By Zach Arnold | September 8, 2013
To read all CSAC-related articles, dating back to May 2012, CLICK HERE.
Amidst the good news of UFC running Arco Arena for a Saturday, December 14th Fox network broadcast event, some interesting developments are brewing for promoters in the Golden State.
The tabloid stories about kid’s Pankration in California and the lingering media scandal has set the stage for Assembly Bill 1186. AB 1186 would give the California State Athletic Commission power in overseeing such fights. This has made parents involved in kid’s Pankration extremely unhappy.
The current state of financial affairs for CSAC is tenuous. The commission currently has about $300,000 in the bank and is slotted for $1.2M a year from the Governor’s Budget for the foreseeable future. That means margins are extremely tight, given the volume of shows in the State and how much geography there is to cover. One mistake and the budget can blow up in a hurry.
With financial constraints at the forefront, Sacramento politicians at the Capitol are readying for a modification of the athletic commission’s current tax structure & enforcement policies. One look at the state House’s Sunset Bill, which would extend CSAC’s future for two years, lays out what changes are coming.
Taxes on live gates and on TV/PPV broadcast rights are on the table for alteration. Enforcement of taxation on WWE shows, which has always been on the books, is on the table. WWE is a walking target for Sacramento politicians looking for a cash gusher for the athletic commission.
The back story on what is going to happen in the near future and what is going to happen in the next couple of years is complicated but needs to be told.
Sunset Bill changes
Currently in the state Assembly, SB 309 (read full text of bill here) brings some new changes to the athletic commission’s business affairs. For example, there is no longer any sort of requirement for the athletic commission to give lawmakers a report on comments from stakeholders at various commission meetings regarding new laws or changes in business practices.
The issue of licensing transgender fighters is also about to get resolved in this manner:
Under existing law, only a natural person may be licensed as a boxer and martial arts fighter. This bill would eliminate that natural person limitation on who may be licensed as a boxer and martial arts fighter.
The Sunset Bill also deals with the neurological & boxer pension slush funds. These bank accounts are growing in size because promoters have to pay a tax on ticket sales for each show they run. The money goes into these accounts. Way more cash is being collected into these accounts than money being distributed from them to beneficiaries.
SB 309 also creates a new licensing hurdle in which anyone who is training a fighter must pay $200 or else disciplinary action will be launched. How the state will actually enforce this provision, your guess is as good as mine. Here’s the text:
The bill would prohibit a person from training a professional boxer or kickboxer or martial arts athlete unless he or she has been licensed by the commission. The bill would make the application and renewal fee for a licensed professional trainer $200.
While all of the changes proposed will have an impact on business affairs, the biggest change to come will have the most impact on just how many fights happen in the state in future years. That change is in regards to the cap on the state’s television/PPV tax that promoters have to pay in order to run a live event in California.
Changes in live gate & television taxes
As stated in SB 309:
The bill would require the commission to report to the Legislature on the fiscal impact of that $100,000 limitation during its next sunset review. The bill would increase the limit on the 5% fee for the sale, lease, or other exploitation of broadcasting or television rights to $35,000.
Let’s address the live gate tax situation first, since that is less difficult to discuss. Right now, there is a $100,000 cap on live gates with a 5% tax as the benchmark. This means that the exposure of the live gate tax is for any gate up to $2 million dollars. Anything over $2 million dollars would not be taxed.
What the politicians in Sacramento are quickly going to discover is that modifying the live gate tax isn’t going to really change the financial affairs of the state athletic commission. Why? The state simply isn’t attracting fight events that draw $2 million gates. Therefore, the only way you could rake more money in from the live gate is if you raise the 5% tax rate.
In the grand scheme of business affairs, the live gate tax is not where the money is. The money is with the television tax. And this is where the promoters who run events in California are getting nervous.
The TV tax rate is currently 5% and the cap is $25,000. SB 309 raises the cap to $35,000. This means the capture zone for TV show revenue goes up from a $500,000 limit to a $700,000 limit.
