Dalton v. Pataki

835 N.E.2d 1180, 5 N.Y.3d 243, 802 N.Y.S.2d 72

Opinions

OPINION OF THE COURT

ClPARICK, J.

In 2003, we addressed whether the Governor had the authority to enter into compacts with Indian tribes pursuant to the federal Indian Gaming Regulatory Act of 1988 (IGRA) (25 USC §§ 2701-2721; 18 USC §§ 1166-1168) allowing casino gaming on Indian lands within the state (see Saratoga County Chamber of Commerce v Pataki, 100 NY2d 801 [2003]). We determined that the Governor’s actions in unilaterally negotiating and entering into such tribal-state compacts violated separation of powers principles because such actions involved policy decisions within the power of the Legislature. Since the compacts were invalidated on this ground, we did not reach the questions whether casino gaming permitted by such tribal-state compacts violated the commercial gambling prohibitions of article I, § 9 of the New York State Constitution and whether IGRA preempts in this area. Those issues are now squarely presented for our review. Also presented is the constitutional validity of video lottery gaming and New York’s participation in the multistate Mega Millions lottery.

Chapter 383 of the Laws of 2001 was introduced in the Senate and the Assembly on the evening of October 24, 2001, and the early morning of October 25, 2001. The 81-page bill contained a wide range of provisions aimed, in part, at countering the anticipated negative economic effects of the terrorist attacks of September 11th and at generating revenue. The Governor submitted a message of necessity, certifying the need for an immediate vote on the bill, which had not been on the legislators’ desks in final form for the required three calendar days (see NY Const, art III, § 14). The Legislature enacted the bill immediately and the Governor signed it into law shortly thereafter.

The provisions at issue on this appeal are parts B, C and D of chapter 383. Adding a new Executive Law § 12, part B authorized the Governor to enter into “a tribal-state compact with the Seneca Nation of Indians pursuant to the [federal] Indian Gaming Regulatory Act of 1988 . . . consistent with a memorandum of understanding between the [parties]” (L 2001, ch 383, part B, § 2). The memorandum of understanding permitted the parties to negotiate a compact to allow class III gaming in up to three casinos.¹ The compact would be deemed adopted by the Legislature when the Governor certified that the agreement provided for, among other things, reasonable access to the gaming facilities by labor unions, a satisfactory system for civil recovery and adequate liability insurance. Part B also authorized the Governor to enter into tribal-state compacts with unnamed tribes to allow up to three additional class III gaming facilities in Ulster and Sullivan counties. Those compacts would likewise be deemed adopted by the Legislature when the Governor certified they met the requisite labor union, civil recovery and liability insurance requirements.

Part C authorized the use of video lottery terminals (VLTs)— under Tax Law § 1617-a—at several racetracks, including Aqueduct, Monticello, Yonkers, Finger Lakes and Vernon Downs (see L 2001, ch 383, part C, § 1). The bill also amended Tax Law § 1612 to include a revenue distribution scheme for the VLT proceeds (see L 2001, ch 383, part C, § 2). Between 12% and 25% of the total revenue was designated a vendor’s fee. The legislation provided that a portion of the vendor’s fee must be reinvested in the racing industry by applying it to enhancing purses and to the appropriate breeding fund. Finally, part D amended Tax Law §§ 1604 and 1617 to authorize the State’s participation in a multijurisdictional lottery (see L 2001, ch 383, part D, §§ 1, 3).

Plaintiffs are a group of citizen taxpayers, state legislators and not-for-profit organizations “opposed to the spread of gambling.” They commenced this action in January 2002. Plaintiffs moved for summary judgment declaring parts B, C and D of chapter 383 unconstitutional. Defendants and intervenor-defendant (Park Place) each cross-moved for summary judgment dismissing the complaint. Supreme Court granted the cross motions, denied plaintiffs’ motion for summary judgment and declared the challenged portions of chapter 383 of the Laws of 2001 constitutional.

The Appellate Division modified, in a comprehensive opinion, by reversing the portion of Supreme Court’s order that declared part C constitutional, declared part C unconstitutional and, as so modified, affirmed (see 11 AD3d 62 [2004]). The Court determined that the Governor’s message of necessity was sufficient to meet the requirements of article III, § 14 of the State Constitution. It further found that since the State allows the type of gaming at issue, with certain limitations, the gaming was “properly the subject of a tribal-state compact and part B” was constitutional (11 AD3d at 83). Similarly, the Appellate Division found that part D, authorizing the multistate lottery, was constitutional—finding that the State “retains sufficient supervision over the multistate lottery ... to satisfy the constitutional requirement that a lottery be ‘operated by the state’ ” (11 AD3d at 105 [citations omitted]). The Court also determined that the net proceeds from the multistate lottery were properly dedicated to education in the state (see 11 AD3d at 106).

As to part C—authorizing the operation of video lottery terminals—the Appellate Division concluded that the VLTs were components of lotteries rather than slot machines and, as such, were constitutionally permitted (see 11 AD3d at 94). However, the Court determined that the portion of the legislation directing that certain percentages of the vendor fees be reinvested for enhancing purses and in an appropriate breeding fund did not meet the constitutional requirement that lottery proceeds be dedicated exclusively to the support of education within the state (see 11 AD3d at 99). The Appellate Division found the revenue distribution defect was not severable because severance would result in “either an inflated vendor fee or no fee at all” (11 AD3d at 102). Thus, the Appellate Division declared part C unconstitutional in full. Plaintiffs now appeal, and defendants cross-appeal, as of right pursuant to CPLR 5601 (b) (1). We modify the Appellate Division and declare that parts B, C and D of chapter 383 of the Laws of 2001 are in all respects constitutional.

