North Dakota eyes offtrack firm's books

The attorney general of North Dakota and other state regulators are looking into whether Racing Services Inc., the offtrack betting operator in the state, deliberately underreported some of its recent handle figures to avoid paying taxes, state officials said Tuesday.

The inquiries follow closely on the heels of a July 18 warning from the director of the state's racing commission, Paul Bowlinger, that Racing Services pay nearly $1.5 million in back taxes "immediately" or face the loss of its license. The taxes became an issue earlier this year after state officials complained that the company was failing to comply with state law to pay taxes on handle promptly.

Susan Bala, the founder and chief executive officer of Racing Services, said on Tuesday that the company did underreport its handle to the state racing commission, but that the reporting was an "internal mistake." She said that the company filed amended reports with the racing commission earlier this year. Bowlinger confirmed that Racing Services filed the amended reports.

The amount underreported by Racing Services was $100 million, Bowlinger said, during a six-month period from October 2002 to the end of the first quarter of 2003. In all of 2002, before the amended reports were filed, total handle at Racing Services' offtrack outlets was reported as $172 million, according to the racing commission, meaning handle in 2002 was likely about $220 million.

The underreported handle was first uncovered by the state racing commission while conducting an audit of Racing Services' financial reports, Bowlinger said. The commission forwarded the results of its audit to the office of Attorney General Wayne Stenejhem, where investigators from the gaming unit are conducting a separate audit of Racing Services, a spokeswoman for the attorney general, Sandi Tabor, said Tuesday.

Bala said that Racing Services would cooperate with the inquiries. "We are very open," she said. She also disputed Bowlinger's account of the commission uncovering the underreported figures, and said that the company reported the mistake to the racing commission after conducting a review of its first-quarter business.

Racing Services operates 10 OTB's in North Dakota and provides simulcast services to other outlets in Idaho and South Dakota, and it recently has started providing simulcast services to companies in Mexico and Venezuela. The company has been one of the fastest-growing racing firms over the past decade by attracting high-rolling bettors using a form of rebates on the bettors' handle, a controversial practice in the racing industry.

Racing Services pays 1 percent of its handle to a special fund that was created to pay purses to horsemen and award state breeders. It also pays 2 to 2.5 percent of its handle to the state's general fund.

On July 2, Bowlinger ordered Racing Services to pay its $1.5 million debt from unpaid taxes during February, March, and April to the state's special fund by Aug. 15. The commission then ordered the company to pay its June arrears to the general fund on July 18, after Racing Services, for the first time, failed to meet a statutory deadline to pay the general fund taxes for June, Bowlinger said.

"We are stewards of the public's money, and this is a serious breach," Bowlinger said. The racing commission is expected to meet next on Aug. 15, Bowlinger said.

Bala said that she had not yet decided whether Racing Services would comply fully with Bowlinger's order. "We don't like to speak before we know what we are saying," Bala said. "We want to do this realistically, which means sitting down and figuring out which way to go forward with the commission."

Bala said the company has cash reserves that would meet the company's tax arrears, but she said that deciding to pay the taxes in full would be a matter of "internal planning." She blamed the company's failure to comply with the tax deadlines on "disruptions" in the company's new international businesses.

Earlier this year, state legislators passed a bill granting Racing Services a tax break on its handle. In published reports, legislators said they were told that if the tax break was not passed, a bettor in North Dakota who wagers $160 million a year might leave the state for a better deal.

In 2001, Racing Services was investigated by the Thoroughbred Racing and Protective Bureau, the racing industry's private security arm, when the company was accused of giving the same high-rolling bettor, who uses a sophisticated analytical computer program, special access to the wagering network. The investigation did not uncover any wrongdoing.