A new federal online gambling tax regime has been proposed in the US in response to the launch and pending launch of internet gambling in various states throughout the country. Internet gambling is currently raising its head after years of hiding in the shadow.
New Jersey is the first to kick off its online wagering November 26, becoming the most populous state to do so after Nevada and Delaware. California, Illinois and Pennsylvania are considering such moves.
Other states have become active since 2011, when the federal government signaled it would not block most forms of Internet wagering.
The move is expected to make money pour in the federal budget.
The launch in a handful of states “will release a floodgate of investor interest in the online space, and spur new states to open to reap tax dollars,” analyst Vaughan Lewis said in a note to clients.
Morgan Stanley estimated legal US online gambling revenues would reach $670 million in 2014, increasing to $9.3 billion in 2020.
The United States has a handful of gambling regulations. While casino gambling was only allowed in Nevada a few decades ago, New Jersey allowed casinos in Atlantic City in the 1970s and until recently, the federal government claimed that online gambling was unlawful. But a 2011 Justice Department legal opinion said only sports betting would be considered illegal.
Nevada authorized online poker in 2012, and Delaware and New Jersey passed laws allowing a full range of casino games.
Despite existing bans, Americans spent $2.6 billion on online gambling in 2012 in a global industry worth $33 billion, according to a study for the American Gaming Association, which represents commercial casino operators. The American Gaming Association has called for more comprehensive and less confusing federal rules, including banking regulations. Even though banks and other credit card issuers weren’t supposed to process gambling payments for US customers after the Unlawful Internet Gambling Enforcement Act (UIGEA) laws were passed in 2006, any online poker or casino player can tell you that sometimes, they did. However most major banks did comply, under threat of strict fines and penalties from the Department of Justice. So now that online gambling becomes fully legal in a handful of states, there is a risk that some banks will refuse to process payments to those regulated sites.
Most of the decisions to the individual issuing banks, meaning they can simply choose not to allow a transaction if they’re not comfortable with it, which appears to be the case with many online gambling deposits in those states that have regulated the industry.
“While we have long supported federal regulation versus state regulation, the most important point is that online gaming must be regulated to protect consumers and ensure the integrity of the games,” said association president Geoff Freeman.
Answering the calls, Representative Jim McDermott has introduced a bill to ensure taxes and fees are collected within a regulated regime. The Internet Gambling Regulation and Tax Enforcement Act of 2013 would create a 12% deposit tax that would be paid by licensed operators rather than players.The federal government would collect 4% of this tax, with the remaining 8% being distributed to qualified states and tribes in the federal regime.
The tax payable to states and tribes would remain dependent upon the location of the customer in the respective state or tribal area at the time they made their deposit.
Supporters of the new regime said that rather than using a Gross Gaming Revenue (GGR) as a basis for tax calculation in a multi-jurisdiction environment, a deposit tax approach would be better suited to an online gambling market. GGR is the amount wagered minus the winnings returned to players, a true measure of the economic value of gambling
Deposit tax is paid up front, creates transparency in the market and supports both revenue calculation and distribution across multiple jurisdictions based on a place of consumption methodology, bill advocates say.
However, online gambling critics warn of the dangers of unhindered expansion online — that geographic and age restrictions could be easily bypassed, and unsavory elements could use the systems to launder money.
“This is not just fun and games, it’s a question of national economic security,” said University of Illinois business professor John Kindt.
Kindt said the expansion of Internet gambling would simply be “a transfer of wealth, with no productivity gains,” and that those profiting would likely be offshore firms or organized crime.
“There are still things that can go wrong, even with controls in place,” added Steve Kenneally, vice president for regulatory compliance at the American Bankers Association.
Meanwhile, players are left trying to figure out how to deal with newly legal Internet gambling sites. Using geolocation technology, the systems require that gamblers be located within the state. “Once these states are successful within their borders, they will figure out how to pool players across state lines to take bets from each other, and a lot of other states will jump in,” said Whittier Law School professor I. Nelson Rose. “Within 10 years, I think we will see a very large portion of states will have Internet gambling,” he predicted.
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