SBJ Betting: The taxman cometh

When Illinois legislators voted to increase the tax rate that sportsbooks will pay in that state from 15% to as much as 40% earlier this month, the lobbyist whose group lost that fight turned his attention to future battlegrounds.

States facing budget shortfalls almost certainly will be in play, especially those in which Democrats control the legislature. Any of the 18 states with tax rates of less than 20% on online sports betting will bear watching.

It is a push that has been building since the start of 2022, when New York regulators were able to get nine sportsbooks, including what were then the top six, to sign up for licenses despite a 51% tax rate that they said would make profitability unlikely, if not impossible.

In March, typically one of the busier betting months of the year, New York generated $77.4 million in tax revenue from online sports betting -- more than Illinois, Pennsylvania, Ohio, North Carolina, New Jersey and Massachusetts combined -- and more than 35% of the $208.3 million collected nationally. 

This was not simply a product of scale. On a per capita basis, New York collected $5.18 per over-21 adult resident.  No other state eclipsed $2 per person.

It was inevitable that one, some, most or all of the rest would wonder “Why not us?”

Ohio was the first to move, doubling its tax rate from 10% to 20% last July, just six months after launching. The $12.4 million it generated in taxes this March was a 34.8% increase on the $9.2 million collected last March.

Then came Illinois, which switched from a 15% tax on adjusted gross revenue to a progressive tax that starts at 20% on the first $30 million in annual AGR and rises to 25% from $30 million to $50 million; 30% on $50 million to $100 million; 35% on $100 million to $200 million and 40% above that.

Though only FanDuel and DraftKings were in the highest bracket last year, BetRivers would have been in the 30% bracket, while Fanatics, BetMGM, ESPN Bet and Caesars would have been at 25%, with all but Caesars closing in on 30%.  “The graduated rate basically penalizes anyone who starts to build any sort of market share, so it’s not just going to be DraftKings and FanDuel that feel the pain,” said Jeremy Kudon, the Orrick law firm partner who directs legislative strategy for a coalition of leading sportsbooks FanDuel, DraftKings, BetMGM and Fanatics. “This is really, for the industry, the most important issue there is right now -- the tax rate.”

Are different odds in different states on the way?

From the time that New York opened for business, it has been the fulcrum for the tax debate. Those who argued for higher rates argued that New York was evidence that others were leaving money on the table. Sportsbooks warned that higher taxes would force them to spend less on advertising and promotion, suppressing growth.

A review of tax rates, tax revenue and handle generated in March supported the positions of both.

Not surprisingly, states with higher tax rates generated more revenue from taxes. Nine of the 11 states that brought in the highest per capita tax revenue had tax rates of 15% or more, which was slightly above than the median of 14.63%.

But there are indications that higher tax rates also may have been a drag on handle.

New York, Illinois and Massachusetts all had relatively high per capita handle in spite of their higher than average tax rates. But Pennsylvania (36% tax rate) and Ohio (20%) both were in the bottom half of per capita handle, while Arizona (10%) was second and Colorado (10%) was third. Iowa (6.75%) and Kansas (10%) both were in the top 10.

Still, the demonstrated ability of sportsbooks in New York to generate a spot in the top five per capital handle -- in the most onerous tax environment in the country -- makes for a compelling argument that Kudon frequently hears when lobbying, and heard repeatedly in Illinois.

His firm marshaled Illinois sports bettors to send more than 60,000 emails to legislators in the three months after Gov. J.B. Pritzker proposed the tax hikes. But they weren’t enough to overcome the will of a popular, determined governor -- and the appearance that sportsbooks could afford the hike.

By all accounts, the 51% rate hasn’t slowed bettors in New York a bit.

Kudon argues that’s likely to come soon, as sportsbooks tweak their platforms to allow them to offer different odds in each state -- something they don’t do now, even in states in which a single operator has online exclusivity and doesn’t have to worry about consumers shopping around for better pricing.

“They’re right at the moment,” Kudon said. “There’s no impetus for the customer to go over the border from New York to New Jersey to get better odds because the companies haven’t gotten to the point where they can offer that. I think Illinois has hastened that process of differentiating odds. That’s one option on the table.  In a year or two, you’ll see different odds and real changes.”

Lobbyist: betting operators could begin to exit markets if rates keep creeping up

It’s important to remember that New York did not land on its 51% tax rate as a matterof legislation, or even in state budget negotiations. It was determined through an RFP process that had operators include tax rate as part of their bids. They could present sliding scales based on how many operators the state selected.

A consortium of Caesars, PointsBet, WynnBet, Rush Street and Resorts World set the bar, agreeing to a 65% rate if they were the only operators chosen, which would drop to 51% if the state chose nine operators. The other four operators that the state eventually selected -- FanDuel, DraftKings, BetMGM and Bally -- had offered 37.5% if they were the only ones selected and 15% if the state expanded the field to nine.

To get in, the four agreed to pay 51% , which was 15% higher than the next highest rate at the time -- Pennsylvania. New York also did not allow sportsbooks to deduct promotional wagers or other expenses from gross gaming revenue. The impact can be significant. Sportsbooks in Pennsylvania had GGR of $61.7 million last month, but paid taxes on only $44.2 million.

Of course, the well capitalized among the nine in New York appear to be doing just fine, in spite of the astronomical rate. FanDuel, DraftKings, BetMGM and Caesars all say their sportsbooks are profitable. Fanatics counted an Empire State license as one of the more important assets it gained when it acquired PointsBet. Penn Entertainment paid Wynn $25 million for the license ESPN Bet will use to enter the state later this year.

When legislators make that argument, Kudon says that New York has been a loss-leader for all of them, an important, massive market that they can afford to play in mostly because they’re making money in the many other states that charge lower rates.

“The industry has been able to continue to operate New York because the national average tax rate was 15%,” Kudon said. “Now the national average is 18%. If that number continues to creep up, then you’re going to lose companies left and right. They’re able to subsidize the New York market with other markets, and ultimately they’ll be able to price it with different odds. But at some point, it’s not sustainable.”

• The U.S. Supreme Court this week "decided not to hear" the Florida online sports betting case, "one of the last remaining legal hurdles challenging the Seminole Tribe’s monopoly" on online gambling in the state, notes the Tampa Bay Times.

• FanDuel is “threatening to terminate its exclusive contract running D.C.'s mobile sports betting platform” if the city “follows through with a plan to open the city's mobile sports wagering market to more operators,” reports the Washington Business Journal.

• SBJ this week profiles this year's class of Forty Under honorees, and among them in Proskauer partner Jason Krochak, who has continued to expand his practice in sports betting (a key area of focus since 2019). His sports betting clients have included the Browns, Crew, FanDuel, the PGA of America and the Nationals.

• Golden Knights President Kerry Bubolz told the Las Vegas Review-Journal that the next step in a new media partnership with Scripps Sports is “trying to make the broadcasts more appealing to all fan bases going forward, including a betting aspect."

• In the final hours of the 2024 session this week, a "small bipartisan crew of senators in the Minnesota legislature tucked puffy packets stuffed with amendments in their desks, ready to filibuster if a bill to legalize sports betting came up for a late-hour vote," reports the Minneapolis Star Tribune.