New York State Constitution

While our State Constitution generally prohibits gambling, this broad prohibition is subject to limited exceptions. For example, the Constitution provides that

“no lottery or the sale of lottery tickets, pool-selling, bookmaking, or any other kind of gambling, except lotteries operated by the state and the sale of lottery tickets in connection therewith as may be authorized and prescribed by the legislature, the net proceeds of which shall be applied exclusively to or in aid or support of education in this state as the legislature may prescribe, and except pari-mutuel betting on horse races as may be prescribed by the legislature and from which the state shall derive a reasonable revenue for the support of government, shall hereafter be authorized or allowed within this state” (NY Const, art I, § 9 [1]).

The Constitution further allows individual municipalities to authorize, by vote at a general or special election, certain “games of chance”—such as bingo, lotto or other types of games where a winner is determined on the basis of a winning number, color or symbol (see NY Const, art I, § 9 [2]). These types of games are further restricted by the Constitution, which requires that only certain religious, charitable or nonprofit organizations will be authorized to conduct these types of games (see NY Const, art I, § 9 [2] [1]). In addition, only “bona fide” members of the particular organization are permitted to “participate in the management or operation of such game” and are not permitted to receive any remuneration for their participation (see NY Const, art I, § 9 [2] [3]-[4]). Further, the entire net proceeds from these games must be dedicated to the lawful purposes of the organization (see NY Const, art I, § 9 [2] [2]). The Constitution also restricts the prizes that can be awarded—allowing no more than $250 for a single prize and a maximum total of $1,000 for “any series of prizes on one occasion” (NY Const, art I, § 9 [2]).

Plaintiffs argue that because the State Constitution prohibits commercial gambling, subject to specifically stated exceptions, the Legislature may not authorize the Governor to enter into tribal-state compacts, nor may it allow video lottery terminals or permit the State to participate in a multistate lottery.

Legislative enactments are entitled to “a strong presumption of constitutionality” (see Schulz v State of New York, 84 NY2d 231, 241 [1994]). “While the presumption is not irrefutable, parties challenging a duly enacted statute face the initial burden of demonstrating the statute’s invalidity ‘beyond a reasonable doubt’ ” (LaValle v Hayden, 98 NY2d 155, 161 [2002], quoting People v Tichenor, 89 NY2d 769, 773 [1997]). With respect to parts C and D of the legislation, plaintiffs have failed to rebut that strong presumption. However, the inquiry is different as to part B, given that the State Constitution expressly prohibits commercial gambling. For part B, we must instead determine whether IGRA preempts this constitutional proscription because the State allows class III gaming for certain charitable and other purposes.

Background of IGRA

Necessary to our determination is an analysis of the federal Indian Gaming Regulatory Act of 1988 (25 USC §§ 2701-2721; 18 USC §§ 1166-1168). Contrary to plaintiffs’ assertion, IGRA has preempted the field in the area of Indian gaming but permits states to negotiate with tribes to regulate gaming. IGRA was enacted, in part, to promote the self-sufficiency and economic development of Indian tribes (see 25 USC § 2701 [4]; § 2702 [1]). Congress determined that “Indian tribes have the exclusive right to regulate gaming activity on Indian lands if the gaming activity is not specifically prohibited by Federal law and is conducted within a State which does not, as a matter of criminal law and public policy, prohibit such gaming activity” (25 USC § 2701 [5]).

IGRA separates the types of gaming into three classes— classes I, II and III—each subject to a different degree of regulation. Class I gaming consists of “social games solely for prizes of minimal value or traditional forms of Indian gaming engaged in by individuals as a part of, or in connection with, tribal ceremonies or celebrations” (25 USC § 2703 [6]; see also 25 CFR 502.2). This type of gaming is solely within the jurisdiction of the tribes and is not subject to IGRA (see 25 USC § 2710 [a] [1]). Class II gaming includes bingo, lotto and certain types of card games—specifically excluding banking card games such as baccarat (see 25 USC § 2703 [7] [A], [B]; 25 CFR 502.3 [a]-[c]). Class II activity is permissible on Indian land,² subject to the tribe’s jurisdiction, if located in a state that otherwise permits such gaming for any purpose and if the Indian tribe passes a resolution that is approved by the Chair of the National Indian Gaming Commission (see 25 USC § 2710 [b] [1]).

Class III gaming includes all remaining types of gaming not within class I or II (see 25 USC § 2703 [8]). This type of gaming is the most highly regulated. In addition to the requirements for class II gaming—a Chair-approved tribal ordinance and location in a state that otherwise permits such gaming—the class III gaming must also be conducted according to a valid tribal-state compact (see 25 USC § 2710 [d] [1] [C]). A tribe seeking to conduct class III gaming on Indian land must request that the state negotiate with the tribe in an attempt to develop a tribal-state compact to regulate gaming activity (see 25 USC § 2710 [d] [3] [A]). “Upon receiving such a request, the State shall negotiate with the Indian tribe in good faith to enter into such a compact” (25 USC § 2710 [d] [3] [A]). Any such compact is subject to the approval of the Secretary of the Interior (see 25 USC § 2710 [d] [3] [B]).

Prior to the enactment of IGRA, the United States Supreme Court addressed the applicability of state law to Indian gaming within the state of California (see California v Cabazon Band of Mission Indians, 480 US 202 [1987]). Cabazon dealt with a federal statute giving California, along with certain other states, criminal and limited civil jurisdiction over Indian land within the state. California sought to enforce a penal statute prohibiting bingo—unless conducted by certain charitable organizations—against two Indian tribes. The Court observed “that Indian tribes retain ‘attributes of sovereignty over both their members and their territory’ and that ‘tribal sovereignty is dependent on, and subordinate to, only the Federal Government, not the States’ ” (Cabazon, 480 US at 207 [citations omitted]). However, the Court also noted that, if authorized by Congress, state laws would be applicable to tribal lands.

