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Comments on NJ iGaming Regs Part II: Account Transfers and Staking

June 24th, 2013 No comments

We continue our discussion of New Jersey’s Division of Gaming Enforcement draft regulations for internet gaming with player-to-player transfers and staking considerations.

New Jersey’s draft iGaming regulations expressly prohibit player-to-player fund transfers.

N.J.A.C. 13:69O-1.3(g) reads: “A casino licensee shall not permit a patron to transfer funds to another patron.”

Nevada, the only jurisdiction in the U.S. currently with live real-money internet poker taking place, has promulgated the same prohibition in its interactive gaming regulations.

Why, at least initially, are states prohibiting player-to-player fund transfers?

The transfer of funds from one account to another inherently raises money laundering questions.

In the United States, the Bank Secrecy Act (“BSA”) is the primary anti-money laundering federal statute. Under the BSA, casinos are required to report to the U.S. Department of Treasury certain suspicious financial transactions. (Read this for background discussion on how the BSA may apply to intrastate iGaming in the U.S.) It’s possible a player-to-player transfer on an iGaming site could be deemed suspicious, implicating the BSA.

Player-to-player transfers would require iGaming operators to have suitable mechanisms in place to ensure compliance with the BSA. Developing and testing such mechanisms would almost certainly significantly prolong the process an operator must endure before receiving approval from the regulators to launch an iGaming site.

Primarily for this reason, I believe New Jersey regulators, like Nevada, feel that the benefits from authorizing player-to-player transfers is outweighed by the added burdens in the early stages of the iGaming market.

Why do we care about having player-to-player transfers?

A player-to-player transfer adds much ease to engaging in staking activity. Suppose Player 1 agrees to pay for Player 2′s online poker tournament buy-in of $1,000. With transfers authorized, Player 1 could simply send from his online account $1,000 to Player 2′s account to buy the seat.

Without a player-to-player transfer, a number of other fund delivery methods are available, such as bank account transfer, writing a check, or delivering cash.

With alternative transfer options, what’s the big deal if there are no player-to-player transfers on an iGaming site?

Following the money for tax purposes.

Let’s follow the money with and without authorized transfers in the Player 1 and Player 2 example. If Player 2 places in the money, they agree to split the winnings 50-50.

With iGaming Account-to-Account Transfers

Suppose Player 2 wins $20,000 (net of the buy-in) in the tournament. Assuming Player 2 is a U.S. resident, the iGaming operator would normally issue a Form W-2G to Player 2 reflecting the winnings.[1]

A W-2G of $20,000 to Player 2, however, does not mirror the economics of the transaction between Player 1 and 2. Player 1 and Player 2 actually won $10,000 apiece.

Player 2 could have to explain to the IRS with sufficient documentation the staking arrangement. This could create an unnecessary burden for Player 2, as many IRS employees do not understand gambling issues. It could take several months before a case disputing with the IRS is transferred to someone knowledgeable at the IRS who does understand the issues. It would be much better to avoid the situation altogether, if possible.

To avoid the accounting issue for its players, an iGaming site could have an option set up that actually has Player 1 directly buying Player 2′s seat for a $1,000 entry online poker tournament, with the players also letting the site know before the tournament of their agreed percentage distribution of winnings, if any.

That way, when Player 2 wins the $20,000, the site already knows that $10,000 is attributable to Player 1. The site could automatically credit each account $10,000 instead of crediting Player 2′s account $20,000 and leaving it to Player 2 to transfer the $10,000 to Player 1.

It’s easy to follow the money with account-to-account transfers: Player 1 buys Player 2′s seat for $1,000. Player 2 wins $20,000, and the site credits Player 1 and Player 2′s accounts $10,000 apiece, also issuing W-2Gs to each for the same amount. Very transparent and easy to explain to the tax authorities if questioned.

Without iGaming Account-to-Account Transfers

Without a transparent transfer between Player 1 and 2 on the iGaming site, is there any way for the players to have the operator issue two W-2Gs of $10,000 apiece?

Possibly.

The IRS created Form 5754 to address the situation. Upon placing in the tournament, Player 1 and 2 could provide to the iGaming operator a completed 5754 so that the operator issues two W-2Gs, similar to above.

Unfortunately, however, I don’t see all iGaming operators accepting the form, similar to the brick and mortar casino situation.

If an operator doesn’t accept 5754, then the players are left in the cold to prepare other documentation to substantiate each step of the staking process.

Under these circumstances, it would be foolish for Player 1 to give Player 2 the buy-in money in cash. How would Player 2 then prove to the authorities that the buy-in wasn’t his original funds? Receipt of the funds by check or bank wire would make far more sense.

Plus, the players would likely have to prove that they agreed to split the winnings, and that the winnings, if any, were distributed pursuant to the agreement.

Miss any of these crucial steps in “following the money” and Player 2 could have insufficient evidence to prove that half of the winnings were in fact not his. Then Player 2 could be responsible for paying income tax on the full $20,000. Not a situation Player 2 wants to be in.

