Intrastate iGaming: State Gaming Taxation Models
It’s no secret the chief aim for most—if not all—states to legalize Internet gambling is to generate tax revenues. This “Intrastate iGaming” series now turns to how states may seek to attain that goal.
Gaming Taxation in the United States – Gross Gaming Revenue
A convenient iGaming tax model for states to adopt is that used to collect gaming tax revenues from licensed brick and mortar casinos in their particular state. Among the twenty-two states with commercial casinos, most tax casinos based upon Gross Gaming Revenue (“GGR”).
GGR is characterized as a profit-based model. In general, GGR consists of total wagers made by customers less the winnings paid back to its customers. The GGR base may be further reduced by other expenses. The tax is a percentage of GGR, from a low of 6.75% in Nevada to a high of 55% on slot machines in Pennsylvania.
The GGR model has already been adopted to tax iGaming operators at the state level. In Nevada, the first state to promulgate iGaming regulations, gross revenue received by an interactive gaming operator is subject to the same license fee “as the games and gaming devices of the establishment, unless federal law otherwise provides for a similar fee or tax.” (NV Gaming Comm’n Reg. 5A.170(1)) In other words, the State will generally tax iGaming operators the same as its brick and mortar casinos.
Delaware is the only other state with an iGaming law on the books, titled The Delaware Gaming Competitiveness Act of 2012 (“DGCA”). Delaware’s iGaming framework is different from Nevada’s because it is under the control and operation of the Delaware Lottery. Furthermore, it authorizes not only internet poker like in Nevada, but also traditional lottery games and table games over the internet.
Similar to Nevada, Delaware generally taxes iGaming based on GGR. Under the DGCA, gross revenue from iGaming, less winnings paid to players, are required to be placed in a special account called the “State Internet Lottery Fund.” After an appointed Director pays administrative and operation fees out of the account, the first $3.75 million of proceeds for a given fiscal year must be transferred to the State Lottery Fund for the benefit of the state. Remaining funds from internet lottery and table games are to be distributed pursuant to the provisions under section 4815 of the Delaware Code.
Alternative Model – Deposit Tax
Another iGaming taxation model is the deposit tax. Instead of taxing gross gaming revenues, the deposit tax is imposed on a percentage of funds a player deposits with an operator. A volume-based model, deposit tax rates around the world on iGaming are generally much lower than GGR rates.
It’s notable that of the three federal bills containing tax schemes for regulated iGaming in the U.S. (here, here, and here), all of them called for a deposit tax. The Internet Gambling Regulation and Tax Enforcement Act of 2010, for example, sought to impose a two percent tax on deposits made by customers on licensed iGaming sites.
Comparing the Models
GGR may be viewed as relatively low-risk for operators since the tax is based on profits from gaming. Plus, it’s the model many future iGaming operators will be most comfortable with at the outset, since GGR is the most common model to tax commercial casino gaming in the United States.
Applied to iGaming, the GGR model has some kinks. When are payouts to customers in the iGaming space deemed to be made? When a winning wager is credited to a customer’s account or when the customer withdraws the funds from the account? The answer impacts the timing of the deduction from the GGR base. In addition, some GGR models have different tax rates depending on the game played. This structure adds complexity to the accounting measures operators must have in place to properly remit the GGR tax to the State.
Licensing jurisdictions would seem to favor a deposit tax for iGaming because the tax is collected up front, when the customer deposits funds on the iGaming site. And unlike GGR, the deposit tax does not depend on the type of game played, so it is game-neutral. An across the board tax would make implementation far easier for iGaming operators.
One issue with the deposit tax is that it may apply regardless of whether an iGaming customer actually uses the deposited funds to engage in wagering activity. Theoretically, customers could deposit funds and then immediately request withdrawal without placing any wagers. Such activity presents no benefit to the operator, who would have to pay a tax without the opportunity to earn revenue.
Finding a Happy Medium
At least initially, states seem keen on carrying gaming taxation models from brick and mortar to iGaming. It’s not a surprise considering operators are already accustomed to GGR. Jurisdictions should bear in mind the deposit tax offers potentially much simpler implementation. But what about the deposit tax issues?
To address the deposit and immediate withdrawal situation, states could permit operators to charge early withdrawal fees. Another idea is to allow operators to take a tax credit for withdrawn funds that are not returned to players, thereby imposing the deposit tax only on wagered funds. Such a credit makes the deposit tax more akin to a profit-model like GGR while maintaining game-neutrality.
The gaming taxation model is crucial for determining how a state will generate revenue from iGaming. Each state must carefully consider the implications of each proposed model for operators and customers and ultimately determine which is in the best interests of the State in order for the iGaming industry to thrive in the United States.
Next time, we will highlight some tax considerations for states entering into interstate iGaming compacts.