In determining whether the law at issue could be enforced on Indian land, the Supreme Court recognized a distinction between whether the law was prohibitory or regulatory in nature (see Cabazon, 480 US at 209). If the purpose of the law is to prohibit specific conduct, it is considered prohibitory and can be enforced on Indian land. If, on the other hand, the law allows the conduct “subject to regulation,” the law is regulatory and not enforceable on Indian land (see Cabazon, 480 US at 209). “The shorthand test is whether the conduct at issue violates the State’s public policy” (Cabazon, 480 US at 209). Because the State allowed “a substantial amount of gambling activity, including bingo,” the Court determined that the statute at issue was regulatory rather than prohibitory (see Cabazon, 480 US at 211). The Court then went on to decide that California’s interest in regulating bingo was insufficient as compared with the significant tribal interests.

Congress enacted IGRA in response to Cabazon (see S Rep No. 100-446, 100th Cong, 2d Sess, reprinted in 1988 US Code Cong & Admin News, at 3071). The legislative history indicates that Congress intended that “unless a tribe affirmatively elects to have State laws and State jurisdiction extend to tribal lands, the Congress will not unilaterally impose or allow State jurisdiction on Indian lands for the regulation of Indian gaming activities” (S Rep No. 100-446, 100th Cong, 2d Sess, at 5-6, reprinted in 1988 US Code Cong & Admin News, at 3075). The tribal-state compact was designed as a way to reconcile tribal and state interests concerning class III gaming (see S Rep No. 100-446, 100th Cong, 2d Sess, at 6, reprinted in 1988 US Code Cong & Admin News, at 3076).

Significantly, IGRA was “intended to expressly preempt the field in the governance of gaming activities on Indian lands. Consequently, Federal courts should not balance competing Federal, State, and tribal interests to determine the extent to which various gaming activities are allowed” (S Rep No. 100-446, 100th Cong, 2d Sess, at 6, reprinted in 1988 US Code Cong & Admin News, at 3076). Congress expected that the courts would apply the prohibitory/regulatory distinction when deciding whether gaming was permitted in a state, but in a different way than it was applied in Cabazon (see S Rep No. 100-446, 100th Cong, 2d Sess, at 6, reprinted in 1988 US Code Cong & Admin News, at 3076). Specifically, rather than determining the degree to which a state’s laws would apply to Indian lands, “the courts will consider the distinction between a State’s civil and criminal laws to determine whether a body of law is applicable, as a matter of Federal law, to either allow or prohibit certain activities” (S Rep No. 100-446, 100th Cong, 2d Sess, at 6, reprinted in 1988 US Code Cong & Admin News, at 3076).³

Following the enactment of IGRA, the Second Circuit addressed a similar situation to that presented here (see Mashantucket Pequot Tribe v State of Conn., 913 F2d 1024 [2d Cir 1990]). The court determined that since Connecticut allowed certain class III gaming—although it was highly restricted by statute—the State only regulated rather than prohibited this type of gaming (see Mashantucket, 913 F2d at 1031-1032; see also Northern Arapaho Tribe v Wyoming, 389 F3d 1308, 1312 [10th Cir 2004]).⁴

Tribal-State Compacts

Plaintiffs assert that although the Constitution allows for certain types of regulated gaming, it still completely prohibits commercial gaming. However, IGRA does not allow the state to consider the purpose behind the gaming. The language of the statute is clear that class III gaming will be permitted when “located in a State that permits such gaming for any purpose by any person, organization, or entity” (25 USC § 2710 [d] [1] [B] [emphasis added]). This language is intentionally broad and includes the limited gaming permitted by the New York State Constitution under the supervision and authority of the New York State Racing and Wagering Board {see General Municipal Law art 9-A; 9 NYCRR 5600.1 et seq.). Through IGRA, Congress has preempted the states in this area. Since New York allows some forms of class III gaming—for charitable purposes—such gaming may lawfully be conducted on Indian lands provided it is authorized by a tribal ordinance and is carried out pursuant to a tribal-state compact {see 25 USC § 2710 [d] [1]).

We likewise reject the argument that IGRA specifically provides that state laws prohibiting gambling will apply on Indian lands. Plaintiffs argue that 18 USC § 1166 allows for the constitutional ban on commercial gambling in article I, § 9 to he applied to Indian lands. That section states that “all State laws pertaining to the licensing, regulation, or prohibition of gambling, including but not limited to criminal sanctions applicable thereto, shall apply in Indian country in the same manner and to the same extent as such laws apply elsewhere in the State” (18 USC § 1166 [a]). However, the statute further provides that class III gaming conducted pursuant to an approved tribal-state compact will not be considered “gambling” for purposes of that section {see 18 USC § 1166 [c] [2]). Thus, the state constitutional prohibition against commercial gambling does not apply to Indian lands that are in compliance with IGRA and governed by a valid tribal-state compact.

Plaintiffs state that IGRA does not require states to enter into a tribal-state compact with Indian tribes, arguing that, as a matter of state sovereignty, “[t]he Federal Government may not compel the States to enact or administer a federal regulatory program” (New York v United States, 505 US 144, 188 [1992]). However, it may be to the state’s benefit to do so. Through IGRA the states are granted a certain degree of authority over class III gaming that they otherwise would not have due to the sovereignty of Indian nations (see Seminole Tribe of Fla. v Florida, 517 US 44, 58 [1996]; US Const, art I, § 8 [3]). Thus, through the compacting process, IGRA confers a benefit on the state by allowing it to negotiate and to have some input into how class III gaming will be conducted.

However, this authority is limited in that if the state either does not negotiate with a tribe or does not do so in good faith, the tribe may bring suit in Federal District Court (see 25 USC § 2710 [d] [7] [B]).⁵ If the court determines the state has not negotiated in good faith, the court will order the parties “to conclude such a compact within a 60-day period” (25 USC § 2710 [d] [7] [B] [iii]). If an agreement is not reached within that time, the court will appoint a mediator, who “shall select from the two proposed compacts [from the tribe and the state] the one which best comports with the terms of this Act and any other applicable Federal law and with the findings and order of the court” (25 USC § 2710 [d] [7] [B] [iv]). If the state timely agrees, that compact will become the tribal-state compact (see 25 USC § 2710 [d] [7] [B] [vi]). If the state does not agree (or invokes sovereign immunity under the Eleventh Amendment to the United States Constitution), the Secretary of the Interior and the tribe will decide upon procedures for conducting class III gaming (see 25 USC § 2710 [d] [7] [B] [vii]). Thus, if class III gaming is permitted in the state for any purpose, including a strictly charitable purpose, it will be permitted on Indian land with or without the state’s involvement. Given the consequence, obviously state involvement and regulation is to be favored.