According to several industry sources, there was a significant fight between Sacramento, the commission, and the promoters over the changes in the TV tax cap. The politicians were interested in raising the cap to $50,000 per show, which would have raised the capture zone to $1 million. Major promoters like UFC allegedly agreed to a cap raise of $35,000 but no more. If the cap gets higher or the 5% tax rate is bumped up further, promoters are signaling that they are ready to take their business elsewhere.
For boxing & MMA promoters, the TV tax fee is basically a sunk cost. For HBO, Showtime, ESPN, and PPV events, promoters are cutting checks ahead of time to the commission to pay the TV tax. It’s the easiest money a commission can ever make.
In California, many of the televised events bringing TV tax revenue to the commission are hosted on tribal land. Those shows are site fee/sold show deals for promoters. Boxing promoters rarely are interested in “four wall deals” where the live gate revenue is a variable rather than a fixed number. Promoters want their live gate revenue to cover the costs for booking the undercard fights. Promoters would rather obtain a sold show deal and have a third party take on the financial risk of making money from the live gate (like a casino or a rich person who is a fight fan).
The TV money is where it’s at for the promoters. For the tribes, boxing events are a tool for increasing cash flow from gambling activity. MMA events don’t carry the punch that boxing events carry when it comes to increasing casino revenue. The tribes are willing to give promoters good deals and the networks paying the promoters television money for events are happy with the shows.
A perfect example of this in action is the deal Golden Boy has with Fantasy Springs in Indio, California. They ran a show there on Saturday night with Chris Arreola vs. Seth Mitchell. The tribal shows such as events at Chumash in Santa Ynez, Morongo in Cabazon, Pechanga in Temecula, Fantasy Springs, Agua Caliente in Rancho Mirage, and San Manuel Casino are the easiest sources of revenue for the state athletic commission. $4,500 for a minimum fee plus 5% TV tax.
The impact of California taxation
What makes the situation in California so precarious is the current system of city & state taxation. California has tremendous fight fans, a big population base, and a lot of available venues. Unfortunately, taxation has crippled many opportunities for major events to be hosted in the state.
Most fighters don’t want to fight in California because of the high state income tax. Most promoters will still consider running shows in California if they don’t have to deal with city taxes. And that’s where the problems begin. Staples Center should be hosting major fights all the time. Unfortunately, promoters don’t want to run the venue due to tax issues. In Los Angeles, there is a 5% special events/gross receipts tax. Put CSAC’s 5% TV & gate tax on top of that along with federal taxes and you have a mess on your hands. A perfect example of this was back in 2000 when Bob Arum booked Staples Center for a fight between Oscar De La Hoya & Shane Mosley. The live gate was $8 million dollars. The 5% CSAC live gate tax translated to $400,000. Los Angeles wanted their own check of $400,000. Arum painstakingly negotiated the city tax down from 5% to 3%, which meant he still paid $240,000. He didn’t want to pay the tax at all and thought he could convince politicians to help him out. Not so much. The city/state taxation problems created an environment where Arum struggled to convince anyone into doing a site fee/sold show deal.
Because of the situation in Los Angeles with taxation, many fights are now being hosted at the Home Depot/Stub Hub Center in Carson, California. It’s an 8,000-seat venue. It’s not the kind of venue that’s going to get you a $2M gate. However, the television money is still good — and that’s the gusher the Sacramento politicians are desperately trying to tap into.
California versus other states
The politicians in Sacramento would like to jack up taxation rates for fight shows to levels you see in other states like Nevada. They would like to raise the TV tax cap up to $50,000. What the pols don’t get or don’t want to comprehend is that promoters aren’t sweating the $50,000 TV tax check in a place like Nevada or New Jersey because the casino is the one paying the bill. The casino is the one paying the site fee for shows, so Nevada can get away with an uncapped 6% live event gate tax and get away with a $50,000 cap.
