Extras on Excise: Nevada and Delaware Bet on Virtual Poker’s Popularity – Interstate Agreement Offers Path for Others to Legalize Online Gambling

Legalized gambling as a means of generating state tax revenue has been historically controversial. On the one hand, gambling can be a highly addictive and costly habit. On the other hand, it is enormously popular and can be highly profitable. With the latter in mind, a number of states have chosen to regulate the industry in order to capitalize on the corresponding tax revenue not only from the gambling itself, but also from the associated entertainment, shopping and dining options that are typically available in or near most modern casinos.

Like most industries, gambling, whether legal or not, has been affected with the advent of the Internet. Virtual card tables in which Internet users can wage bets against other users in a different state or country began popping up over a decade ago. Predictably, those websites soon gained marked success and popularity.  Indeed, the convenience of rolling out of bed and hitting a poker or blackjack table from the comfort of one’s home has proven to be quite attractive to many.  

While many of these websites were, early on, forced to shut down when their legality was called into question, Delaware, Nevada and New Jersey have instead opted to legalize and regulate the online industry with the hopes of generating additional tax revenue. 

However, because such legalization is limited to intrastate participants, the less populated Delaware has been left with lower than desired revenue figures. In an effort to boost those numbers, on February 25, Nevada and Delaware signed the Multi-State Internet Gaming Agreement , thus establishing the framework for the first interstate online gambling industry.

The historic agreement allows participants physically located in either Nevada or Delaware to compete against one another in online poker, the only online gambling offering permitted in Nevada (Delaware currently allows 12 types of online gambling offerings, including poker).  In addition, while Nevada and Delaware are the initial and the only current member states under the agreement, other states are permitted to join so long as they meet certain requirements and are accepted by the other member states. 

Under the agreement, member states receive the revenue generated from patrons participating in online poker from their respective member state. Specifically, in scenarios in which a website calculates its revenue on the basis of commissions from participating patrons per round of play, or a “rake,” the amount collected by each state is based on the pro rata amount contributed to the rake by the state’s patron during a round of play. Otherwise, when a website collects on the basis of tournament fees, those fees are attributed to each member state based on the patron’s physical presence at the time of entry into the tournament. In addition, states have the flexibility for determining their own tax structures (rate, base, etc.) and the gaming laws of each respective member state apply to the patrons of those respective states.

While it is presently unclear how long it will take Delaware and Nevada to fully implement the provisions set forth under this agreement, the aim is to expand the online gaming industry to other states and to offer other gaming options in the process. While New Jersey is the obvious current state to be linked to joining the agreement, in the future, there may be more states joining the ranks as those “eligible.” Indeed, in 2014, at least 10 states are expected to consider legalizing online gambling. However, regardless of when implementation occurs or how many states join in the near future, the groundwork has been laid for what could produce a nationwide online gambling network.

Continue the discussion on the  BNA State Tax Group on LinkedIn : What sort of any effect, if any, will the Delaware/Nevada online gambling agreement have on either state’s tax revenue? Will the agreement be successful in establishing a nationwide online gambling network?

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