For many Americans, sports betting has been an integral part of the country’s sports and entertainment culture for generations, despite being illegal for much of that time.
The road to regulation, and the resulting tax revenues, started in 1931 when Nevada legalized gambling and Las Vegas emerged as the gambling epicenter of the U.S. It remained one of the only legal sports-betting jurisdictions in the U.S. until, in 2018, the Supreme Court struck down the 1992 Professional and Amateur Sports Protection Act (PASPA), paving the way for legalization in additional states.
Today, gambling on sports is legal in some form in more than 35 states and the District of Columbia, with no signs of the industry slowing down. With a cascade of both in-person and online gambling legalization over the past several years, 2022 saw a 61% increase in U.S. sports betting revenue over 2021, to $7.5 billion.
State treasuries are attempting to stack the deck in their favor in order to remain in the black by levying taxes against the entities operating these retail and mobile sports betting businesses. Although states are taking a wide array of approaches to capturing this surge in gambling revenues, it appears that, just like the house, eventually state taxation regimes always win.
Differing approaches to taxation of sports betting
Given the vast interest and relatively short time since its widespread legalization, it may not be a surprise to see states taking various approaches when it comes to the taxation of sports betting. Whether bets are placed in person or via mobile devices has a major impact on both the legality and the tax rates applied to winnings in many states. Four states (Missouri, Montana, Washington and Wisconsin) even regulate mobile sports betting to “location-limited apps.”
While 29 states permit both in-person and mobile betting in some form, the respective regulations, fees and taxes involved vary widely.
A preliminary question before a state can tax a winning wager is where the bet took place. This is a simple question for in-person betting, but various federal and state cases have demonstrated that there is no agreed-upon test. Recent theories favor that a bet is made where it is accepted. Often for a mobile wager, this is the location of the servers, which may or may not be at the casino.
Once a wager falls under a state’s jurisdiction, a rate must be applied. New York has a unique approach that has led to some very high tax rates. While New York law requires mobile betting revenue to be taxed at a minimum rate of 12% due to the bidding process conducted by the New York State Gaming Commission, operators that are willing to operate under higher rates have bid it up to the current online rate of 51%.
Some states (i.e., Arizona, Colorado, Connecticut, Michigan, Pennsylvania and Virginia) offer exclusions from gross revenue for items like bets made using promotional credits, but no such dice in New York. In fact, the Tax Foundation estimated that the effective tax rate of mobile betting in New York could be over 77%.
States also tax in-person and mobile gambling differently, with most deltas ranging from 1% to 5%. However, another potential bad bet for New York is its 41% rate differential caused by its 10% retail rate.
Differing incentives may be partly to blame for the myriad approaches to rates and regulations. While some states, eager for a revenue windfall, are taxing sports betting heavily, others are foregoing short-term profits and competing for long-term market share by taxing the activity at more favorable rates. The latter often leads to what tax policy hawks describe as a “race to the bottom.”
For example, while Iowa and Minnesota impose rates of 6.75% and 6%, respectively, Delaware, New Hampshire and New York impose rates at 50%, 51% and 51%, respectively. Overall, other parts of the country trail the Northeast in aggressive sports-gambling tax rates.
Questions also remain regarding how the reporting of winning sports bets will be incorporated into existing IRS regulations. Currently, Nevada casinos are required to immediately report any slot machine win over $1,200. Democrat Dina Titus is planning to propose an increase to this IRS reporting threshold to $5,000 and indexed for inflation going forward. Her previous proposal, the aptly named Shifting Limits on Threshold (SLOT) Act, did not move forward after its introduction last year in the U.S. House of Representatives. It’s unclear whether these same reporting requirements will soon apply to both on-site and mobile sports bets.
Keeping pace
Keeping up with the litany of state tax laws regarding sports betting is essential for anyone involved in the sports-betting industry. Tax rates, fees and other requirements can significantly impact the profitability of sportsbook operators and the payouts offered to bettors.
Tax rates and regulations will continue to evolve in lockstep with the sports-betting industry, and those involved in the business of sports gambling would be wise to either ensure your in-house team is aware of these rules or engage outside tax advisors.
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