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Withholding Massachusetts Gambling Winnings: Searching for a Better Solution

Over the weekend the Boston Globe ran a story about an interpretation of Massachusetts law requiring the state’s casinos to withhold and report a patron’s gambling winnings of $600 or more.

The law would capture far more than the corresponding withholding and reporting rules for gambling winnings under federal law. The Internal Revenue Code requires informational reporting for slot machine winnings of at least $1,200 or more and for poker tournament winnings of more than $5,000. There are no reporting requirements for table games such as blackjack, unless the player wins more than $600 and the odds are no better than 300-to-1.

Here’s the law at issue:

Every person, including the United States, the commonwealth or any other state, or any political subdivision or instrumentality of the foregoing, making any payment of lottery or wagering winnings which are subject to tax under chapter 62 and which are subject to withholding under section 3402 of the Internal Revenue Code, without the exception for slot machines, keno and bingo played at licensed casinos in subsections (q)(5) and (r) of said section 3402 of the Internal Revenue Code, shall deduct and withhold from such payment an amount equal to 5 percent of such payment, except that such withholding for purposes of this chapter shall apply to payments of winnings of $600 or greater notwithstanding any contrary provision of the Internal Revenue Code.

In other words, the law requires five percent withholding for state income tax on all winnings of $600 or more in MA casinos. Read more in the Massachusetts Department of Revenue Technical Information Release 13-4.

With Massachusetts in the process of determining casino licensees, prospective operators are making a fuss. There will be more paperwork to deal with. More significantly, higher stakes players may be less inclined to gamble at MA casinos, because a lot of their winnings would be subject to the reporting and withholding.

This possibly slight shift from the status quo that is unfavorable to the industry demonstrates a higher need to completely overhaul the reporting and withholding rules for gambling winnings. There has to be a more effective method that makes the government, operators, and players all happy.

I’ve discussed before a federal bill that included tax reporting and withholding rules for internet gambling winnings:

H.R. 2230, Internet Gambling Regulation and Tax Enforcement Act of 2011, for example, sought to require “Internet gambling licensees” to report to the IRS, among other things, the “net Internet gambling winnings” for the calendar year of each person placing a bet or wager with the licensee. Such a requirement would maximize the reporting to the IRS. But would it be prohibitively costly for iGaming operators to not only document but also report the net winnings of all persons placing wagers, including nominal amounts (e.g. less than $100)?

Players are happy here, because their losses are built into the amount reported to the tax authorities. There is no issue of substantiating gambling losses, which is a big problem for taxpayers at brick and mortar casinos.

Issuing annual tax forms to all patrons with winnings at brick and mortar casinos is not similarly practical. Or is it?

The IRS and casinos could establish a streamlined process for first-time patrons to provide tax information. Once a patron is in the system, all the casino must do is keep track of a patron’s winnings and losses, which can be done upon issuing and retrieving chips, and then report and withhold accordingly. It’s not quite that simple, but it’s a starting point.

As the possibility—however unlikely—of federal legislation for online gambling remains, an overhaul of the reporting and withholding rules should be kept in mind.

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