Federal Constitutional Court - Press office -

Press release no. 45/2009 of 28 April 2009

Order of 4 February 2009 – 1 BvL 8/05 –

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


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.


This press release is also available in the original german version.