Suffolk OTB sues Islip Town over Jake's 58 property taxes

Suffolk OTB and Islip Town are in a legal dispute over whether the lucrative Jake's 58 Casino Hotel in Islandia should pay more than $1 million a year in property taxes.

OTB officials maintain that the 210-room hotel and undeveloped property at Jake’s should not be taxed because the Off-Track Betting corporation is a government agency, disputing Islip’s contention that the hotel and excess land should be considered separate from its casino operations.

In a lawsuit filed Jan. 19 in Suffolk County's State Supreme Court, OTB officials allege Islip has erroneously taxed about three-quarters of the casino property since OTB bought Jake's in 2021 from Buffalo-based entertainment conglomerate Delaware North. 

Islip, in letters rejecting OTB's requests for tax exemptions in 2022 and 2023, said most of the 19-acre property — including the hotel and land slated for future use — should not be tax-exempt because they are not part of OTB's core mission as a public benefit corporation providing gambling for customers and using casino profits to help fund public schools. 

Hauppauge-based OTB countered that the hotel is an important part of casino operations because free and discounted hotel stays are part of the betting parlor's rewards program.

The lawsuit, which one legal expert said may be the first of its kind, claims Islip's decision to tax Jake's poses a challenge to the commonly accepted practice of granting tax exemptions for government properties such as office buildings, parks, schools and courthouses. While OTB facilities generally are eligible for exemptions, there are exceptions for properties that are not used specifically for gambling, state law documents show.

Suffolk County Regional Off-Track Betting Corp. president Phil Boyle said in an interview the agency is entitled to the tax exemption after generating $600 million for the state Department of Education in recent years and tens of millions dollars more for Suffolk County.

“It was one thing when Delaware North was involved, but we own the building. It is a government-owned building," Boyle said Thursday. "We don’t tax the police headquarters in Yaphank. We don’t tax the [H. Lee] Dennison [county office] building. It [Jake's 58] may make money, but it is still a government-owned building.”

Islip Town officials declined to comment on the lawsuit.

Islip stands to lose millions of dollars in future tax revenue for the town and other taxing entities such as the Hauppauge school district and library and fire districts if OTB prevails. 

OTB paid about $1.3 million in property taxes to Islip in 2022-23, town officials said, and has so far paid a little over $701,000 in the 2023-24 tax year, with a second payment owed by May 31.

After missing a $1.8 million tax payment to Islip during the 2021-22 tax year, OTB paid those funds to Suffolk County, records show. The county comptroller's office acts as tax collector when town taxes are not paid on time, said Comptroller John M. Kennedy Jr., who otherwise declined to comment on the OTB lawsuit.

Delaware North, which was not eligible for tax exemptions, paid Islip a total of $7,124,700 in taxes on Jake's 58 during the five fiscal years between 2016 and 2021, according to records provided by Islip to Newsday. The company also paid a $10,132.32 penalty in 2016-17 and a $8,278.71 penalty in 2019-20 for reasons Islip officials did not specify, those records show.

Separately, OTB pays the Village of Islandia about $2.25 million per year as part of a 20-year, $47 million "taxpayer relief agreement" adopted when the village approved the casino in August 2016, OTB officials said. That number will nearly double to $4.25 million when OTB completes a $200 million expansion of Jake's 58 next year, including doubling video lottery terminals from 1,000 to 2,000, adding new pubs and restaurants and refurbishing hotel rooms, OTB officials said.

OTB lawsuit a legal first

OTB's lawsuit may be the first case to tackle the question of whether some OTB properties should be taxed, said Ted De Barbieri, a professor at Albany Law School who teaches courses that include focus on state and local government and community economic development law. 

De Barbieri said the suit highlights an "inherent tension between the State Legislature and local governments" over which properties qualify for tax exemptions. State standards for exemptions conflict with local governments' goal to maximize property tax collection, he said.

"I haven't seen other cases interpreting this statute. So at least as far as I can tell, this is a novel issue that's coming up," he said. 

"The important thing is, in order for a property to be tax-exempt, fundamentally, there needs to be some sort of public use or public purpose. And the legislature decided, when they passed the statute that Suffolk OTB is pointing to, that certain types of property related to Off-Track Betting could be tax-exempt," De Barbieri added.

Off-Track Betting corporations were authorized in 1970 when the state updated its racing and pari-mutuel wagering law, which was enacted in 1939. OTBs were created as a public benefit corporation to stem rampant illegal betting and provide revenue for public schools and state and local governments.

Suffolk and Nassau have two of the state's five Off-Track Betting operations. Nassau OTB did not respond to requests for information about its properties and whether they are taxed.

A spokesman for the state Gaming Commission, which oversees Off-Track Betting, horse racing and other gambling across the state, declined to comment and referred a reporter to the racing and pari-mutuel wagering law.

The pari-mutuel wagering law generally exempts regional Off-Track Betting corporations from taxation, including property taxes, for any land the OTBs use for betting. But the law also states that a portion of OTB-owned property may be taxed if it is used "for purposes unrelated to its corporate purpose."

State Sen. Joseph Addabbo Jr. (D-Ozone Park), chair of the Senate Racing, Gaming and Wagering Committee, said the Islip case appeared to be unique and may point to vagaries in the law that might require clarification by state lawmakers.

