Sports betting: Regulation and tax rates of utmost importance

By: Tom LaMarra

Posted: March 16, 2018

As the pari-mutuel industry prepares for a potential gambling environment that includes legalized sports betting, regulation and tax rates will be of the utmost importance, according to an official with William Hill, a British bookmaking firm with United States-based businesses.

Joe Asher, chief executive officer of William Hill US, was among the panelists for a sports betting discussion held March 14 at the National Horsemen’s Benevolent and Protective Association winter convention. William Hill a few years ago partnered with Monmouth Park in anticipation of legal sports betting becoming a reality in New Jersey—and perhaps the entire country.

An upcoming U.S. Supreme Court decision on the Professional and Amateur Sports Protection Act of 1992 could determine the fate of sports betting beyond four grandfathered states. The New Jersey Thoroughbred Horsemen’s Association, which leases and operates Monmouth through an entity called Darby Development, was at the forefront of the push for sports betting in New Jersey.

Asher said the NJTHA and William Hill US, which spent about $1 million turning a restaurant into a sports book, have a deal to split an sports betting revenue 50-50. He credited Dennis Drazin, who heads Darby Development, with being the impetus for the push to legalize sports betting in New Jersey, and ultimately, the rest of the U.S.

Drazin earlier said there are three possible outcomes: The high court could uphold PASPA; it could declare it unconstitutional, which would allow states to authorize sports betting; or it could decide on a partial repeal, which would benefit New Jersey because it already has a law that decriminalized sports betting.

A number of states have passed or are considering legislation that would authorize sports betting depending on the Supreme Court ruling. Many identify racetracks and casinos as potential licensees, but the revenue picture isn’t as clear. The take from sports bets is traditionally much lower than that of pari-mutuel wagering; in that regard it has a competitive edge.

William Hill US is the bookmaker for the Delaware Lottery, which began offering limited parlay card betting on professional football in 2009. A percentage of the net proceeds goes to Thoroughbred and Standardbred horsemen in Delaware.

“It clearly brings a lot of people in for weekends (during NFL season),” Asher said. “In Delaware, the illegal parlay-card market dried up because the state offered a legal product priced competitively with prices similar to Las Vegas. The legal market comes down to regulation and the tax rate. Keeping tax rates fairly modest is critical to horse racing.

“It will be interesting to see what happens around fixed-odds wagering in the United States.”

Asher noted the sensitivity of pricing when he discussed efforts by the National Basketball Association and Major League Baseball to get an “integrity fee” included in state legislation. The NBA has suggested a 1% fee; a sports betting bill in the New York Senate states there may be a fee up to 0.25%.

Asher said an integrity fee of 1% would amount to about 20% of net revenue. The federal sports betting tax of 0.25% equates to 5% of net proceeds.

“It has nothing to do with integrity,” he said. “It’s just a cut of the action.”

Dr. Jennifer Durenberger, an industry consultant and former director of racing for the Massachusetts Gaming Commission, said it’s important for horse racing to understand not only the different revenue models but also regulatory relationships.

“The states will decide whether to have sports betting or not,” Durenberger said. “If racing (commissions) are the regulator of sports betting, those relationships are critical. If you go to a legislature, don’t make (sports betting) an us-versus-them game. Benefits to horse racing will require a cooperative effort. All interests need to be aligned.”

Durenberger also said she believes “there will be a federal piece to this” even though states govern and regulate gambling.

National Thoroughbred Racing Association President Alex Waldrop said the third option in the case before the Supreme Court—only New Jersey can offer sports betting—”would probably cause a rush by states to Congress to take action. Sports leagues will rush to the federal government to slow the process down, and they’re a formidable opponent.”

Waldrop said the Gaming Accountability and Modernization Act introduced in 2017 by New Jersey Congressman Frank Pallone would legalize sports betting and offer minimum standards and consumer protection should it be implemented. It includes an online wagering component as well as state and federal law enforcement provisions.

“It could add more costs to operators but that may be the tradeoff for customers who get protection,” Waldrop said. “The likelihood of a widespread expansion of sports betting is a coin toss right now, but horsemen need advisors to come up with a plan for the industry to go to the statehouse to lobby for legislation that is racing-friendly. It’s important to get everybody to speak with one voice.

“You need to be on the phone with a company that offers sports bets for advice. It’s complicated, so if you’re not well-advised, you may be left behind. This is not horse racing. It is something completely different.”

Durenberger said that from a lobbying standpoint, it’s not unlike the relationship between racing and casino gambling in which purses and breed development programs receive revenue from gaming machines and table games.

“With the racino model, compensation is based on economic impact and contributions to a state,” she said. “That economic argument is still extremely relevant.”

The following is look at legislative and tax details in several states that have THA affiliates.

