Sportsbooks may avoid some states
One New Jersey racetrack set Memorial Day as the target date to accept the state’s first bets after the Supreme Court ruling that cleared the way for sports gambling nationwide.
The estimated $150 billion a year illegal sports gambling industry, however, isn’t going away anytime soon. One need only look to Pennsylvania — one of a handful of states that passed legislation in anticipation of the decision to overturn the Professional and Amateur Sports Protection Act (PASPA) — to see a major reason why.
“There is a huge black market that pays zero tax,” said Greg Carlin, CEO of Rush Street Gaming, whose company operates two casinos in Pennsylvania. “If legal sports betting is go-
ing to be a regulated and successful business, the tax rates can’t be so high that it makes it impossible to compete with the black market.”
Pennsylvania is seeking a
$10 million licensing fee, along with a state tax of 34% on gaming revenue. By comparison, Nevada — the only state before Monday that had legalized, state-sanctioned betting — pays 6.75% to the state. All states must pay a federal excise tax, which equates to about another 5%.
It’s a sticker price that has given multiple companies pause, including two that operate gambling establishments in the state: Rush Street (Rivers Casino in Pittsburgh and Sugar House Casino in Philadelphia) and Penn National Gaming (Hollywood Casino in Grantville).
“We haven’t made a final determination on whether to pursue sports betting in Pennsylvania,” Jeff Morris, vice president of public affairs and government relations at Penn National Gaming, said in an email. “In addition to the high application and annual licensing fees, the challenge will be trying to make the 34% tax rate work — this would be the highest tax rate in the world on sports betting. For comparison, West Virginia recently passed a sports betting law at a 10% tax rate, which is the range most states are considering.”
New Jersey is expected to tax gaming revenue between
8%-10%, and Mississippi, another state that could launch sports gambling in the coming week, will have a tax of 8%.
Carlin said Rush Street Gaming “hasn’t made a decision” to launch sports betting under the current terms, though he didn’t rule out jumping into the market to keep a competitive advantage if others decide to pounce.
“There could be circumstances that we would get in, even if it means we aren’t going to make any money and possibly lose money,” Carlin said. “We are still assessing costs and making projections. We want to see the regulations are completed.”
Pennsylvania Gaming Control Board spokesperson Doug Harbach said that likely won’t happen until next month at the earliest. Harbach said the agency has had conversations with potential sports gaming operators, though it’s too soon to conclude how many, or if any, will agree to the current fee and tax rates.
Sports law attorney David S. Weinstein said some gambling companies openly questioning whether to open locations in states with high tax rates could just be “lobbying.”
“This is free money for the states,” said Weinstein, former assistant U.S. Attorney and a partner at Hinshaw & Culbertson. “Before Monday, they got no revenue from sports gambling. If nobody wants to come in and pay the tax rates the legislators set, they could say, ‘Fine. You don’t want to pay it. We will just run it ourselves.’ ”
While sports gaming is seen as the next frontier for many states to boost their coffers, those within the industry frequently point out that it’s a low-margin business.
The American Gaming Association, the lobbying arm for casinos, estimates that sportsbooks in Nevada make about 5% after taxes and expenses. Some sportsbooks — such as William Hill, which operates more than 100 locations in the state — are more profitable, according to a study by Deutsche Bank released in March.
William Hill will run what is expected to be the first sportsbook to open in the post-PASPA era at Monmouth Park Racetrack in Oceanport, N.J.
The company was founded by its namesake in Britain more than 80 years ago when sports betting was illegal in the UK, and the gaming giant came to the USA in 2012 waiting for what occurred in Washington on Monday.
“I think that was one of the reasons they bought my business,” said Joe Asher, who became CEO of William Hill U.S. after the acquisition of his Nevada gaming operation (Lucky’s Race & Sports Books) and two others six years ago.
“The idea was to buy these three sportsbooks, combine them and make it into profitable business that would position itself to take advantage of the market when sports betting became legal in the U.S., whether that was 2013, 2015, 2018 or 2025. We didn’t know when it was going to happen, but we knew one day it would happen.”
Along with taxes, another complicating factor is a 1% integrity fee the sports leagues are seeking in many states. That would come out of the “handle,” the total amount taken in by a sportsbook for a bet — not on the revenue generated.
No state has passed legislation that would include such a fee, though bills under consideration in Illinois, Kansas, Indiana and New York do include it.
“I’ve been trying to get the word out because 1% seems like a nice, small number,” Asher said. “Really, that 1% would equate to about 20% of the revenues.”
The end result could be that states seeking higher taxes and agreeing to integrity fees could end up with the same tax revenue on sports gambling as they had before the Supreme Court ruled: None.
Starting and running sportsbooks in some states could be an expensive proposition.