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Number-of-units taxation standard of the Hamburg Gaming Machines Tax Act incompatible with the principle of equality

Press Release No. 45/2009 of 28 April 2009

Order of 04 February 2009
1 BvL 8/05

The judicial referral concerns the constitutional admissibility of the number of units as the standard for the taxation of coin slot machines pursuant to § 4.1 of the Hamburg Gaming Machines Tax Act (Hamburgisches Spielgerätesteuergesetz SpStG), which was valid until 1 October 2005. Under this provision in its version relevant to the original proceedings, the tax rate is DM 600 per gaming machine and calendar month. Neither the amount brought in by the gaming machines nor the stakes made by the gamblers is taken into account when assessing the tax.

From January 1999 to February 2000, the complainant and plaintiff in the original proceedings operated two amusement arcades in which at first 18, later 16 coin slot machines were located. The plaintiff submitted respective gaming machine tax statements while at the same time lodging objections; the objections were denied by the Tax Office, the defendant in the original proceedings. The complainant brought action against this before the Hamburg Finance Court (Finanzgericht Hamburg). By its order of 26 April 2005, the Hamburg Finance Court stayed the proceedings and submitted to the Federal Constitutional Court the question as to whether § 4.1 of the Hamburg Gaming Machine Tax Act violates the general principle of equality.

The First Senate of the Federal Constitutional Court reached the conclusion that § 4.1 SpStG is incompatible with Article 3.1 of the Basic Law (Grundgesetz - GG), but not void. Taking the number of units as a standard of taxation results in an unequal burden on the gaming machine operators because it is structurally unsuitable to guarantee the necessary connection to the gamblers' amusement expenses. While the previous case-law of the Federal Constitutional Court and of the Federal Administrative Court (Bundesverwaltungsgericht) still regarded the number-of-units standard as a constitutionally valid and unobjectionable basis for the levying of the tax, this can no longer be justified according to the state-of-the art technical standards, as the Federal Administrative Court and the Federal Finance Court (Bundesfinanzhof) have meanwhile found. The Gaming Machine Tax Act can, however, continue to be applied for the assessment periods until 1 October 2005.

In essence, the decision is based on the following considerations:

The legislative competence of the Free and Hanseatic City of Hamburg for issuing the Gaming Machine Tax Act results from Article 105.2a GG. As a local tax on expenses, the Hamburg Gaming Machine Tax Act meets the requirements of this provision on competence; the choice of the taxation standard and the question of whether the tax may be shifted to the gamblers have no influence on the legislative competence.

The provision submitted, however, violates the general principle of equality (Article 3.1 GG) because taking the number of units as a standard has proven unsuited for levying the gaming machine tax, thereby placing an unequal burden on the gaming machine operators in an unjustifiable manner. It is, however, not the lack of the possibility of shifting the tax to the gamblers which makes the tax fail.

The point of reference of the entertainment tax in the shape of the gaming machine tax is the commercial organisation of gaming with slot machines. The organiser of the entertainment is the person liable to pay the tax. All the same, it is the individual gambler's entertainment expense on which the tax is levied because the entertainment tax is aimed at burdening the gambler's economic performance which is expressed by the use of his or her income for the entertainment. As the Federal Constitutional Court has already decided several times, this makes the individual, real entertainment expense the most appropriate standard for such a tax.

However, constitutional law does not restrict the legislature to applying such a standard, i.e. a standard which is oriented towards reality. When opening up a tax source that concerns the individual's entertainment expense, the legislature has a far-reaching freedom of drafting. This especially applies, inter alia, to the choice of the standard of taxation. Article 3.1 GG sets a limit to the legislature's freedom of drafting only where a plausible reason for equal treatment or unequal treatment is lacking, which would make it arbitrary.

If in entertainment tax law, the legislature, however, chooses a substitute standard or a probability-oriented standard instead of the reality-oriented one, it is restricted in its choice to a standard that makes a certain entertainment expense at least probable. The need of justification for choosing a substitute standard increases the more the further the standard which is chosen in the individual case is removed from the actual reason for the burden. The substitute standard of a gaming machine tax must have, at any rate, at least a loose connection to the gambler's entertainment expense because the substitute standard makes use of the legislative latitude with regard to the closeness of tax assessment to reality; this latitude, however, does not provide an exemption for the necessary orientation of the tax, as regards its content, towards the reason for the burden.

