ST. THOMAS - The V.I. government is suing video gambling contractor Southland Gaming of the Virgin Islands for more than $20 million that government officials believe the gambling company owes the territory.

Since 2003, Southland Gaming - abbreviated in the lawsuit as SGVI - has provided video lottery terminals on St. Thomas and St. John through an exclusive contract with V.I. Lottery. The gambling machines provide revenues to the government, schools, senior citizen programs, the establishments where they are located and Southland Gaming itself.

Over the last several months, the question as to whether Southland Gaming has correctly interpreted its contract and is giving the government the revenues it is allocated has been discussed in several forums. At Senate hearings earlier this year, people affiliated with the V.I. Lottery said that there is a possibility that Southland owes the government more than $20 million.

The 16-page lawsuit, filed Wednesday in V.I. Superior Court, demands that money. It charges that Southland Gaming has been using an incorrect formula to calculate the percentage of revenues from the gambling machines that go to the government and is using an illegal agreement to skirt payment of gross receipts taxes.

The lawsuit also asks the court to invalidate the master license agreement between Southland Gaming and the V.I. government because the lawsuit argues that the agreement is not valid. It is a civil lawsuit, but it accuses Southland of breach of contract, breach of fiduciary duty, conversion and unjust enrichment in its business operations.

The amount of money in question is not identified in the lawsuit, but the $20 million figure has been thrown around at several Senate hearings in recent months.

On Monday, Attorney General Vincent Frazer said that the interpretation of Southland's contract has been examined and discussed for more than a year.

"It came to the point in our discussions where we were not able to bring it to a conclusion," Frazer said. "Litigation was necessary."

Frazer said the lawsuit is more about correctly interpreting the contract, and less about making a move to increase the government's revenues during the current economic crunch.

At the heart of the lawsuit is the way that Southland has been divvying up money from the gambling machines. According to the contract between Southland and the V.I. government, Southland is responsible for all of the money put into the machines. The gambling company pays the V.I. government its share of the revenues on a weekly basis. It also pays the owners of the bars, restaurants and gaming centers where the machines are located their share of the money.

The contract sets a scale for the portion of gambling machine revenues Southland Gaming receives. The scale is based on the total amount of money that the machines take in and the length of time they have been operating. Southland gets anywhere between 40.5 and 75 percent of the revenues, depending on those two factors.

According to the lawsuit, Southland also gives retailers 22 percent of the money that their machines make.

The lawsuit states that when dividing up revenues, Southland takes its portion first. After that money has been subtracted, retailers get 22 percent of what is left over. Under this method of calculation, the government is the last to get paid, and the lawsuit states the government is getting 22 percent less than it should. For example, if Southland is taking 40.5 percent of the revenues from machines, currently the retailers are taking a 22 percent portion of the pie. The territorial government ultimately is receiving 37.5 percent of the total revenues.

Frazer said the government believes the retailers should be paid out of Southland's portion of the money. If Southland takes 40.5 percent of the revenues from machines, Frazer's argument is that the government should receive the remaining 59.5 percent of the money. The 22 percent for retailers should be subtracted out of Southland's portion of the money, leaving the gambling company with a total of 18.5 percent of the profits.

"SGVI was in a position of trust and loyalty in relation to the government as it pertained to the collection and proper distribution of net game revenue," the lawsuit states. "SGVI had a duty to distribute properly the funds that it collected and to act solely on the government's behalf regarding the share of net game revenue to which the government was rightfully entitled. SGVI breached that duty toward the government by not distributing to the government the rightful share."

The lawsuit also charges that Southland owes the V.I. government gross receipts taxes -Β and has never paid them. A June 2007 audit from the U.S. Interior Department's Inspector General estimated the government had missed at least $3.7 million in gross receipts revenues from gambling machines.

According to the V.I. Code, corporations and individuals doing business in the territory must pay 4 percent of their gross receipts in taxes. The V.I. Code allows for a gross receipts tax exemption for commissions from the sale of V.I. Lottery tickets. The lawsuit argues that is not applicable to video gambling terminal revenues because there are no tickets involved.

A master license agreement between the V.I. government and Southland Gaming that was signed in December 2003 specifically defines the proceeds of video lottery terminals as the same type of tax-exempt commissions on lottery ticket sales.

However, the lawsuit argues that the master license agreement - which allows Southland to place gambling machines at different locations throughout St. Thomas and St. John - is not valid. It was signed by then-Lottery Executive Director Paul Flemming and Southland President Robert Huckabee III. At the time that the agreement was signed, the lawsuit states, the Lottery Commission also would have needed to approve it. The agreement also lacks the authorization of the Property and Procurement commissioner - who is in charge of government contracts -Β and the governor.

"The master license agreement violates the terms of the video lottery contract and is void due to there being no written authority by the Lottery Commission, the commissioner of Property and Procurement, and the governor, all of which would have been required for the master license agreement to be valid," the lawsuit states.

Even if the master license agreement is valid, the lawsuit argues, that agreement by itself had no authority to expand the definition in the V.I. Code about tax-free lottery ticket sales to include revenues from video gambling machines.

Huckabee said on Monday that he was surprised and disappointed by the lawsuit.

"We deny that we owe the government any of these moneys," he said.

Huckabee wrote a guest editorial explaining why the government's argument is inaccurate, which was printed in The Daily News on Friday. It does not specifically address the lawsuit. Huckabee said that the editorial details Southland's exact position.

The question about whether the government is getting the money it deserves was first raised in December in a letter from former Acting Lottery Executive Director Lenyse Shomo, Huckabee said. Those issues were fully explained to Shomo and other lottery officials, he said.

In February, Huckabee received a letter from Shomo withdrawing her concerns. The letter stated that the Lottery no longer thinks Southland may be in breach of its contract, and does not wish to pursue litigation at this time.

The discussion about funds Southland may still owe the government started at a Senate hearing in April.

Huckabee said that all of the agreements that are being questioned in this lawsuit were given to Southland by V.I. government attorneys. Nobody has questioned them since the gambling machines started operating in 2003, he said.

"I do not understand how the government can say that the agreement is not valid after they gave it to us six years ago," he said.

Southland's representatives will be present today at a hearing of the Senate Appropriations and Budget Committee hearing to discuss the operations of the V.I. Lottery and the money the government believes it is owed by Southland. The hearing was scheduled before the lawsuit was filed.