“We’re looking into it at this point,” Addabbo said Tuesday. “We are in the fact-finding stage right now. This is something new.”

Former Suffolk OTB president Phil Nolan said he couldn't predict the dispute's outcome.

“What I would say is, I don’t know," said Nolan, also a former Islip supervisor. "I think they both have a case, and they’re going to find it out in court.”

Suffolk OTB applied for property tax exemptions for the 2022-23 and 2023-24 tax years, according to the lawsuit. 

Islip Assessor Anne Danziger, in 2022 and 2023 letters rejecting the applications, said only 25% of the Jake's 58 site is used for the casino, and the rest, which consists of a hotel, dining and other properties, should be taxed like any other commercial enterprise. According to court records, a 25% exemption for the casino floor already shifts $450,000 in real property taxes annually onto other property owners in the town.

Suffolk OTB is asking Islip to pay back property taxes paid those years, plus interest. OTB also is asking Suffolk for a refund for taxes paid to the county. 

The next court appearance in the case is scheduled for May 10 before State Supreme Court Justice John J. Leo in Central Islip. 

Local entities reaping benefits

Jake's 58 casino has become one of the most profitable betting operations in the state since it opened in February 2017.

So far, in fiscal 2023-24, which began last April 1, the casino has raked in $251,306,727 in net revenue after bettors receive their winnings, according to figures posted on the state Gaming Commission website.

State gaming law requires OTB to contribute 45% of its net revenue to the state public education fund and 10% to the gaming commission to rent video lottery machines and help pay the commission's administrative expenses. Since April, OTB has paid $113,088,027 to the public education fund and $25.1 million to the gaming commission, gaming commission records show.

In court papers, Boyle said 4.5% of net revenue goes to the New York Racing Association and 0.5% goes to the state's Thoroughbred Breeding and Development Fund, which supports the horse racing industry.

The remaining 40% of profits is kept by OTB to pay its expenses, Boyle said. Last year, OTB used those funds to contribute $12 million to the county and pay down $29 million in debt, OTB said Friday.

The Islandia casino helped Suffolk OTB escape bankruptcy in 2020, after the corporation partnered with Delaware North in 2017 to run the casino hotel. OTB later purchased Jake's 58 in 2021, along with 10 surrounding parcels that the OTB said also should be tax-exempt.

Buying the hotel-casino was, at the time, expected to save Suffolk OTB about $13 million a year in rental and management fees paid to Delaware North, which had held a 50-year contract to manage the casino for the corporation, Newsday has reported.

OTB officials said in court records that all operations at Jake's 58 are directly tied to casino revenue, with all profits included when calculating government dividends. 

The hotel operates at a loss to maximize casino profits, according to court records, with heavily discounted rooms, meals and drinks to motivate casino patrons to stay longer. In 2023, hospitality losses totaled $3.3 million.

Between 200 and 250 casino club members use a hotel discount or complimentary stay per week, court records show, helping to bring in an additional $63,847 per week on average between June 2022 and October 2023.

Exemption claims panned

One elected official said Jake's shouldn't be completely tax-exempt, no matter how much money it generates for public schools. 

“I agree with the Town of Islip," said Assemb. Mike Fitzpatrick (R-St. James), a longtime critic of Suffolk OTB, adding the casino should be taxed like a commercial property. "If government is going to get into the vice business, at the very least it should get some tax out of it. … I’ve never been a fan of OTB. I just think it’s a cancer on the body politic of Suffolk County.”

Fitzpatrick, whose district includes Jake's, said he doesn’t agree that the hotel is an inextricable part of casino operations.

“As OTB has morphed into a full-scale gambling operation, it’s so far removed from its original mission [that] it’s now become a very large and very lucrative, unfortunately, business and I think that the tax status of OTB should be revisited. I’m rooting for Islip on this one,” Fitzpatrick said. 

Fitzpatrick added that the less OTB pays in taxes, the more tax burden is shifted to taxpayers.

“You’re just picking the pockets of your less fortunate citizens to pad your pensions,” he said. “All this money comes in, but our taxes never go down.”

Suffolk County Legis. Steve Flotteron (R-Brightwaters), who represents parts of Islip Town, said the casino-hotel also uses public resources such as fire and ambulance services. 

"With hundreds of thousands of people going through the building, it is a strain on local services. They need to be definitely paying their fair share," said Flotteron, a former Islip councilman.

Paul Sabatino, a Huntington Station-based attorney who has represented casino opponents in the past, said regional OTBs are tax exempt if the OTB “owns the real estate and title of the corporation,” and if the property is being used “for off-track betting purposes.”

“So, for example, they just can’t invest in a piece of vacant land and just have that property in their title but not actually be using it to run an off-track betting operation,” he said.

Deeds included in court records describe some of the parcels as abandoned or vacant, although OTB officials argue the land was purchased for development.

Sabatino believes Islip has a strong defense, especially since casino patrons at Jake’s 58 don’t necessarily need to use the hotel.

“Las Vegas is like a destination place, where people fly there and there’s all kinds of shows and there’s a whole series of activities related to the casino itself," he said. "I don’t think Jake’s really has that package. Basically, it’s people driving there and then driving home, for the most part."