The standard provided in § 4.1 SpStG, which is based on the number of units, transgresses this latitude and thus leads to an unequal burdening of the gaming machine operators. According to the submitting court's findings, the standard has proven generally unsuitable in the territory of the Free and Hanseatic City of Hamburg because it is structurally unsuitable to guarantee the necessary connection to the gamblers' entertainment expense. There is no longer a valid justification for using the substitute standard nevertheless.

The application of the number-of-units standard according to § 4.1 SpStG leads to the equal treatment of facts that are essentially unequal. According to this standard, the tax on the operation of coin slot machines is the same, irrespective of the entertainment expense incurred by the users of the gaming machines at the different machines in the respective taxation period; the only difference that is made is the one between the operation of gaming machines in amusement arcades and in other locations. As regards the ranges of variation as regards the amounts brought in by the gaming machines that have been ascertained, they are so significant that there can no longer be any question of a sufficient connection, which is necessary for an entertainment tax, between the taxation standard and the taxable entertainment expense in the area of application of the Hamburg Gaming Machine Tax Act. With variations of several hundred per cent of the amounts brought in, variations which exist not only in individual cases but almost as a general rule, any correlation between the - mere - operation of slot machines and the gamblers' entertainment expense is lacking, irrespective of whether the expense is measured according to income brought in or according to the stake per game.

Earlier assumptions made by the Federal Constitutional Court to justify the suitedness of the number of units as a taxation standard for gaming machines (see Decisions of the Federal Constitutional Court (Entscheidungen des Bundesverfassungsgerichts - BVerfGE) 17, 476; 31, 8), which was followed by the older case-law of the administrative courts and finance courts, can no longer be upheld in view of the technical and economic development in this field and the concomitant possibilities of obtaining information. This particularly applies due to the fact that since 1 January 1997, only the operation of coin slot machines with a tamper-proof counter has been permissible, which has made it possible since that date to ascertain the gamblers' expense with sufficient reliability.

Apart from this, the unsuitability of the number of units as a standard for levying the gaming machine tax is not due to the special characteristics of the factual or legal situation in Hamburg but obviously has structural reasons with a view to the present situation on the gaming machine market. The number-of-units standard must therefore deemed generally unsuitable for assessing the gaming machines tax because at best in more or less coincidental combinations of individual circumstances can it ensure the sufficient connection between tax assessment and the gambler's entertainment expense, which is required by the precept of the equality of tax burdens. In recent times, for instance, no positive evidence could be produced for the required connection to the figures compiled, which should at least be a loose one. Apart from this, the difficulties involved in producing the evidence of this content-related connection, and the insecurities as regards the existence of the connection - assuming that it could be established in the individual case - are so serious that neither the person liable to pay the tax nor the ultimate taxpayer can be reasonably expected to accept the use of such a standard; it is also not practicable for the tax administration.

Other factual reasons, in particular practicability, the assumption of an internal compensation of burdening among the gaming machine operators, the pursuit of steering objectives and the possible lack of a different, admissible method, cannot justify retaining the number of units as taxation standard in this factual situation.

It is also not apparent that a standard which is closer to reality were not available be because a standard that would be more strongly oriented towards the gamblers' expense would not be compatible with Community law.

Thus the unconstitutionality of the tax assessment challenged in the original proceedings follows from the inadmissibility of the number of units as taxation standard. However, it does not additionally result from the impossibility of shifting the tax towards the gamblers. If the tax is geared towards the tax burden being shifted from the person liable to pay the tax to the ultimate taxpayer, this is sufficient, even if the shift does not successfully take place in every individual case. No indications are apparent for a shift being factually impossible. By contrast, even under the application of § 4 Abs. 1 SpStG, the entrepreneurs retained the possibility of working towards an increase in turnover, for instance by choosing suitable locations for the amusement arcades, and by designing and equipping them accordingly, and by restricting their own cost to what is absolutely necessary in order to be able to earn not only what is needed for paying the tax, but also for making a profit.

The unconstitutionality of § 4.1 SpStG does not result in its nullity. What is established is only the incompatibility of the provision with Article 3.1 GG. The gaming machines tax can be levied according to the number-of-units standard set out in § 4.1 SpStG for a transitional period until the entry into force of the Gaming Entertainment Tax Act in Hamburg on 1 October 2005.