On June 3, 2013, draft regulations for internet gaming by the NJ Division of Gaming Enforcement (DGE) were published in the New Jersey Register for a sixty-day public comment period. Check out a great “cliffs” of these proposed regs at Quadjacks.com, here.
I have already covered some of the tax aspects of New Jersey’s enacted iGaming legislation. In a series of a few weekly posts, I will now examine the draft regulations in light of those aspects as well as other general tax considerations for iGaming in the U.S.
The goal with this short series is to raise awareness, obtain input, and then submit formal comments on the proposed regs to the DGE if appropriate. Please do not hesitate to share your thoughts in a comment below or by e-mail (brad AT taxdood DOT com).
The first item addressed here is international players. The New Jersey iGaming legislation authorizes sites to accept wagers from patrons who are physically located in New Jersey. Theoretically—and eventually in reality—someone who lives outside of the U.S. will travel to New Jersey and attempt to deposit funds on and place wagers using an internet gaming account.
To be clear, this post is not addressing players who are physically located outside of New Jersey and would attempt to deposit funds on an internet gaming account. Such a scenario could be authorized by a “reciprocal agreement,” a topic for another post. For this post, international player generally means a player who is ineligible to obtain a social security number.
Although the New Jersey legislation does not explicitly prohibit an international player from establishing an internet gaming account in New Jersey, the regulations are unclear on this issue.
Unless an international player is a U.S. citizen living abroad, it is unlikely that person has a social security number. In general, noncitizens may be eligible for a social security number only if authorized to work in the U.S. by the Department of Homeland Security.
One may conclude that an individual without a social security number cannot establish an account under proposed regulation N.J.A.C. 13:69O-1.3(b):
In order to establish an Internet or mobile gaming account, a casino licensee shall:
1. Create an electronic patron file, which shall be encrypted and include at a minimum:
a. Patron’s legal name;
b. Patron’s date of birth;
c. Patron’s Social Security number;
d. Patron’s Internet and/or mobile account number;
e. Patron’s address;
f. Patron’s electronic mail address;
g. Patron’s telephone number;
h. The method used to verify the patron’s identity; and
i. Date of verification.
(Emphasis added.) So if a casino licensee cannot obtain a patron’s social security number because the patron does not have a social security number, must the licensee refuse the patron’s business in order to comply with the regulation?
There may be a fix to this issue. Before we go there, we should first see whether the issue is addressed elsewhere in the proposed regs.
Continue reading N.J.A.C. 13:69O-1.3(b). Under (b)(2), a casino licensee shall verify a patron’s identity in accordance with:
1. N.J.A.C. 13:69D-1.5A and, in addition, record the document number of the governmental issued credential examined; or
2. Other methodology for remote multi-sourced authentication, which may include third-party and governmental databases, as approved by the Division.
N.J.A.C. 13:69D-1.5A is a promulgated regulation addressing situations when a casino licensee is required to verify the identity of person or the validity of a signature on a document, found here. The verification involves establishing a “patron identification file.” To establish the file, a casino employee must require the person to present two identification credentials, at least one of which must be government issued.
To meet N.J.A.C. 13:69D-1.5A, an international player may present documents such a civil birth certificate, passport, or national identification card. It just seems impractical to require international players to present these documents to meet the standard every time the patron seeks to establish an online gaming account with a licensee in New Jersey.
Fortunately, proposed reg N.J.A.C. 13:69O-1.3(b)(2)(2) above provides some flexibility for the Division to approve other methodologies for identification verification for international players, but the lack of any specific methodology in this provision does not leave me very confident that regulators and casino licensees will be prepared at the outset to smoothly handle patrons of international origin in New Jersey.
This brings us back to a possible solution.
A state’s internet gaming regulations should require players who are not eligible to obtain a social security number to provide an individual taxpayer identification number (ITIN) to verify the international player’s identity and establish an internet gaming account.
What is an individual taxpayer identification number?
Similar to social security number, an ITIN is a nine-digit number issued by the Internal Revenue Service to individuals who are required to have a U.S. taxpayer identification number but who do not have and are not eligible to obtain a social security number.
In what situations are individuals required to have a U.S. taxpayer identification number but do not have and are not eligible to obtain a social security number?
Situation 1: In general, nonresident aliens (i.e. taxpayers who are not considered U.S. residents) who generate income in the United States may be required to file a U.S. tax return. In order to file the return, the taxpayer needs to obtain an ITIN.
Gambling winnings of nonresident aliens won in the United States is taxable income in the U.S. A patron traveling from abroad to New Jersey may have a U.S. tax return filing requirement if such patron has winnings on a NJ regulated iGaming site.
Situation 2: Nonresident aliens who generate income in the United States and seek to claim treaty benefits (which may or may not impact the requirement to file a U.S. tax return) would need to obtain an ITIN to claim the benefits.
Some tax treaties entered into between the U.S. and foreign countries exempt gambling winnings earned by residents of a foreign county from U.S. income tax. Taxpayers who are residents of such foreign countries and generate gambling winnings on a NJ regulated iGaming site should look to obtain the benefit of the exemption.
Applying either situation to our international player who attempts to establish an internet gaming account in New Jersey produces the same outcome: The international player will need to obtain an ITIN.
How does one obtain an individual taxpayer identification number?
To obtain an ITIN, a taxpayer must submit to the Internal Revenue Service Form W-7 with supporting documentation and must also file a tax return with the Form W-7.
What supporting documentation may be provided along with Form W-7?
The supporting documentation may include a government issued credential such a civil birth certificate, passport, or national identification card.
Sound familiar? These are governmental issued credentials that may satisfy the player identification verification standard under N.J.A.C. 13:69D-1.5A.
There is a practical benefit to having international players obtain ITIN for establishing an internet gaming account in New Jersey. Once the ITIN is obtained, the player would not have to present the other government issued documents each time the player seeks to open an additional account on another NJ iGaming site. The player may instead provide the ITIN each time.
How does the international player address the tax return filing requirement for Form W-7?
There is a potential timing obstacle with the tax return filing requirement in the iGaming context.
An international player without an ITIN may not be in a position to prepare a tax return until after the close of the first calendar year that the international player has gambling winnings in the United States.
Without going into the detail here, there are exceptions to the tax return filing requirement in the Form W-7 Instructions applicable to our international player with gambling winnings in the United States.
The iGaming regulators and operators could work with the Internal Revenue Service in an effort to establish a streamlined process for international players to obtain an ITIN.
Such a process seems like a “win-win.” Getting the IRS on board, however, may be wishful thinking.
The international players benefit by addressing the bulk of the identification verification up front. In addition, the players will be more prepared to address U.S. income tax obligations, if any.
The operators benefit with more consistency in their patron’s files: All electronic patron accounts would either have a social security number or ITIN on file.
The bottom line is that state-issued iGaming regulations should include an explicit mechanism for accepting wagers from a patron physically present in the state but ineligible for social security number by requiring the patron to provide an ITIN.
If New Jersey intends to accept wagers from patrons ineligible for a social security number, then at a minimum I propose N.J.A.C. 13:69O-1.3(b)(1)(c) be amended by adding the language “or individual taxpayer identification number” after “Patron’s Social Security number.” One step further, I propose the regulations to include a provision requiring patrons ineligible for a social security number to provide an ITIN before being permitted to deposit funds on an iGaming site.
Next time I will discuss how player-to-player transfers and staking could be covered under New Jersey’s proposed iGaming regulations.