The Commonwealth Court of Pennsylvania upheld a trial court ruling which states that rooms offered on a complimentary basis are not subject to room rental tax in Pennsylvania. The tax in dispute was the 5% tax Luzerne County assessed under the Third Class County Convention Center Authority Act (Act). Luzerne County (Luzerne) enacted a Hotel Room Rental Tax Ordinance (Ordinance) which requires operators to report monthly transactions and gross sales. Under the Ordinance, all rooms are subject to the tax unless the operator’s records show otherwise, meaning the operator must prove either the rent for the room is exempt from tax or vacant. Under this law, “consideration” received for the room or rooms includes receipts, fees, cash, credit, and property of any kind received by the operator.
The taxpayer in this case is Downs Racing, L.P., d/b/a Mohegan Sun Pocono (Mohegan), a Pennsylvania Limited Partnership who operates a casino resort in Luzerne County which includes a hotel, convention center, bars, restaurants, and other amenities. As part of their business, they extend complimentary rooms and suites to both potential and actual patrons by giving an offer code to redeem a complimentary room. After receiving advice from counsel, Mohegan stopped paying tax on complimentary rooms though they had been self-reporting and paying tax on all rooms previously.
When Luzerne County noticed Mohegan had stopped remitting tax on rooms previously treated as taxable, they issued an assessment for $1,368,081.17 in unpaid taxes for the period January 2016 through August 2018. To calculate this number, Luzerne assumed 100% occupancy and a $159 per night rate due to Mohegan’s failure to provide any data on the actual number of complimentary rooms.
In the trial court, Mohegan argued that the assessment is not authorized by the Act or Ordinance because no compensation is received for complimentary rooms. In fact, the parties stipulated for this case that a “complimentary room” is any room or suite offered by the resort to customers or potential clients without requesting payment. However, Luzerne argued they do receive consideration in the form of foot traffic, a fuller and more exciting casino, increased revenue, and boosted customer loyalty. The trial court found the language of the Act and Ordinance to be clear, and that while the “consideration” need not be cash, it did need to offer a form of quid pro quo, which this arrangement did not. The complimentary rooms were an offer with no guarantee that the recipients will even stay at the hotel, let alone visit the casino or spend money. For this reason, the complimentary rooms are gifts.
In this appeal, Luzerne raises concerns about if the non-monetary value is consideration and if the trial court erred in disregarding the expert Luzerne provided. Luzerne held that the Act and Ordinance provide an expansive definition of the term “consideration” which includes fees, cash, credits, or other payments received in concert with a stay in the room. To illustrate their point, Luzerne called on Professor Anthony Lucas, Ph.D., from the University of Nevada, Las Vegas, who teaches many courses on various casino topics. He concurred with Luzerne’s arguments that Mohegan had received some form of consideration. By definition, Luzerne argues, staying at the hotel isn’t even required, since the Act and Ordinance state that just the right to use the room is enough to create taxable occupancy. Due to the complex loyalty program Mohegan uses and the economic benefits of providing the complimentary rooms, Luzerne holds they have received consideration. According to Luzerne, the offer codes are “credits” because they are loaded to member accounts, they are “property of any kind or nature” because they are issued by Mohegan, received, possessed, and used by patrons, and they are “payment” because they are given in exchange for lodging. These codes, Luzerne insists, are not given randomly to the general public nor are they given with nothing expected in return – they are issued selectively to specific patrons and they are designed to increase presence and spending by customers Mohegan wishes to attract.
The Commonwealth Court agreed with the trial court that Luzerne was incorrect in their assertions and that they have conflated “value” with “consideration”. Because of this, Mohegan’s complimentary rooms are not subject to the tax due to the lack of consideration received. The Court goes further, pointing out that the Regulations require tax to be collected from the purchaser at the time of payment, which would be impossible under Luzerne’s argument that the increased hotel business should count as “consideration” for purposes of taxation. Mohegan highlights that they don’t receive anything for the rooms; patrons are not required to do or give anything and there is no request for payment or even a requirement to redeem the offer. The lack of guarantee makes the “compensation” Luzerne argues Mohegan received speculative at best, and without quid pro quo, the offer of a complimentary is a gift. The tax report used by Lucerne County also undercuts their argument since it lists “gross receipts” and Mohegan does not collect anything for complimentary rooms form patrons. The 5% tax is charged based on compensation, so if the benefits received were intangible, calculation of tax is impossible.
Luzerne also asked the Court to consider if the trial court made an error in disregarding the testimony of their expert, Dr. Lucas and his opinions on the “consideration” Mohegan received. The trial court, the Commonwealth Court found, neither made an error nor disregarded the testimony. Since Dr. Lucas was retained to consider and an expert in casino related issues, that is as far as his testimony needed to be considered. The question of compensation and its impact on a contact, however, is a question of law, which experts cannot give their opinions on. To add to this, since trial courts have discretion to hear or exclude testimony, the trial court did not act incorrectly with regard to Dr. Lucas’s testimony.
This case touches on many issues taxpayers should be aware of, including taxability of complimentary items, the impact of intangible benefits on taxation, and the impact of experts. Taxpayers who offer complimentary items need to be aware of state requirements for taxation before either underpaying or overpaying tax. Mohegan, in this case, initially overpaid tax by assuming complimentary rooms were subject to tax. Other states do charge sales tax on promotional items, so it is critical to understand the laws where the business is operating and the applicable tax types. Next, taxpayers need to note how intangible benefits impact the compensation or lack thereof. As the Court pointed out in this case, it is impossible to calculate intangible benefits as a monetary good. Without a clear idea of value, taxpayers need to consider if what they are receiving is taxable. Finally, this case showed many ways courts will consider arguments, in particular, the assertions of experts. One’s expertise can only go so far, and courts generally have wide discretion about what testimony they will or will not consider, so taxpayers need to be prudent in considering what experts to engage and should diversify their approach in finding arguments to present in their favor. (Opinion Not Reported, Filed February 3, 2026. Leadbetter, Bonnie Brigance, Senior Judge. Downs Racing, L.P., d/b/a Mohegan Sun Pocono, f/k/a Mohegan Sun at Pocono Downs v. Luzerne County, Luzerne County Treasurer, and Luzerne County Division of Budget and Finance, Case No. 1752 C.D. 2024 in the Commonwealth Court of Pennsylvania)