In the alternative, plaintiffs argue that even if IGRA requires that class III gaming be permitted on Indian lands, the same result is not required on land that is not Indian land. This argument is directed to the portion of part B that authorizes the Governor to enter into tribal-state compacts allowing up to three casinos in Sullivan and Ulster counties (see L 2001, ch 383, part B, § 2, codified at Executive Law § 12 [b]). With a few exceptions, gaming is generally prohibited on lands acquired by the Secretary of the Interior after the enactment of IGRA and held “in trust for the benefit of an Indian tribe” (25 USC § 2719 [a]). Gaming, however, will be permitted when

“the Secretary, after consultation with the Indian tribe and appropriate State and local officials, including officials of other nearby Indian tribes, determines that a gaming establishment on newly acquired lands would be in the best interest of the Indian tribe and its members, and would not be detrimental to the surrounding community, but only if the Governor of the State in which the gaming activity is to be conducted concurs in the Secretary’s determination” (25 USC § 2719 [b] [1] [A]).

Here, plaintiffs urge that both the constitutional provision and New York’s public policy against commercial gambling prevent the Governor from agreeing that there would not be a detrimental effect on the communities at issue if casinos were located in those areas. The constitutional provision is relevant to the determination under 25 USC § 2710 (d) (1) (B) only— whether class III gaming is permitted for any purpose and thus whether gaming should be allowed on Indian lands. Section 2719 (b) (1) (A) does not call for the Governor to make a determination as to the legality of gaming. Rather, the determination whether gaming would be detrimental to the surrounding community entails an analysis of the potential negative consequences presented by the presence of the casinos, such as social or economic consequences. The Constitution plainly does not prevent the Governor from determining that there would be no detrimental effect on a particular community.⁶

Plaintiffs’ last argument pertaining to part B is that it was an improper delegation of legislative authority for the Legislature to authorize the Governor to execute tribal-state compacts in Sullivan and Ulster counties (see L 2001, ch 383, part B, § 2, codified at Executive Law § 12 [b]). In Saratoga, we determined that the Governor did not have the authority to “unilaterally . . . negotiate and execute tribal gaming compacts under IGRA” (100 NY2d at 824). The Court observed that the issues that would be covered by a tribal-state compact involved policy decisions that were within the province of the Legislature (see Sara-toga, 100 NY2d at 823).

Here, the Legislature authorized the Governor to execute the tribal-state compacts and specified that such agreements would be “deemed ratified by the legislature upon the governor’s certification” that the compacts contained certain provisions (L 2001, ch 383, part B, § 2, codified at Executive Law § 12 [b]). For example, the Legislature required that the compacts contain assurances that the tribe would provide access to labor unions, an adequate civil recovery system and sufficient liability insurance (see L 2001, ch 383, part B, § 2, codified at Executive Law § 12 [b]). The Legislature has thus made the necessary policy determinations as to what the tribal-state compacts must contain and has authorized the Governor to implement those policy determinations by executing the compacts to their specifications. This is a permissible delegation of authority. That the legislation does not specify the names of the tribes or where the casinos will be located does not change this determination (see Bourquin v Cuomo, 85 NY2d 781, 785 [1995] [“there need not be a specific and detailed legislative expression authorizing a particular executive act as long as ‘the basic policy decisions underlying the regulations have been made and articulated by the Legislature’ ” (citation omitted)]).

Video Lottery Gaming

Plaintiffs next challenge the constitutionality of part C of chapter 383 of the Laws of 2001. That section authorized “the operation of video lottery gaming at Aqueduct, Monticello, Yonkers, Finger Lakes and Vernon Downs racetracks,” and at certain other racetracks that are licensed pursuant to article III of the Racing, Pari-Mutuel Wagering and Breeding Law and located within a county that has approved video lottery gaming (L 2001, ch 383, part C, § 1).

The video lottery is played using video lottery terminals, which are each connected to a central system through the use of “site controllers”—computers that connect several VLTs both to each other and to the central system. In the most common form of video lottery gaming, participants at individual VLTs play against each other by purchasing electronic instant tickets from a finite pool. In order to play, individuals place cash or other currency into the VLT to purchase an electronic instant ticket. The player then determines the “game identifier” and the price of the electronic ticket to be purchased. The VLT receives the next ticket from the site controller and displays the predetermined outcome—win or loss. If the player wins, the VLT will print an “electronically encoded instrument” which can be used to play additional video lottery games or can be redeemed for value.⁷

Plaintiffs argue that because video lottery gaming is played using VLTs, which they contend resemble slot machines, the video lottery is not a lottery at all, but rather state-sponsored slot machine gambling forbidden by the Constitution. But whereas slot machines are not mentioned in the Constitution, lotteries are, and they are expressly permitted when operated by the State. Thus, if the video lottery is a lottery, the statute providing for it is constitutional regardless of whether the terminals used to play the lottery also look like, or even meet the Penal Law definition of, slot machines.⁸

Since the Constitution does not define the term “lottery,” we must first determine what constitutes a lottery within the meaning of article I, § 9. The Penal Law definition of lottery— consisting of consideration, chance and prize (see Penal Law § 225.00 [10]; People v Hines, 284 NY 93, 101 [1940], overruled on other grounds People v Kohut, 30 NY2d 183, 190-191 [1972]; Trump v Perlee, 228 AD2d 367, 368 [1st Dept 1996])—provides little guidance, because, as the Court below recognized, this definition applies equally to all forms of gambling or games of chance. Clearly, the limited constitutional exception for state-run lotteries cannot be read to allow any casino game (such as poker, blackjack or roulette) to constitute a valid lottery if operated by the State. Thus, we agree with the Appellate Division (see 11 AD3d at 92) that a constitutional lottery requires something more—specifically, the use of tickets and multiple participation, as opposed to a single player competing against a single machine.

