States Try Different Playbooks on Taxing Sports Betting

Sports betting and fantasy sports operators and players face a shifting landscape as states impose taxes on expanded gambling. More than 35 states and the District of Columbia have legalized some form of sports betting after the Supreme Court struck down a federal ban, imposing a 19% average tax rate on receipts. While some states still restrict betting to in-person formats, such as at a casino or sports book, 29 allow online betting, a frontier being pushed by casinos and other betting operators like FanDuel Group and DraftKings Inc. This patchwork approach forces tax practitioners to deal with issues such as how sports betting is taxed in physical locations and on mobile devices; whether legalized gambling includes fantasy sports; and the effect of higher tax rates on betting operators in certain states.

Aggressive Tax Rates

In states where sports betting is legal, the consumer’s experience can differ based on the authorized sports betting formats.

Twenty-nine states permit both in-person and mobile sports betting, including four states that limit mobile apps to authorized locations and two states that have legalized betting but not yet brought it live. Some states specifically include both retail and mobile in their definitions of sports wagering or betting operators, while other states simply classify sports betting as being whatever method or system the state gaming authority approves.

Not only can the betting experience differ for customers based on which format they choose, so can the tax bill for the betting operators. In Arizona, Louisiana, Massachusetts, New Hampshire, New Jersey, and New York, betting operators are subject to different rates for retail and mobile sports betting, with the difference usually ranging from 1% to 5%. On the low end of this spectrum, New Hampshire’s rate for retail is 50% of gross revenue and 51% for mobile. Arizona has a 8% retail rate and a 10% online rate. New York has the greatest difference in rates with 10% of retail revenue and 51% for mobile.

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Two states, Tennessee and Wyoming, have legalized only mobile sports betting. Tennessee’s 20% tax on mobile betting is the highest outside of the Northeast, where rates average 31% and can be as high as 51%. Both states established marketplaces in which new operators may participate untethered from retail operators. In contrast, Florida attempted to implement a compact that gave the Seminole Tribe a monopoly over mobile gaming. The matter is currently on appeal, but an untethered market seems unlikely in Florida as existing participants protect their interests. If the appeal is successful, Florida would join the other six states that don’t tax sports betting receipts because they are run through tribal jurisdictions.

Betting Versus Skill

Sports betting legalization has forced states to decide whether daily fantasy sports contests should be considered gambling. A divide exists among states that allow both sports and DFS betting, those that allow neither, and states that permit one but not the other. While only 36 states have legalized sports betting since 2018, fantasy contests are legal in 45 states.

What’s the distinction? Sports betting entails wagering money on a certain outcome, such as which players will score or how much one team will win by. DFS involves picking entire teams of players and earning points based on their performances. DFS operators distinguish fantasy contests from gambling on the basis that DFS is a game of skill.

Unlike at the federal level, where fantasy contests are excluded from the federal definitions of “bet” and “wager,” the states are split on whether DFS is considered gambling. The Illinois Supreme Court agreed that DFS isn’t gambling, using the “predominant factor test” to conclude that most DFS outcomes are heavily dependent on participants’ skill levels in a 2020 decision.

On the other hand, Nevada has declared DFS to be a form of gambling. Consequently, DFS operators must obtain gaming licenses to offer contests in the state, which has dissuaded the major DFS companies from operating in the state.

The distinction can be significant for taxpayers. While some states subject sports betting and fantasy contests to the same general gaming tax, many have taken the opportunity to impose excise taxes in addition to the 0.25% federal tax on total amounts wagered. Nevada taxes all gambling at a rate of 6.75%, while Delaware and New York tax fantasy contests at a rate of as much as 15.5%. Betting operators in New York, New Hampshire, and Rhode Island can be taxed as much as 51% on their receipts.

Empire State Rate

While New York state has benefited from the boom in tax revenue – collecting $267 million in the first six months of mobile launching – mobile operators have expressed frustrations with the high tax rate. Promotional credits that the operators give to customers are included as gross revenue, even when a customer loses a free bet and no money is exchanged. The reported gross gaming revenue can be significantly higher than actual revenues brought in because of the volume of promotional credits operators give out to gain customers, according to the Tax Foundation, which also said the effective tax rate operators are paying could be as high as 77%.

While many states offer deductions for these credits, some states, such as Virginia and Colorado, are starting to decrease or phase them out. This stabilization of an effective tax rate could be replicated in other states as mobile operators establish customer bases, holdouts legalize sports betting, and comparative rates make functioning in high tax states less competitive.

Laura Lieberman is a tax law analyst at Bloomberg Tax, focusing on state indirect taxation. She received her law degree from George Mason University School of Law. She can be reached at llieberman@bloombergindustry.com.

Dillon Fowler is an associate tax law analyst at Bloomberg Tax in the Indirect Taxes Group, where he focuses on excise, sales, and use taxes. He has Juris Doctors from the University of Ottawa and American University, Washington College of Law. Contact him at dfowler@bloombergindustry.com.

Szymon Maziakowski is an associate tax law analyst at Bloomberg Tax in the Indirect Taxes Group. He has a Juris Doctors from the George Mason University School of Law. Contact him at smaziakowski@bloombergindustry.com.