[Tax Story] The Journey and Challenges of the 'Sansu (傘壽) Leisure Tax'

The summer vacation season, known as the "time for leisure," is in full swing. The origin of the word leisure is the Greek word schole, which means free time. Schole was also used to refer to a place where academic discussions took place, as for ancient Greek philosophers, the highest form of leisure was debate. Schole evolved into the Latin word licere, meaning "to be free," which eventually became the modern term leisure. Leisure activities were an important part of life even in ancient times, and today the balance between work and leisure continues to be emphasized.

Under the current Local Tax Act, a tax category called "leisure tax" collects 10% of the ticket sales for betting on seven gambling industries, including horse racing, cycle racing, motorboat racing, and bullfighting. In addition, local education tax amounting to about 30% of the leisure tax, special rural tax, and a separate livestock development fund are also paid. The state has incorporated horse racing and similar gambling activities into the system by viewing their gambling nature as low and their entertainment value as high. While considering the purchase of betting tickets as a taxable consumption act, it also adds a sin tax characteristic to regulate gambling activities.

On the other hand, other gambling industries such as casinos, lotteries, and sports promotion lottery tickets are excluded from taxation but are subject to development funds for mining areas, lottery funds, and national sports promotion funds. The taxable base for the leisure tax is the purchase of betting tickets for horse racing, cycle racing, motorboat racing, and bullfighting. The place of taxation is the metropolitan local government (city or province), and for tickets sold at off-track betting sites, the tax is paid 50% each to the location of the racecourse and the off-track betting site.

A portion of the leisure tax paid, 1.5%, is distributed as a grant to the basic local governments where the off-track betting sites are located. Citizens who engage in legally permitted gambling at racecourses pay leisure tax and other local taxes, as well as national taxes such as individual consumption tax and education tax when purchasing admission tickets, and income tax and local income tax on other income if they win from betting. The leisure tax is the primary local tax among the triple taxation on gambling activities.

The history of the leisure tax dates back 80 years to 1942 when the "horse racing ticket tax" was newly established as a national tax. Later, during the comprehensive tax reform under the first five-year economic development plan in 1961, the Local Tax Act was enacted, and the tax was transferred to city and county taxes. In 1988, when the Seoul Racecourse moved to Gwacheon City, Gyeonggi Province, the tax revenue concentrated heavily in Gwacheon, so to prevent tax revenue concentration in a specific local government, it was converted to metropolitan city and provincial tax. In 1994, it was renamed "race and horse racing ticket tax," expanding the taxable base to include cycle racing and motorboat racing. From 1995, a portion of the tax base was allocated to the cities and provinces where off-track betting sites are located. In 2002, to broaden the tax base, the name was changed to "leisure tax," and the purchase of betting tickets for bullfighting was also included as a taxable activity. According to the Ministry of the Interior and Safety's "2020 Local Tax Statistical Yearbook," out of the total local tax revenue of about 90.5 trillion KRW, the leisure tax accounts for about 970 billion KRW, or approximately 1.1%, so its share is not high. However, in Gyeonggi Province, where more than 5 trillion KRW is collected annually, and in metropolitan cities and provinces with about 10 racecourses and 70 off-track betting sites, it is an important tax item that cannot be ignored. Conversely, in Ulsan, Sejong, Gangwon, Chungbuk, Jeonbuk, and Jeonnam, there are no facilities subject to leisure tax, so there is no tax revenue at all.

Although the leisure tax is small in scale, various proposals have been made due to its special nature. First, it is pointed out that the leisure tax, contrary to its name, fundamentally taxes gambling activities such as horse racing ticket purchases, which is disconnected from the general concept of leisure. It is desirable to change the name to reflect the actual nature of the tax, such as "special entertainment tax" or "gambling activity tax."

Compared to other gambling activities like casinos, lotteries, and sports promotion lottery tickets, which only tax winnings or admission, horse racing, cycle racing, and motorboat racing are subject to triple taxation on admission, ticket purchase, and winnings, which calls for regulatory improvements. Recently, due to the impact of COVID-19, leisure tax revenue has dropped to about 20% of previous years, leading some to argue for extending the leisure tax to lotteries and sports promotion lottery tickets. From the perspective of tax equity among gambling industries, including funding for related funds, there is a need for medium- to long-term reform of the gambling industry tax system. While the policy need to reduce gambling through taxation cannot be denied, since the state permits horse racing, cycle racing, and motorboat racing within the legal framework, additional overlapping regulations should be approached with caution. We look forward to a rational resolution of the leisure tax issues, which turns 80 this year.

Baek Jeheum, Lawyer at Kim & Chang

This content was produced with the assistance of AI translation services.