For many Americans, sports betting has been an integral part of the country’s sports and entertainment culture for generations, even though it was illegal most of the time.
The road to regulation, and the resulting tax revenues, began in 1931 when Nevada legalized gambling and Las Vegas emerged as the center of gambling in the U.S. It remains one of the only legal jurisdictions to bet on sports in the US until, in 2018, the Supreme Court struck down the 1992 Professional and Amateur Sports Protection Act (PASPA), paving the way for legalization in more states.
Today, sports gambling 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 in-person and online gambling legalization over the past few years, 2022 sees a 61% increase in US sports betting revenue by 2021, to $7.5 billion.
State treasuries have tried to stack the deck in their favor to stay in the black by levying taxes against entities that operate these retail and mobile sports betting businesses. Although states take a broad approach to capture this influx of gambling revenues, it appears that, just like at home, in the end state tax regimes often win out.
Different tax methods on sports betting
Due to the great interest and relatively short time since its widespread legalization, it may not be a surprise to see the states take different approaches when it comes to taxing sports betting. . Whether the bets are placed in person or through mobile devices has a significant impact on the legality and the tax rates applied to the winnings in many states. Four states (Missouri, Montana, Washington and Wisconsin) even regulate mobile sports betting to “location-restricted apps.”
While 29 states allow in-person and mobile betting in some form, the individual regulations, fees and taxes involved vary.
A preliminary question before a state can pay a winning bet is where the bet took place. This is a simple question for personal betting, but various federal and state cases show that there is no agreed upon test. Recent theories favor that a bet is made where it is accepted. Usually for a mobile wager, this is the location of the servers, which may or may not be in the casino.
Once a bet falls under the jurisdiction of the state, a rate must be applied. New York has a unique approach that has led to some very high tax bills. 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 willing to operate under more high rate bid it up to the current online rate. at 51%.
Some states (ie, Arizona, Colorado, Connecticut, Michigan, Pennsylvania and Virginia) offer exclusions from gross revenue for things like bets made using promotional credits, but New York has no such dice. . In fact, the Tax Foundation estimates that the effective tax rate on mobile betting in New York could be over 77%.
States also tax personal and mobile gambling differently, with most deltas ranging from 1% to 5%. However, another potentially bad bet for New York is the 41% rate difference due to its 10% retail rate.
Different incentives may be partly to blame for the many methods of rates and regulation. While some states, eager for a revenue windfall, heavily tax sports betting, others prioritize short-term revenue and compete for long-term market share by taxing the activity. at very 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 of 50%, 51% and 51%, respectively. In general, other parts of the country are following the Northeast in aggressive sports-gambling tax rates.
Questions also remain about 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 winnings of more than $1,200. Democrat Dina Titus plans to propose an increase in the IRS reporting threshold to $5,000 and indexed for future inflation. His previous proposal, the aptly named Shifting Limits on Threshold (SLOT) Act, did not move forward after its introduction last year in the US House of Representatives. It is unclear whether these same reporting requirements will soon apply to on-site and mobile sports bets.
Keeping up with the flow
Continuing the litany of state tax laws regarding sports betting is important for anyone involved in the sports betting industry. Tax rates, fees and other requirements can affect the profitability of sportsbook operators and the payouts offered to bettors.
Tax rates and regulations will continue to evolve along with the sports betting industry, and those involved in the sports gambling business would be wise to ensure that your in-house team is aware of these rules or engage outside tax advisors.