Yes, player-to-player transfers and staking activity for iGaming are for the benefit of the players. An iGaming site shouldn’t care how player’s winnings are distributed.

As gaming industry stakeholders jockey for position in the emerging iGaming industry in the U.S., it’s easy to lose sight of adequately looking out for the players. Considering the express prohibitions on player-to-player transfers, this issue may be just one of many examples.


[1] If Player 2 is not a U.S resident, then the operator would issue a Form 1042-S and withhold thirty percent of the winnings. For this post, we will keep the discussion to U.S. residents. Read this for a detailed discussion of the issues facing nonresidents for staking activity.

Comments on NJ iGaming Regs Part I: International Players

June 17th, 2013 No comments

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.

New Jersey Online Gambling: Tax Roundup

February 27th, 2013 No comments

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.

Operators

There are three tax components for operators:

  1. 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.
  2. 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.”
  3. 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.

Consumers

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.”)

The Billion Dollar Issue in the NJ Sports Betting Case is Commandeering

February 10th, 2013 3 comments

The last time I wrote about sports betting and New Jersey was last May, and I said the following:

Late last week, New Jersey Governor Chris Christie announced his State will proceed to take the steps necessary to offer sports betting at Atlantic City casinos and the State’s four horse tracks.

New Jersey is far ahead of New York in the process, as Governor Christie signed a bill into law in January 2012 that authorizes professional sports wagering in NJ. New Jersey will likely encounter in the near future efforts by federal authorities challenging such legislation on the basis of the Supremacy Clause. NJ will argue PASPA is unconstitutional.

My prediction held true, sort of.

Last August, the NCAA and the four major professional sports leagues filed suit against NJ Governor Christie, et al., in an effort to prevent the expansion of legalized sports betting in the United States.

Then in December, U.S. District Court Judge Michael Shipp held that the leagues have legal standing to sue NJ over the State’s sports betting law.

About a month later, the U.S. Department of Justice filed papers to intervene as a co-plaintiff in the case and defend the constitutionality of the Professional and Amateur Sports Protection Act of 1992.

Since then, the parties exchanged and filed legal briefs outlining their positions, ahead of this Thursday’s oral argument on the merits before Judge Shipp in federal court in Trenton, NJ.

What will the parties focus on during oral argument?

The leagues and the DOJ will argue that PASPA is constitutional and thus NJ’s sports betting law violates PASPA. NJ, in turn will argue that PASPA is unconstitutional under any of three theories, as articulated in New Jersey’s brief filed on Friday:

  1. PASPA Impermissibly Commandeers The Legislative Authority Of The States
  2. PASPA’s Lack of Uniformity Exceeds Congress’s Commerce Clause Power by Depriving States of Equal Sovereignty
  3. PASPA Violates Due Process and Equal Protection Rights

I find theory #1 the most compelling argument of the three. It’s clear NJ feels the same, as the substantial majority of its brief focuses on the commandeering issue.

What is commandeering? The 10th Amendment to the U.S. Constitution:

The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.

The U.S. Supreme Court has struck down federal laws as unconstitutional for violating the 10th Amendment only a handful of times. The basis for the findings was that the federal statutes in question commandeered the states to enforce them.

The issue narrows to, again: What is commandeering?

Unsurprisingly, the parties fiercely disagree on the answer to this question.

Does the 10th Amendment merely prohibit federal statutes that compel the states to take some affirmative action, as the DOJ argues? Or, as NJ argues, does it also extend to federal statutes that do not necessarily compel the states to do anything, but instead prevent them from taking some action?

In this case, that’s the billion dollar question.

NJ may have a tougher time prevailing on the issue merely because there is no Supreme Court case on point factually to support its interpretation of the 10th Amendment’s reach. But, the 10th Amendment cases decided by the Supreme Court are not even roughly analogous to this case, so that is the opening NJ is seeking to exploit.

In its brief, NJ comes out firing in the opening two paragraphs. Citing New York v. United States, the State emphasizes that under the Constitution, Congress lacks the power directly to compel the States to require or prohibit certain acts pursuant to a federal statute. And of course, argues the State, PASPA prohibits States from offering sports betting.

The entire brief is a worthy read, as the State picks apart the 10th Amendment characterizations presented by the leagues and the DOJ. In short, the State takes the position that the anti-commandeering doctrine has been applied to federal statutes that command the States to maintain a certain state of affairs.

There’s some great additional commentary on the commandeering issue in this Pokerati post and its comments.

No matter how Judge Shipp rules in this case, an eventual appeal to the U.S. Supreme Court seems inevitable. There’s simply too many dollars at stake for either the leagues or New Jersey to back down until the Supreme Court says to do so.

Governor Christie Conditionally Vetoes iGaming Bill: What About Poker?

February 8th, 2013 2 comments

Yesterday, New Jersey Governor Chris Christie acted on the internet gambling bill sitting on his desk during the final moments of his forty-five day time-frame. He could have (i) taken no action, thus allowing the bill to become law, (ii) vetoed the bill, or (iii) conditionally vetoed the bill, recommending changes to the legislation that he would sign off on.