New Jersey

Voters approved a constitutional amendment in 2011 that authorized sports betting, but professional sports leagues filed suit and launched the fight that has ended up in the Supreme Court. In 2014 then-Gov. Chris Christie signed into law a bill that would permit racetracks and casinos to offer sports betting without regulation, and the professional leagues continued their fight to keep PASPA in place.

The first New Jersey bill that included regulations set the state tax rate for sports betting at racetracks at 8% of gross revenue. It doesn’t include a breakdown of how racetrack commissions would be paid, but Monmouth has said it plans to use the revenue to bolster the racing product at the track.

Delaware

The Delaware Lottery in recent months has been preparing for a possible expansion of sports betting beyond the parlay cards on professional football it can offer at three racetracks and more than 100 other retail sports lottery outlets. Because it has the infrastructure already in place, Delaware believes it has an advantage should there be an affirmative high court ruling.

Purses, including those at Delaware Park, have received a share of sports betting revenue since the law passed in 2009. Based on Delaware Lottery statistics, the Delaware Park purse account receives 9.6% of net proceeds, which can fluctuate greatly depending on how much is paid in winnings. The track commission hovers around 40%, while the state gets 50% of net proceeds.

For the month that ended Sept. 24, 2017, purses at Delaware Park earned $106,968 from sports betting, but for the month that ended Nov. 26, the amount was $58,597.

The Delaware Lottery in a fiscal 2017 report said the distribution of total sports lottery proceeds was as follows: 5% for commissions, 4% for the general fund, 2% for vendors, 1% for operating expenses and 1% for purses. That left 87% paid in winnings.

Pennsylvania

Broad gaming expansion legislation passed in Pennsylvania in 2017 includes sports betting, which could commence with a favorable Supreme Court decision. The state tax rate on sports betting gross revenue, however, is a prohibitive 34%, with another 2% local assessment tax.

Horsemen and breeders wouldn’t receive any revenue from sports betting, but the latest gaming bill included an important provision that placed slot machine revenue that goes to purses and breed development programs into a protective trust in an effort to keep lawmakers from raiding the Race Horse Development Fund. In addition, the bill authorized up to 10 satellite casinos, all of which are permitted to offer full-card simulcasts as an amenity, but they will not have to pay a percentage of slots revenue to purses.

The primary concern of horsemen is that slots at satellite casinos, which won’t have to contribute to the Race Horse Development Fund, could cut into slots play at existing casinos.

Maryland

The state legislature recently held committee hearings on bills that call for a referendum on sports betting, and the House passed a bill March 15. If a bill passes both houses during the current session, the question could be on the ballot this November. The legislation would permit casinos and racetracks to offer sports betting on site with no provisions for mobile wagering.

The bills are designed to have something on the books should the federal climate change. They don’t include a breakdown of how net proceeds would be paid, but a bill filed in 2017 included a tax rate of 20%, one quarter of which would go toward the Purse Dedication Account.

Racing industry representatives spoke in favor of legislation during a House Ways and Means Committee meeting in early March. Officials said sports betting can serve as means to attract additional customers to tracks and introduce them to horse racing.

New York

Legislation filed in the state Senate would authorize sports betting at racetracks, off-track betting facilities and casinos, and would permit mobile wagering. The bill includes an integrity fee of up to one-quarter of 1% that would be paid to leagues whose games are offered for wagering purposes.

The state tax rate would be 8.5% of gross revenue. Of that amount, 85% would go to the Commercial Gaming Revenue Fund; 5% would be used for problem gambling programs; 5% for regulatory costs; and 5% for “market origin credits.” The latter is referenced to pari-mutuel statute, which states that credits awarded to racing associations provide 40% of revenue to enhance purses and 20% to support state breeding funds.

During a recent Senate committee hearing, the New York Thoroughbred Horsemen’s Association, New York Thoroughbred Breeders and New York Racing Association presented a unified front in support of sports betting in the state. NYRA indicated its new account wagering service is designed to accommodate fixed-odds propositions.

Illinois

A pro-racing senator in January filed what amounts to a “placeholder” bill for sports betting, but no action has been taken. The Illinois Thoroughbred Horsemen’s Association, as part of its lobbying efforts, intends to make it clear to the legislature that horsemen must share in any revenue from sports betting should it become a reality, and the tracks and off-track betting outlets be permitted to take wagers.

Nevada, the only state with an expansive sports betting network, has a tax of 6.75% on gross revenue and the 0.25% federal handle tax. Optimal tax rates for sports betting have been part of legislative discussions around the country, as has the integrity fee sought by sports leagues.

A new West Virginia law, which would permit casinos to offer sports betting on site and via mobile devices, calls for a 10% tax on gross revenue but doesn’t include an integrity fee or a cut of revenue for horsemen. Lawmakers in both houses rejected calls from the NBA and MLB to impose an integrity fee, but Gov. Jim Justice in a statement said he wants to revisit the law to perhaps add an integrity fee that could range from 0.25% to 1% of gross revenue.