It is clear from the language of the Constitution that an authorized lottery requires the sale of tickets (see NY Const, art I, § 9 [1] [“no lottery or the sale of lottery tickets . . . except lotteries operated by the state and the sale of lottery tickets in connection therewith . . . shall hereafter be authorized or allowed within this state”]). The Senate debates concerning the 1966 amendment to article I, § 9—allowing state-run lotteries as an exception to the general prohibition against gambling— reflect the same understanding (see e.g. New York State Senate Debate Transcripts, 1965 New York Constitution, June 14, 1965, at 4776, 4778, 4798). In addition, the constitutional history reflects that the Senate considered multiple participation an additional element of the definition of a lottery (see New York State Senate Debate Transcripts, 1965 New York Constitution, June 14, 1965, at 4808).

The video lottery authorized by part C is consistent with this definition. As noted above, players tender consideration (cash or other currency) to purchase electronic tickets and receive a prize in the form of compensation or chances to play additional games. Multiple participation is satisfied in that the VLTs are linked through the site controllers to a central system, and players compete against one another for prizes by purchasing tickets from a finite depleting pool of electronic instant lottery tickets, with a set number of predetermined winners randomly distributed, or by choosing a series of keno numbers, colors or symbols from a finite pool in the hope that they, as opposed to other players, will have matched those colors, numbers or symbols later drawn, thus satisfying the element of chance. It is of no constitutional significance that the tickets are electronic instead of paper. The particular methods of conducting the lottery are subject to change with time. The language of the Constitution is not so rigid as to prevent this type of update and modernization. Thus, we conclude that the video lottery is a valid lottery under article I, § 9 (1), and that, rather than slot machines, VLTs are simply mechanical devices for the implementation of the video lottery (see e.g. Tax Law § 1604 [a] [8]).⁹

Plaintiffs also argue that part C violated their rights to equal protection because it allows only certain local legislatures to vote to give prior approved for installation of VLTs. They argue that strict scrutiny should be applied because the issue involves the denial of the right to vote. However, as the Appellate Division noted, “[e]ven in voter classification, a State is not prohibited from recognizing the distinctive interests of the residents of its political subdivisions” (City of New York v State of New York, 76 NY2d 479, 486 [1990] [holding that it was reasonable to permit Staten Island residents, but no other New York City residents, to vote on the issue of secession]). Thus, rather than strict scrutiny, we use a rational basis standard of review. When reviewing using a rational basis standard, “a classification must be upheld against an equal protection challenge if there is any reasonably conceivable state of facts that could provide a rational basis for the classification . . . [I]ndeed, a court may even hypothesize the motivations of the State Legislature to discern any conceivable legitimate objective promoted by the provision under attack” (Port Jefferson Health Care Facility v Wing, 94 NY2d 284, 290-291 [1999] [citations and internal quotation marks omitted]). Here, it would have been rational for the Legislature to determine that certain racetrack communities were in greater need of the potential revenue that would be generated by the video lottery than others and, as a result, not require those areas to get prior local approval.

Reinvestment of Video Lottery Revenues

Defendants cross-appeal, arguing that part C is constitutional in all respects. Specifically, they assert that the revenue distribution provision requiring reinvestment in breeding funds and for the enhancement of purses is constitutional and, even if it is not, that the reinvestment provision is severable.

Part C provided for the allocation of revenue from the video lottery. The funds used to pay out prizes must be no less than 90% of video lottery sales (L 2001, ch 383, part C, § 2). Fifteen percent of the remaining revenue—after the prizes were paid— was allocated to the Division of the Lottery for administrative and operating expenses (L 2001, ch 383, part C, § 2, codified at Tax Law § 1612 [a] [5] [A]). The legislation also authorized a vendor’s fee for the track operator of between 12% and 25% of the revenue remaining after prizes (L 2001, ch 383, part C, § 2, codified at Tax Law § 1612 [a] [5] [A]).¹⁰ Further, a portion of the vendor’s fee was required to be reinvested to enhance purses and for distribution to an appropriate breeding fund (L 2001, ch 383, part C, § 2, codified at Tax Law § 1612 [a] [5] [B]). Specifically, 35% of the vendor’s fee for the first year, and 45% beginning the second year, was allocated to enhance purses, and no less than 5% of the vendor’s fee was apportioned to an appropriate breeding fund.

The statute has been very recently amended (L 2005, ch 61, part CC, § 2).¹¹ The repeal of the reinvestment provisions, however, does not render our consideration of this issue moot. This new legislation is prospective only, in that it “shall take effect immediately” (L 2005, ch 61, part CC, § 6). As a result, an actual controversy remains as to the constitutional validity of the reinvestment provision of part C of chapter 383 of the Laws of 2001, for the payments that have already been made under Tax Law § 1612 (c) (1).

We hold that the reinvestment provision of part C is constitutional. The Constitution requires that the net proceeds from the sale of lottery tickets “shall be applied exclusively to or in aid or support of education in the state as the legislature may prescribe” (NY Const, art I, § 9 [1]). “Net proceeds” means gross proceeds less any appropriate charges and expenses. It is for the Legislature to determine the necessary expenses incurred in operation of the lottery and, thus, what remaining portion of the total lottery revenue will constitute net proceeds. Here, the Legislature has prescribed that net proceeds consists of all money remaining after the payment of administrative expenses, including the vendor fee.

