Sports Betting Costs Would Limit State Tax Revenue, Industry Says

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By Che Odom

State governments will be able to tax only about 30 percent of revenue from online sports betting after subtracting the costs of running the business and complying with regulations.

That’s according to an industry executive watching a pending U.S. Supreme Court case addressing a federal law prohibiting sports betting.

“After taking into account the cost of operating, we estimate there’s approximately 30 percent to 35 percent of revenue available for taxation,” Adam Steinberg, executive vice president of gaming consultant firm Spectrum Gaming Group LLC, said during a March 15 webinar hosted by Spectrum and GeoComply, a geolocation compliance technology company.

Operating costs involve various compliance-related services, such as software monitoring the location of those placing wagers, making sure participants are of legal age, and maintaining consumer-protection measures, Steinberg said. The online industry could see revenue of about 5 percent of total wagering, he said.

The industry, as well as several states hoping for tax revenue, are waiting for a decision from the U.S. Supreme Court in Murphy v. NCAA, which involves New Jersey’s attempt to repeal part of its ban on sports wagering in an effort to revive the struggling Atlantic City area. The high court agreed to review the case after a lower court ruled that the partial repeal violated the federal Professional and Amateur Sports Protection Act of 1992 (PASPA), which prohibits states from “authorizing” gambling related to professional and amateur sports leagues.

While multiple states have passed legislation to legalize sports betting, most will look for the high court’s green light before moving forward, according to Ethan Wilson, policy director of commerce and financial services with the National Conference of State Legislatures.

Sports betting has been authorized at some level in Connecticut, Mississippi, New Jersey, New York, and Pennsylvania, and about a dozen others are considering similar measures. PASPA grandfathers in Nevada, Delaware, Montana, and Oregon, which all had legalized sports betting laws on the books.

Fairness Costs

If the Supreme Court decides to open up sports betting across the country, then “we will see state-by-state movement,” William Coley, incoming president of the National Council of Legislators from Gaming States, said during the webinar.

States will need to “ensure that the system is fair and economical,” otherwise players are going to go to their legislators and demand the system be fixed, Coley said. This is reason to get it right from the beginning, and why the National Council of Legislators from Gaming States is working on model laws it hopes states will consider adopting, he said.

In addition to promoting fairness and curbing illegal betting, states are interested in tax revenue.

According to the American Gaming Association,18 states have active bills enabling sports betting—some with varying tax rates on sports-gambling revenue. Alongside taxes, many states also propose licensing fees for sports books.

Room to Tax Casinos

Casinos, even those outside Nevada, have an advantage over online sports betting, because they can more easily guarantee that participants are of age and that wagering takes place completely within the state’s borders, Lindsay Slader, operations manager of GeoComply, said during the webinar.

Determining the location of online wagering can be especially difficult, but software is available that can be far more accurate than merely looking to a wagerer’s IP (internet protocol) address, which can be manipulated, Slader said.

States will require that the entire online wagering system be contained within their borders, she said.

Casinos, where bets are placed in person, may find compliance with that requirement easier than online services might, but casinos have greater overhead costs, Steinberg said. When it comes to casinos, the maximum amount of taxable revenue available to states is between 10 percent and 13 percent, compared to 30 percent or more with online providers, he said.

To contact the reporter on this story: Che Odom in Washington at codom@bloombergtax.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bloombergtax.com

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