The Nevada attorney general’s office has told a federal appeals court that by embracing a tax on their trading revenue in North Carolina, Kalshi is admitting that a state has the power to regulate its operations in the state.
“A stunning about-face, which would mean that (at a minimum) Kalshi cannot evade Nevada’s taxing provisions,” Nevada Deputy Attorney General Abigail Pace wrote in papers filed Thursday with the Ninth Circuit Court of Appeals in San Francisco.
Under North Carolina’s state budget signed by Democrat Governor John Stein, prediction market operators like Kalshi face a 6% tax on trading fee revenue attributable to state residents. The tax takes effect on January 1.
North Carolina became the first state to codify federal Commodity Futures Trading Commission oversight into law in Senate Bill 257, allowing federally regulated exchanges to operate legally.
Kalshi and other platforms do not require a separate state gaming license or additional regulatory burden to operate in the state. The tax rate on prediction markets contrast with sports-betting operators, who face a 23% tax on gross wagering revenue.
Effective July 1, Illinois imposed a tiered transaction tax on sports-related exchange wagers placed on prediction markets. Enacted under Senate Bill 3019, the law taxes the first five million exchange wagers at 1.75% and subsequent wagers at 3.5%, while requiring operators to get a state sports-betting license.
A four-year license would cost $15 million. Kalshi has sued Illinois to overturn the tax.
“The (North Carolina) law confirms the central holding … that states have the authority to regulate (Kalshi’s) sports, election, and entertainment-related event contracts,” Pace wrote. “Kalshi’s embrace of S.B. 257 undermines its (own) arguments at every turn.”
Pace noted that on field preemption, Kalshi argued that the Community Exchange Act creates a “regime (that) leaves no room for states to supplement it.”
“Yet S.B. 257 acts directly in the very field Kalshi claims is preempted – on DCM (Designated Contract Markets) transactions,” she wrote. “Kalshi attempts to draw a distinction between regulating its contracts and taxing its revenue from these contracts, but that is purely a formalism. Both are forms of regulation by the state.”
Pace wrote that on conflict preemption, Kalshi argued that the application of Nevada’s gaming laws would frustrate a supposed federal policy of uniform federal regulation of derivative markets.
“Yet S.B. 257 imposes exactly that type of state specific regulation by requiring Kalshi to identify its gaming activity attributable to North Carolina and pay taxes on that activity,” Pace wrote.
Kalshi did not immediately respond to a request for comment on Sunday. The two-page filing with the federal appeals court was first reported by gaming attorney Daniel Wallach on LinkedIn.
“By embracing S.B. 257, Kalshi is admitting that a state has the power to regulate its operations in the state,” Pace added. “Kalshi notes that S.B. 257 purports to recognize the CFTC’s exclusive federal regulatory over sports-contracts offered by CFTC-regulated DCMs.”
However, Pace emphasized that the North Carolina Legislature’s “view of the meaning of federal statute is not binding on this court and the legislature’s statement is factually suspect in light of the fact it plainly believes there is room for states to act in regulating prediction markets.”
