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Minn. Stat. S 297E.02; Minn. Stat. , 349.213. Minn. Stat. 9 349.18. Minn. Stat. S 412.221; Penn~O-Tex Oil Co. v. City of Minneapolis, 207 Minn. 307, 291 N,W. 131 (1940). Minn. Stat. 9 349.18 subd. 1. Minn. Rule part 7861 .0040. Minn. Rule part 7861.0060. F. Local gambling tax The state levies an 8.5 percent tax on lawful gambling. A city may impose a local gambling tax on licensed organizations of up to 3 percent per year of the gross receipts from gambling, less prizes actually paid out. The tax must only raise the revenue necessary to cover the cost of regulating lawful gambling. A city may not use these tax revenues for any other purpose. Thus, if regulating lawful gambling only costs the city an amount equal to 2.5 percent of the gambling revenues, the city may only impose a tax of 2.5 percent and not the full 3 percent maximum. The city must file an annual report form with the Board showing the amount of revenue raised by the tax and the use of the tax proceeds. (Copies of the required form are available from the Board.) Ifa city imposes a gambling tax, it may not assess an investigation fee against state licensed organizations. VII. Gambling and the municipal liquor store Cities may want to lease space in the municipal liquor store to lawful gambling organizations because of the additional business and revenue generated by the gambling. However, allowing gambling in the municipal liquor store raises a number of issues. These issues should be resolved before the city allows its property to be used for the conduct of lawful gambling. A. Authority to lease space Cities may lease space in municipal liquor stores to organizations conducting lawful gambling. State law generally allows gambling only on premises owned or leased by the licensed organization. City-owned property may be leased to private parties when the property is not needed for municipal purposes. No law prevents cities from leasing space at municipal liquor stores for the conduct of lawful gambling. B. The lease agreement Leases for space to conduct lawful gambling must be in a form prescribed by the Board. Minnesota Rule part 7861.0040 lists the provisions that must be contained in the lease agreement. Under Board rules, the amount of rent may not exceed $1,000 per month for all forms oflawful gambling other than bingo. For bingo occasions, the rent may not exceed: . $200 for leased premises of not more than 6,000 square feet; . $300 for leased premises of not more than 12,000 square feet; . $400 for leased premises of more than 12,000 square feet; 14 League of Minnesota Cities