It’s a challenge for sports betting operators to keep up with the ever-changing regulatory and tax landscape across the U.S. that shows no signs of slowing.
The subject of the states altering their tax and regulatory policies that operators were counting on when they set up shop in their jurisdiction was under the spotlight during G2E.
The panel was moderated by James Kilsby, chief analyst with Vixio Regulatory Intelligence, and featured Susan Hensel, founder and partner of gaming-law advisory firm Hensel Grad P.C.; Robert Stoddard, a lead U.S. tax partner of gaming for KPMG; and Andrew Winchell, head of government affairs for Betr.
“We’ve seen a universal trend when it comes to online gambling and sports betting of jurisdictions liberalizing their markets and licensing and regulating them, then a few months or a few years revisiting those laws and regulations to impose new restrictions on advertising and responsible gaming and to consider higher tax rates,” Kilsby said.
In 2022, Colorado and Virginia enacted legislation to limit promotional activities and deductions. A year later in 2023, Ohio doubled the tax rate from 10% to 20%. Tennessee passed a law to implement a tax of 1.85% based on handle, rather than revenue, Kilsby said.
So far this year, Illinois has increased the state tax rate from 15% to a graduated revenue structure of 20% to 40%, while the New Jersey Senate has proposed increasing the tax rate to 30%. Maryland has proposed regulation to eliminate promotional deductions.
“We’re seeing a trend toward higher taxation in the gaming industry,” Stoddard said. “We see some pretty high-profile examples. New Jersey has garnered the most attention, as the first regulated state for the most regulated gambling products. That has been met with a lot of opposition.”
Stoddard said legislators tend to view it as not being controversial outside of the operators. The public doesn’t care what the tax rates are and it’s an easy policy for lawmakers who view it as a sin industry. It’s no different than what’s been done with alcohol and tobacco and not met with much controversy. “I suggest that trend will likely continue into the future.”
Legislators in a low-tax state, if they’re facing a budget shortfall, “look longingly” at states with higher tax rates, Hensel said.
“If you see that the experience with those higher tax-rate states has not been negative, it can be tempting to want to increase their tax rates,” Hensel said. “You can’t look at it in a vacuum. That’s the caution. There are more costs associated with operating in a jurisdiction than just the tax rate. There are licensing fees, marketing-access fees, cost of compliance, dealing with enforcement issues, and everything else that comes with operating in a particular jurisdiction.”
Lawmakers have to think about the big picture of what a high tax rate can do to the competitive landscape, particularly forcing out smaller operators that in the long run isn’t what’s best for the bettor or overall tax revenue, Hensel said.
“It has to be viewed in the big-picture context, but I can see there’s temptation to look to other states that have been successful in implementing a higher tax rate. There needs to be a balance. It can’t be all revenue, what the industry wants, or what the bettor wants. Fairness to the player and an attractive product have to be in the mix, because it’s all about sustainability or we kill the golden goose and no one benefits.”
Winchell said there’s a narrative in the media in a lot of states, especially those that have a promotional deduction from taxes. After the initial year of launch, concerns surface about tax generation falling short of expectations.
“That misses the entire view of things, because we usually see an inflated handle number that includes that base of free play. People think those are real dollars being wagered that the state was missing out on. The second part is the state is missing the traditional ramp up over three, four, or five years for the market to mature and they react after year one or even the first six months, trying to generate more revenue without realizing the impact they could have on the long-term strength of the market.”
A Virginia study suggested that in a mature market in 2028, the state would generate between $22 million to $55 million in tax revenue, Winchell said. The state had already eclipsed the $22 million market in the first year-plus with a full promotional deduction. After getting rid of that, the state generated $69 million in tax revenue in 2023. “Because they clamped down on the market, they shot their tax revenues through the roof. I’m sure the state is glad to have that money, but there’s a long-term impact.”
Fully taxing promotional play after the first 12 months of operation in Virginia could lead to a flat market over time, Winchell said.
Stoddard warned that the tax rate doesn’t tell the whole story and pointed to New York at 51%. He added most people don’t realize that the state taxes the free play without a corresponding deduction.
“We’ve seen, especially in the heavy promo period like March Madness and the launch of the NFL season, the tax rate in New York can be north of 70%,” Stoddard said. “That’s a massive tax rate, despite being the largest market. People don’t realize how little return that leaves for product investment, fostering responsible-gaming efforts and everything else the operators have to bear.”
Winchell warned that higher taxes could impact odds or operators pushing customers to higher-margin products to drive more revenue.
“For the long term, it’s going to lead to a stagnation of the market, because the easiest and quickest way to cut costs is to cut back on marketing,” Winchell said. “That’s never a good thing in a developing market where we’re still trying to bring more people over from the illegal market. It’s not something where you flip a switch where the first football season after launch, 95% of the public is in the legal market. It takes time for people to learn and understand.”
Stoddard said odds are impacted by tax rates will compel people to consider offshore markets or local bookies to make their wagers instead.
The panel suggested lawmakers consider a tiered tax structure based on revenue that would help smaller operators compete, which hasn’t made its way to the sports-betting world yet.
“Not driving traffic to the offshore markets is one of the arguments when it comes to setting the tax rate,” Hansel said.
