The business of legal sports betting in the United States may not be as taxing for gaming operators as it could be.
Indeed, one of the reasons given for the ongoing legalization of retail and online sports betting in the U.S. is that it hands governments a new source of tax revenue. However, a recent report from industry-intelligence firm VIXIO GamblingCompliance suggests the tax treatment of free bets and other promotions is saving operators a bundle.
According to the study, promo-related deductions to gaming receipts led to more than $120 million in potential tax revenues being retained by sportsbook operators last year, rather than state governments.
That's a relief
VIXIO’s report noted that 10 legal sports betting jurisdictions in the U.S., including Washington, D.C., allow operators to fully deduct free bets and other promotions from their taxable revenue. The “most prominent” of these territories are Michigan and Pennsylvania, the study said, with operators in those states deducting almost $337 million from their taxable revenues in 2021, saving them more than $76 million in tax.
“The full deductions have helped to make Pennsylvania a major sports betting market despite a headline-grabbing 36 percent tax rate that operators once scoffed at, with promo deductions lowering the effective tax rate in the Keystone State to a more reasonable 24 percent in 2021,” the report says.
There are also five states with limited amounts of promo-related tax relief, such as New Jersey, which permits casino operators to make those deductions for all gaming over $90 million a year, VIXIO said.
“Legislation in 2021 that would have permitted NJ online betting operators to deduct any promotional play over $12m annually was vetoed by Gov. Phil Murphy, who instead allowed the deductions exclusively for retail sports wagering,” the report adds.
Tax tweaks
However, the hit to state coffers due to promo play has caught the attention of lawmakers in certain states. For instance, legislation was passed this year to curb that relief in Colorado and Virginia, which once allowed full deductions.
Meanwhile, states such as Arizona and Ohio inserted "sunset clauses" into the sports-betting bills they passed last year, which will slowly wind down the amount of deductions an operator can claim.
“Provisions allowing deductions in the early days of a sports betting market that phase out over time have recently become a popular move for states, enabling operators to acquire customers early on with the state benefiting in the long run from a full amount of taxable revenue,” the report says.
Operators are also self-regulating their use of promotions lately, as sports-betting companies strive to show investors they can turn a profit. That has led to a dropoff in free bets and other bonuses this summer, although they could ramp up again once the NFL’s regular season starts early next month.
And then there are nine states which don't allow any deductions at all, the VIXIO report notes, the most notable being the sizable market for online sports betting in New York. The Empire State claims 51% of gross gaming revenue earned by online sportsbooks and offers no way for operators to lessen the blow.
“The result has been several operators slowing their customer acquisition efforts in recent months after a brief explosion of inducements offered after the state’s January launch,” VIXIO’s report states. “Other major markets that do not permit bonus deductions include Illinois, Indiana and Tennessee, all of which passed bills legalizing sports betting in 2019 before the promotional play clause became a more popular item to include in any new legislation.”