What isn’t discussed when it comes to Nevada’s TV tax cap is that it’s on a generous sliding scale — and it takes up to $3 million dollars in TV money before you hit the $50,000 cap. If California kept the 5% tax rate but lifted the cap, they’d hit the $50,000 cap if TV money reached $1M. Now you can see why the politicians are so interested in future changes to the CSAC TV tax.
Time to compare and contrast various states & their taxation levels:
California – $1,250 minimum fee to run a show plus 5% live gate tax, capped at $100k (capture zone up to $2M). $4,500 for fee to manage a show on tribal land. 5% TV tax, minimum fee $1,000 and capped at $35,000 (capture zone up to $700,000).
Nevada – $4,000 minimum fee to run a show w/ officials. Throw in $1,000-$2,000 for drug testing. 6% live gate tax (paid & comped tickets), no cap. 3% TV tax for first $1M exposed, 1% of next 2M, capped at $50k (capture zone up to $3M).
Texas – 3% live gate tax, no cap. 3% TV tax, capped at $30k (capture zone up to $1M).
Florida – $1,800 minimum fee to run a show and 5% tax on total gross receipts INCLUDING concessions. 5% TV tax, capped at $40k (capture zone up to $800,000).
New Jersey – sliding scale w/ top end as 6% for any gate over $200,000. Capped at $100k for fees (exposure up to $1.6M). TV Tax is sliding scale. 5% of up to $50k, 3% for next $100k, 2% next $100k, and then 1% for anything over $250,000.
Examples of taxation at work
With California raising the capture zone from $500,000 to $700,000 on collecting the TV tax, let’s do a simple apples-to-apples comparison. The impact of raising the capture zone on the TV tax will hit about 10 shows on California’s calendar. The hope is that as long as the schedule activity remains static that the revenue raised from the capture zone increase will be somewhere near 6-figures in revenue. However, that net increase could easily get neutralized if a few of the scheduled shows go away.
The impact of the capture zone increase hits the upper B-level events the most. For a show with a $500,000 TV check, the breakdown goes like this:
- California & Florida – $25,000
- Nevada & Texas – $15,000
- New Jersey – $10,000
What about a show that has a $700,000 TV check?
- California & Florida – $35,000
- Nevada & Texas – $21,000
- New Jersey – $12,000
The gamble by the Sacramento power brokers is that the $35,000 cap is the bend-but-don’t-break point for promoters. The one advantage that the cesspool of an athletic commission in Florida has over California is no state income tax.
Where this is all heading
With the politicians at the Capitol interested in tinkering with live gate & TV tax rates, they have to be careful not to burn the boxing & MMA promoters too much. Sacramento is looking for gushers of cash right now. There aren’t many left to touch… except for WWE.
The excuse in the past for not sending athletic inspectors to WWE shows was that it was too much of a hassle to send an inspector, pay for a couple of hours of travel & wages, and have them collect a check from the arena box office for a wrestling show. For a revenue-hungry state, California’s intentional hands-off approach of WWE has cost them a lot of money — and there are those at the Capitol who are reconsidering this approach. If the commission spends a couple of hundred bucks sending an athletic inspector to go to a show like Summerslam in order to collect a $35,000 TV tax check & $100,000 live gate check, it would fill the commission’s coffers in a hurry.
In the past, the politicians haven’t had the stomach to go after WWE money. However, the laws have always been on the books and the commission needs a cash infusion. WWE is the fat, easy target. Raising the TV tax capture zone level is one thing, as the returns will be limited at best the way it is currently structured. The real money is going after all the WWE shows in California each year (RAWs, Smackdowns, PPVs). It’s a much easier way of getting a cash infusion.
Sacramento can direct the commission can go after the easy cash (WWE) or they can continue to fiddle around with the tax rates and chase boxing & MMA promoters away from the state. California can’t get the major A-level fights and the TV tax changes will be less enticing for promoters to bring the upper B-level events. Promoters like UFC will always run California because the TV tax is a little nuisance and not a significant impact on their bottom line. It’s everyone else who runs a voluminous schedule in the state that is more concerned about what’s coming down the pike.