Plaintiffs misapprehend the nature of the reinvested funds. These moneys are not a separate deduction, beyond other costs and expenses, from the amount paid to the racetracks as a vendor fee. Rather, they constitute simply a part of the vendor fee itself—but a part whose use the State has decided to regulate. Thus, with respect to the fees earned by the racetracks, the State, which heavily regulates the racing industry, has made a policy determination that the tracks cannot simply retain as profit their entire fee after payment of costs, but must reinvest a percentage back in the industry itself. Placing such restrictions on the use of the tracks’ earned profits is a common practice in the racing industry. Many statutes that allow for revenues to the racetracks from various activities require that a specified portion of those permitted revenues be reinvested in this way {see e.g. Racing, Pari-Mutuel Wagering and Breeding Law § 229 [1] [b] [50% of compensation received by nonprofit racing association or corporation from simulcasting or wagering outside New York to be distributed to purses]; § 318 [1] [a] [ii] [percentages of total pool resulting from on-track harness racing bets to be used exclusively for purses]; § 527 [3] [a] [50% of portion of retained commission on off-track pools distributed to racing associations and corporations to be used exclusively for increasing purses]; § 527 [1] [20% of “breaks” derived from bets on off-track bets on harness races and 50% of “breaks” of other races to be paid to breeders’ funds]).

The revenue to be reinvested belongs to the racetracks in the first instance. Since the vendor fee that must be paid to the tracks is a cost to the State, the reinvestment requirement imposes an administrative cost on the racetracks, not on the State Division of the Lottery. But net proceeds of the lottery are proceeds remaining after costs to the Division, not to the racetracks.

The Legislature’s decision to regulate the racetracks in this way reflects a policy determination constitutionally within its purview. The Legislature was entitled to determine first, that mandatory reinvestment of a certain percentage of the racetracks’ profits in enhanced purses and breeding funds would improve the health of the racing industry, declining in recent years,¹² and second, that a revitalized racing industry would attract more visitors to the racetracks—where VLTs were to be located—who would in turn participate in increased video lottery gaming, thus raising additional revenue for education.

A vendor’s fee, offered not only as reimbursement but also as an incentive for the vendor to offer lottery tickets for sale on the vendor’s premises, is a necessary administrative cost of operating the lottery, because if there is no one to sell tickets (or operate VLTs), there will be no lottery, and ultimately no money earned for education. Indeed, part C expressly contemplated that the vendor’s fee to be established would “ensure the maximum lottery support for education while also ensuring the effective implementation of [Tax Law § 1617-a (authorizing the operation of the video lottery)] through the provision of reasonable reimbursements and compensation to vendor tracks for participation in such pilot program” (L 2001, ch 383, part C, § 2). The policy determination by the Legislature that the enacted allocation of funds would result in the greatest benefit to education was properly its to make.

It is generally not for the courts to determine whether a particular vendor’s fee set by the Legislature is reasonable. While we can perhaps imagine a case where a “fee” was so excessive as to constitute nothing more than a flagrant end run around the requirement that the net proceeds of the lottery be applied exclusively to education, the fee at issue here does not begin to approach that standard. Every lottery ticket agent in the state receives a fee of 6% of total ticket sales (see 21 NYCRR 2805.10), far higher than the fee paid to the racetracks under part C. Indeed, as originally enacted, the vendor fee was to be fixed by the Division of the Lottery at between 1.2% and 2.5%.¹³ After conducting a study and comparing the rates with those fixed by other states, the Division set the rate at the highest permissible level—2.5%. At that level, however, not a single racetrack signed up to participate in the video lottery pilot program.¹⁴ The Legislature therefore amended the statute to allow for a fixed percentage of 2.9% (a portion of which was to be reinvested).¹⁵ Still, New York’s vendor fee remains significantly lower than that of other states offering VLTs at racetracks. Thus, we disagree with the Appellate Division that the vendor’s fee set by the Legislature was “inflated,” and find part C of chapter 383 of the Laws of 2001 constitutional in its entirety.

Mega Millions

Finally, plaintiffs challenge the constitutionality of part D of chapter 383 of the Laws of 2001. Pursuant to this legislation, authorizing the Division of the Lottery to “enter into an agreement with a government-authorized group of one or more other jurisdictions providing for the operation and administration of a joint, multi-jurisdiction, and out-of-state lottery” (L 2001, ch 383, part D, § 3, codified at Tax Law § 1617). New York entered into an agreement with nine other states to participate in Mega Millions.¹⁶ As noted above, the State Constitution prohibits lotteries in general, but makes an exception for lotteries “operated by the state” (NY Const, art I, § 9 [1]).

The Mega Millions agreement specifically provides that the revenue generated by the lottery within each state remains in that state for distribution according to that jurisdiction’s relevant requirements. The states agreed to operate the lottery jointly—including sharing start-up costs and operating expenses. As for the responsibility of paying out prize money, each state is liable for a percentage of its sales proportionate to the total amount of sales. The agreement further provides that the laws of the state will control in the event of any conflict between state law and the Mega Millions agreement. Any claims or litigation involving tickets sold in New York must be determined under New York law. No state will be held accountable for the negligent actions or omissions of the agents or employees of another state lottery. Each state is also permitted to withdraw from the Mega Millions agreement either upon six months’ notice or immediately if the withdrawal is by operation of law.

Plaintiffs make two arguments in support of their position. First, they argue that the multistate lottery is not “operated by the state” as required by the Constitution (NY Const, art I, § 9 [1]). Next, they assert that the net proceeds are not “applied exclusively to or in aid or support of education in this state” (NY Const, art I, § 9 [1]). We address these arguments in turn.

Although several jurisdictions are involved, New York retains sufficient control over the sale of Mega Millions tickets so that it operates the lottery within the state. According to both the terms of the Mega Millions agreement and the Tax Law, New York retains the authority to specify where and in what manner the lottery tickets may be sold (see Tax Law § 1604 [a] [6], [7]). The Division of the Lottery also has the power to license ticket agents and determine the manner and amount of compensation due to such agents (see Tax Law § 1604 [a] [9]; [b]). The Mega Millions procedures comply with New York law and, if at any time they no longer comply, the State is free to withdraw from the agreement.

