bettors that they are expected to file Form 502D and pay an estimated tax whenever they win more than $500. The guide says, for example, that a Montgomery County resident who wins $500 at Laurel should fill out the form and pay an estimated tax of 4.75 percent to the state and 2.95 percent to the county.

Forget about studying the Daily Racing Form. Keeping up with your tax obligations at the track has now become a full-time job.

When Joe De Francis, president of Laurel and Pimlico, learned of the new Maryland policies, he said, "It's ridiculous that this should be applied to people from out of state, particularly because we draw so many of our customers from D.C. and Virginia. This is a substantial disincentive for these people."

Lawmakers who passed this measure thought they would collect more revenue for their financially strapped state. What they will accomplish instead is to change bettors' behavior. Just as states that jack up their cigarette tax drive people across state lines to make their purchases, Maryland will drive wagers across state lines. But bettors won't have to go anywhere to place them, thanks to the availability of legal telephone-betting services.

I place most of my wagers through XpressBet, which is operated by Magna Entertainment, owner of Laurel and Pimlico. Based in Pennsylvania, it withholds no state taxes. When a customer hits a payoff exceeding the IRS threshold, he doesn't have to fill out any paperwork; XpressBet mails the W2-G Form to him. Other wagering services, such as Youbet and Philadelphia Park's Phonebet, operate the same way.

Even casual fans should establish an account with one of these services. Instead of going to a mutuel window to bet a trifecta that might return 300-1 or more, they can wager over a mobile phone instead.

Although Maryland fans should normally try to support Maryland racing, the state has forced them to do otherwise.

(c) 2003, The Washington Post