Daily Tax Report: State provides authoritative coverage of state and local tax developments across the 50 U.S. states and the District of Columbia, tracking legislative and regulatory updates,...
By Ryan Prete
The U.S. Supreme Court’s decision to end a 26-year precedent that prohibited statewide sports betting means states must now follow stringent legal regulations, especially online.
The high court ruled in favor of the petitioner in Murphy v. NCAA, repealing the Professional and Amateur Sports Protection Act of 1992 (PASPA), a federal law that formally prohibited states from “authorizing” gambling related to professional and amateur sports leagues.
Many states are scrambling to implement, or enact, laws to tap into this new potential revenue stream. However, Anna Sainsbury, CEO of GeoComply, an online-gaming compliance company, told Bloomberg Tax that New Jersey and other states that have legalized sports betting will need to integrate software that ensures online bets are only placed in-state.
“Many states have already reached out to us for training and instructions on how to identify fraud,” Sainsbury said. “States seeking to legalize sports betting must be sure to follow regulations. This is a good bandwagon to jump on.”
Murphy v. NCAA was originally New Jersey’s attempt to repeal part of its state ban on sports betting in an effort to revive the struggling Atlantic City region.
The ruling sets up five states—Mississippi, New Jersey, New York, Pennsylvania, and West Virginia—which have already enacted legislation to legalize sports betting pending the high-court decision, to hit the ground running.
Many other states aren’t far behind. Currently, 32 proposals to legalize sports betting are active in 12 states, according to the American Gaming Association (AGA). Proposed tax rates range from 6.25 percent to 30 percent.
Sainsbury’s company integrates software into an online gaming website’s platform and tracks a connected user’s IP address, only allowing access to certain sites if the individual is in a legal territory.
She said many companies beyond the gambling industry seek the services of GeoComply and similar companies.
“The geolocation industry has really grown and is used by companies like Netflix, which offers different streaming products depending on the country,” she said.
Sainsbury said GeoComply pricing is set on a “deal by deal basis.” GeoComply currently serves 100 percent of the U.S. iGaming market.
In a May 1 press release, GeoComply announced it had signed an agreement with Scientific Games Corporation (SGC), a company that provides gambling systems such as electronic gambling machines and iGaming products, to “provide its market-leading geolocation compliance services to the company in anticipation of regulated sports betting becoming legalized in the United States.”
SGC has a market cap of $4.60 billion. The company’s stock price has more than doubled in the past year.
Geoff Freeman, AGA president and CEO, told Bloomberg Tax he expects New Jersey to begin taking bets in a matter of weeks, and that other states should be ready by the start of the 2018-2019 National Football League season, which begins in September.
Freeman was confident that gamblers will be able to wager on National Basketball League and National Hockey League championship games, which run through June.
Freeman said he expects the spread of legal sports betting to expand “quicker than any market we’ve ever seen.”
Paul Martino, general partner at Bullpen Capital, a venture fund, told Bloomberg Tax states are so eager to begin taking sporting wagers that “if the Supreme Court overturns PASPA on a Monday, we’d have New Jersey taking bets by Friday.”
Martino said that legalized sports betting will have even a greater effect on viewership than fantasy sports.
“Fantasy sports changed the way people watched sports because they would tune in to games they normally didn’t care about because they had an active player on their fantasy team. Now just imagine how people will watch if they can put money on every game. This is all day every day action” he said.
Martino expects that dozens of states will soon introduce legislation to legalize sports betting now that PASPA has been overturned.
Freeman said he is confident that overseas-based gambling services like “Bovada"—which allows U.S. users to place sports bets and gamble through an unregulated market—will fade out thanks to the May 14 ruling.
“Consumers no longer have to consider unregulated options, as services like Bovada cannot fully protect users,” Freeman said.
Marc Dunbar, partner at Jones Walker LLP told Bloomberg Tax he wasn’t as certain that offshore services would become extinct.
“If you’re in Utah, a state which has no plans to legalize sports betting, then offshore services might be your only choice,” Dunbar said. “Also, if states establish ridiculously high tax rates, residents will still be driven to alternative options.”
Support behind PASPA’s repeal is significant. Even major sport leagues such as the NBA and Major League Baseball have publicly endorsed sports betting.
“I never thought I’d see this day,” Martino said. “But there’s a lot in this for the leagues. Allowing sports betting will also greatly increase viewership.”
Martino, who was an early investor in FanDuel Inc., noted that the NBA was also a past-investor in the fantasy sports betting website.
However, the leagues’ support comes with a price.
Dan Spillane, senior vice president and assistant general counsel for league governance and policy with the NBA, announced in Jan. 24 written testimony before the New York Senate that the league supported efforts to end PASPA but asked that operators pay each league 1 percent “of the total amount bet on its games.”
While Freeman previously told Bloomberg Tax the fee would hurt the integrity of the NBA and Major League Baseball and would dwarf any revenue returned to state governments, he said on a May 14 press call that the AGA is currently “working through issues” with multiple leagues. He wouldn’t comment on whether the AGA supported or opposed integrity fees. .
Some states have attached the “integrity fee” to their proposals, allowing professional sports leagues to grab a piece of each wager.
New York and Kansas have proposed a 0.25 percent integrity fee. Indiana, Kansas, and Missouri have lobbied for a 1 percent integrity fee.
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