That other states share in certain administrative costs and functions does not change our conclusion. The Division of the Lottery regularly contracts with outside vendors and other entities for various equipment and services to assist in the operation of the state lottery. Although different states operate different aspects of the multistate lottery,¹⁷ that does not change New York’s operation of Mega Millions within the state. While the State may not have exclusive control over every aspect of the Mega Millions lottery, it operates the multistate lottery within New York as required by the Constitution (see art I, § 9 Cl])-¹⁸

Next, we address whether the net proceeds from Mega Millions are “applied exclusively to or in aid or support of education in this state” (NY Const, art I, § 9 [1]). Net proceeds are reasonably understood as the amount of revenue remaining after the distribution of prize money and necessary administrative expenses (see Tax Law § 1619 [j] [2]). The Mega Millions agreement specifies that the states will share equally in any joint start-up and operating costs. As the Appellate Division determined, the expenses paid by New York are used to satisfy the actual administrative costs of operating the multistate lottery. There is no indication that the funds are used to advance the governmental purposes of other states (see Dalton, 11 AD3d at 106). Thus, the necessary net proceeds, less the required administrative expenses, remain in New York and are appropriately dedicated to education within the state. Thus, we reject plaintiffs arguments that part D is unconstitutional.

Plaintiffs’ final argument that the Governor’s message of necessity was unconstitutional under New York Constitution, article III, § 14 is without merit (see Maybee v State of New York, 4 NY3d 415 [2005]).

In conclusion, we hold parts B, C and D of chapter 383 of the Laws of 2001 to be constitutional. Plaintiffs have failed to meet their burden of proving beyond a reasonable doubt the invalidity of the legislation. As to Indian gaming compacts, since “as a matter of criminal law and public policy” class III gaming activity is not prohibited in New York, and although heavily regulated, it is permitted for charitable and other purposes, IGRA’s mandate allows the State to play an important and essential role in regulating gambling on Indian lands. Allowing video lottery terminals and participation in Mega Millions further promotes the State’s public policy to increase funding for education via state-sponsored lotteries. We find no constitutional infirmity in the legislation. Although some may argue the wisdom of the policy choice, the Legislature has made a valid legislative judgment.

Accordingly, the order of the Appellate Division should be modified, with costs to defendants, by declaring part C of chapter 383 of the Laws of 2001 constitutional and, as so modified, affirmed.

1 . Class III gaming is the most heavily regulated type of gaming under IGRA. The federal regulations give examples of class III gaming “including but not limited to . . . [a]ny house banking game” such as baccarat or blackjack, casino games including roulette or keno, slot machines, sports betting and lotteries (see 25 CFR 502.4).

2 . Indian lands are defined as “all lands within the limits of any Indian reservation; and . . . any lands title to which is either held in trust by the United States for the benefit of any Indian tribe or individual or held by any Indian tribe or individual subject to restriction by the United States against alienation and over which an Indian tribe exercises governmental power” (25 USC § 2703 [4]).

3 . Although the portion of the legislative history specifically discussing the prohibitory/regulatory distinction was referring to class II gaming, the applicable language in IGRA is virtually identical with respect to both class II and class III gaming (see 25 USC § 2710 [b] [1] [A]; [d] [1] [B] [gaming is located in a state that otherwise “permits such gaming for any purpose by any person, organization or entity”]). There is no persuasive reason to treat the language in these two subsections differently.

4 . The Northern Arapaho court noted that there is a conflict in the interpretation of IGRA—whether a state must negotiate with tribes concerning all forms of class III gaming when it allows any type of class III gaming, or whether it must only negotiate for the specific games permitted in the state (see Northern Arapaho, 389 F3d at 1310-1311). We do not address this issue as the plaintiffs have challenged the authority to enter into tribal-state compacts in general, rather than the authority to negotiate for particular games.

5 . The G.B. Smith dissent suggests that the State was not required to negotiate in good faith as the Legislature was without authority to legislate in this area (see G.B. Smith dissenting op at 285). The constitutional ban on commercial gambling, according to this dissent, cannot be preempted by federal statute and can only be affected through a constitutional amendment. Certainly, if commercial gambling were to be extended to non-Indian lands, the dissent’s proposition would be correct, but here we are dealing with the extension of commercial gambling to Indian lands, or lands held in trust by the United States Department of the Interior, to which Congress has seen fit to extend, this benefit. This was done with the express intent of protecting Indian sovereignty. The Supremacy Clause of the United States Constitution specifically states that “[t]his Constitution, and the Laws of the United States which shall be made in Pursuance thereof . . . shall be the supreme Law of the Land; and the Judges in every State shall be bound thereby, any Thing in the Constitution or Laws of any State to the contrary notwithstanding” (US Const art VI [2]). Federal law thus preempts even our constitutional ban. This is particularly true in the context of Indian matters, where a traditional exemption from state law will be “lifted only when Congress has made its intention to do so unmistakably clear” (Montana v Blackfeet Tribe, 471 US 759, 765 [1985] [referring to Indian exemption from state taxes]).

6 . We note that the United States Supreme Court recently addressed whether the Oneida Indian Nation was responsible for property taxes on certain property purchased on land that was once an Oneida reservation (see City of Sherrill v Oneida Indian Nation of N.Y., 544 US 197, —, 125 S Ct 1478, 1482-1483 [2005]). The Court determined that the Oneidas could not “unilaterally reassert sovereign control and remove these parcels from the local tax rolls” and that the Tribe would have to follow the procedure set forth in 25 USC § 465, which “authorizes the Secretary of the Interior to acquire land in trust for Indians and provides that the land ‘shall be exempt from State and local taxation’ ” (City of Sherrill, 544 US at —, 125 S Ct at 1493). This holding is consistent with our interpretation of IGRA, allowing the Secretary and the Governor to authorize gaming on lands held in trust by the Secretary after determining such gaming would not be detrimental to the surrounding community (see 25 USC § 2719 [b] [1] [A]).

