New Jersey Online Gambling: Tax Roundup
Yesterday afternoon, New Jersey Governor Chris Christie signed into law Assembly Substitute for Assembly Bill No. 2578, which authorizes internet gambling in New Jersey. The Garden State is keeping pace with Nevada in the budding online gambling market in the United States.
The new law leaves many open questions that we should expect answers to over the next several months. Some include:
- What games will the Division of Gaming Enforcement authorize for iGaming? (Decisions on games are up to DGE.)
- How, if at all, will the State police non-iGaming “commercial enterprises” from making their premises “available for placing wagers at casinos using the Internet”? (See section 28 of the new law.)
- Will player-to-player transfers be authorized? (I doubt it at least initially, for reasons explained here.)
- What states will New Jersey enter into iGaming “reciprocal agreements” with?
David Rebuck, Director of the DGE, said earlier today initial regulations should be ready for iGaming “soon.” As for when the first live wager will be accepted, I’ve seen estimates range from six to eighteen months.
Although many iGaming aspects need to be hashed out before sites go live, the taxes imposed by the State on iGaming isn’t one of them. Some tax considerations do remain, however.
There are three tax components for operators:
- License Fees. The issuance fee is $400,000 minimum. The renewal fee is $250,000 minimum. In addition, iGaming operators must pay $250,000 annually to compulsive gambling programs in the State.
- Internet Gaming Gross Revenue. Operators pay an annual fifteen percent tax on “Internet gaming gross revenue.” IGGR is defined in section 6 as “the total of all sums actually received by a casino licensee from Internet gaming operations, less only the total of all sums actually paid out as winnings to patrons.”
- Investment Alternative. Operators must “reinvest” two-and-a-half percent of annual IGGR through the Casino Reinvestment Development Authority. These funds are used in community and economic development projects in Atlantic City and around the State. If an operator fails to make the reinvestment, then the operator must pay an investment alternative tax at five percent of annual IGGR. In 1999, the Supreme Court of New Jersey upheld the constitutionality of the investment alternative tax. Read the court’s opinion here.
Under the new law, anyone physically located in New Jersey may place wagers on sites licensed by the State. No, one does not have to be a resident of the State to play.
Federal tax laws apply to intrastate iGaming, of course, so consumers will be required to report on their federal income tax return all gambling winnings from iGaming activity in the State.
As I’ve previously discussed, there appears to be some gray area regarding when the federal tax information and withholding determinations should be made by iGaming operators. Whether or not the IRS issues guidance on regulated iGaming operations remains to be seen.
There is also state income tax. Unlike brick-and-mortar gaming, iGaming offers to the tax authorities easy access of all records of consumer activity. The iGaming regulations will almost certainly require operators to maintain detailed records of winnings and losses for all account holders. The regulations may also require operators to provide a summary form of these records to the NJ Division of Taxation.
Under New Jersey law, gambling winnings are subject to income tax in the State. Accordingly, all gambling winnings earned on iGaming sites in New Jersey are subject to income tax in the State, regardless of whether the consumer is a resident of the State. This means a nonresident may be required to file a New Jersey income tax return to report iGaming winnings.
Nonresidents shouldn’t take the reporting requirement lightly. What may happen if a nonresident with iGaming winnings in the State fails to file a New Jersey income tax return?
The NJ Division of Taxation could make at any time in the future an income tax assessment for the unreported iGaming winnings in New Jersey. If the taxpayer owes the State back taxes, it’s possible the taxpayer could be prohibited from continuing to place wagers on iGaming sites in New Jersey until the taxpayer is compliant with the State’s tax laws. It’s also possible the State could pursue criminal charges against the taxpayer for, among other things, tax evasion and failure to file a tax return.
A follow-up post is in store after the Division of Gaming Enforcement proposes iGaming regulations.
(Note: Credit to Joe Kristan for the phrase “Tax Roundup.”)