7 . The only other game offered for video lottery play is electronic keno, which is modeled after the current Lotto and Quick Draw lotteries and involves multiple players selecting a series of numbers, colors or symbols in hopes of matching their selections to those later randomly drawn by the central system.

8 . Indeed, although plaintiffs contend that VLTs fit within the Penal Law definition of a slot machine, as “a gambling device which, as a result of the insertion of a coin or other object, operates, either completely automatically or with the aid of some physical act by the player, in such manner that, depending upon elements of chance, it may eject something of value” (Penal Law § 225.00 [8]), the definition of “[glambling device” specifically excludes lottery tickets and other items used to play a lottery (see Penal Law § 225.00 [7]).

9 . The Attorney General opinions relied on by plaintiffs in support of their argument that the video lottery is not a lottery are inapposite (see 1981 Ops Atty Gen 68; 1984 Ops Atty Gen No. 84-F1). The 1981 opinion addressed and found unconstitutional proposed video games, such as computer poker and blackjack, that did not involve multiple participation, electronic tickets, or predetermined identification of winning tickets based on random selection. Rather, those games involved a single player pitting his or her skill against a machine. The 1984 opinion involved a proposal by the Division of the Lottery to permit betting on the outcome of professional sports events, which involves an element of skill in picking the winning team or predicting the outcome of the game.

10 . This section was amended in 2003 to change the distribution of revenue to allot 10% to the Division and 29% to the track operator as a vendor’s fee. The portion of the vendor’s fee dedicated to enhancing purses was changed to 25.9% for the first three years, 26.7% for the next two years and 34.5% for each year after that. The percentage of the vendor’s fee contributed to the breeding fund was also changed to 4.3% for the first five years and 5.2% for each subsequent year (L 2003, ch 63, part W, §§ 2, 3).

11 . The recent amendment removes the revenue distribution provisions that required portions of the vendor’s fee to be allocated to enhancing purses and an appropriate breeding fund. The new statute increases the vendor’s fee to “thirty-two percent for the first fifty million dollars annually, twenty-nine percent for the next hundred million dollars annually, and twenty-six percent thereafter” (L 2005, ch 61, part CC, § 2, amending Tax Law § 1612 [b]). The legislation further provides for “an additional vendor’s marketing allowance . . . to be used by the vendor track for the marketing and promotion and associated costs of its video lottery gaming operations” (L 2005, ch 61, part CC, §2).

12 . In this regard, defendants contend that in recent years, since the New York racetracks, facing declining revenues, have been unable to offer large enough purses to attract quality horses, the top horses have been drawn instead to races in other states. Because high-quality horses lead to better-quality racing which in turn attracts more spectators, fewer people have been coming to the New York tracks to bet, resulting in less money spent from which to pay purses, attracting fewer players still. Similarly, breeding funds are used in part to improve the quality of the horses that are bred, and therefore raced, here in New York (see Saratoga Harness Racing Assn. v Agriculture & N.Y. State Horse Breeding Dev. Fund, 22 NY2d 119, 123 [1968] [breeding funds are “the instrument through which the Legislature has chosen to effectuate (the) legitimate public interest and purpose” of applying a portion of the revenues from racing to the “general improvement of the sport and the facilities used”]).

13 . Part C set the vendor’s fee at between 12% and 25% of the total revenue wagered less the amount paid for prizes (see L 2001, ch 383, part C, § 2). Since the prize payout is to be no less than 90% of total sales (see L 2001, ch 383, part C, § 2), the fee amounts to between 1.2% and 2.5% of gross sales.

14 . The initial capital investment and continued operating costs of offering video lottery gaming can be significant. The vendor must provide space for the terminals, install and maintain them, and provide increased staff, parking and security for the VLT area. Finger Lakes Racetrack, for example, anticipated its costs of construction, new employees and a variety of other improvements to be nearly $11 million, none of which would be incurred by the State.

15 . The 2003 amendment increased the vendor’s fee to 29% of total revenue wagered less the amount paid for prizes—or 2.9% of gross sales (see L 2003, ch 63, part W, § 3). The 2005 amendment has increased the vendor’s fee to between 2.6% and 3.2% of gross sales, varying as the revenue increases (see L 2005, ch 61, part CC, § 2).

16 . The other states are Georgia, Illinois, Maryland, Massachusetts, Michigan, Virginia, New Jersey, Ohio and Washington.

17 . For example, the Virginia Lottery maintains the grand prize funds and the Georgia Lottery Corporation conducts the actual drawing.

18 . Other courts have addressed the constitutionality of a state’s participation in a multistate lottery (see State ex rel. Ohio Roundtable v Taft, 2003 WL 21470307, 2003 Ohio App LEXIS 3042 [2003], appeal not allowed 100 Ohio St 3d 1484, 798 NE2d 1093 [2003]; Tichenor v Missouri State Lottery Commn., 742 SW2d 170 [Mo 1988]). Ohio Roundtable specifically addressed the propriety of the Mega Millions agreement against a state constitutional provision allowing “an agency of the state to conduct lotteries” (Ohio Const, art XV; § 6; see Ohio Roundtable, 2003 WL 21470307, *3, 2003 Ohio App LEXIS 3042, *9). The court did not find any significant difference between the State contracting with private entities to implement its in-state lottery games and contracting with other states to implement Mega Millions (Ohio Roundtable, 2003 WL 21470307, *6, 2003 Ohio App LEXIS 3042, *18). Ohio retained a sufficient amount of control over the lottery—since it was conducted in accordance with the State’s regulations—to satisfy the Ohio Constitution (see Ohio Roundtable, 2003 WL 21470307, *8, 2003 Ohio App LEXIS 3042, *21; see also Tichenor, 143, SW2d at 174).