The Governor’s conditional veto has apparently generated little, if any, initial opposition. State legislators and other interested parties believe the proposed changes are non-issues and that internet gambling in New Jersey is going to happen.

For a clear and concise read on the events surrounding the Governor’s conditional veto, be sure to check out this piece at Online Poker Report. The “short answer” on what Governor Christie wants changed:

  • Taxes at 15%, not 10%
  • License fees roughly double
  • NJ Division of Gaming Enforcement takes the reigns of online gambling
  • Online gambling regulation “sunsets” (expires) after 10 years (though nothing prohibits the legislature from renewing)
  • More funding for problem gambling initiatives, including an annual report wrt the impact of online gambling on problem gambling

Online Poker Report also delves into a “longer answer” on the changes. There are a couple in particular that raise some interesting questions.

Authorizing Online Poker in New Jersey

I came across this thread on the TwoPlusTwo forums. The original poster wondered whether online poker would be authorized under the Governor’s proposed changes.

The conditional veto calls for this language to be deleted from the bill:

2. (New section) Any authorized game or authorized gambling game, as defined in section 5 of P.L.1977, c.110 (C.5:12-5), that is authorized to be played in a casino may, with the approval of the division, be offered through Internet gaming.

And to be replaced with:

2. Section 5 of P.L.1977, c.110 (C.5:12-5) is amended to read as follows:

“Authorized Game” or “Authorized Gambling Game” – Roulette, baccarat, blackjack, craps, big six wheel, slot machines, minibaccarat, red dog, paigow, and sic bo; any variations or composites of such games, provided that such variations or composites are found by the division suitable for use after an appropriate test or experimental period under such terms and conditions as the division may deem appropriate; and any other game which is determined by the division to be compatible with the public interest and to be suitable for casino use after such appropriate test or experimental period as the division may deem appropriate.  “Authorized game” or “authorized gambling game” includes gaming tournaments in which 6 players compete against one another in one or more of the games authorized herein or by the division or in approved variations or composites thereof if the tournaments are authorized by the division.  “Authorized game” or “Authorized gambling game” shall also include any game that the division may determine by regulation to be suitable for use for wagering through the Internet.

No, you don’t see the word “poker” anywhere, although other games are listed. What, then, is the authority for permitting online poker under this legislation?

The language proposed in the original bill says the Division of Gaming Enforcement may approve for internet gaming any games only already authorized to be played at New Jersey casinos. Since poker is authorized for play in NJ casinos, then the division may approve it for internet gaming.

The Governor’s proposed language (underlined portion above) takes a different approach. Instead, he wants the Division of Gaming Enforcement to decide pursuant to promulgated regulations the games that are suitable for internet gaming. From my reading, it appears that the division would not be limited to approving for internet gaming those games only already authorized for play in NJ casinos, but instead may approve for internet gaming any game the division so chooses.

The proposed change runs consistent with the Governor’s conditional veto statement, which makes clear his goal to grant the New Jersey Division of Gaming Enforcement “wide latitude and authority to establish a regulatory framework that provides for the most effective controls, monitoring, and supervision” of internet gaming.

What wouldn’t surprise me is if the division takes a cautious approach with poker. Games not against the house (i.e. player-against-player) raise various unique issues, such as collusion, that require special attention and consideration.

Poker will be a part of internet gaming New Jersey. Governor Christie is just giving the division the apparently unilateral power to figure out how to bring the game—any games, for that matter—online in the state.

Pooling Liquidity

Another proposed change pointed out at Online Poker Report:

Page 32, Section 33, Line 47: Delete “an interstate compact” and insert “a reciprocal agreement”

The phrase “interstate compact” is found in section 33 of the bill:

33.  (New section)  Notwithstanding any other provision of P.L.      , c.    (C.      ) (pending before the Legislature as this bill), wagers may be accepted thereunder from persons who are not physically present in this State if the Division of Gaming Enforcement in the Department of Law and Public Safety determines that such wagering is not inconsistent with federal law or the law of the jurisdiction, including any foreign nation, in which any such person is located, or such wagering is conducted pursuant to an interstate compact to which this State is a party that is not inconsistent with federal law.

Interstate compacts are agreements entered into between two or more states. Under the U.S. Constitution, interstate compacts require congressional consent.

Perhaps the Governor is anticipating possible legal challenges to agreements entered into with other states for internet gaming. If the iGaming law acknowledges that the agreement is an “interstate compact,” then the State is essentially admitting that the agreement is subject to Congressional approval under the compact clause. By labeling these possible future agreements as something else, the State at least leaves the question open as to whether the agreement is one subject to the compact clause.

With that said, is there any special significance with using the phrase “reciprocal agreement?” Perhaps. As fellow gaming attorney Bob Crawford noted on Twitter, it’s possible that a reciprocal agreement would require other states to accept NJ players, but an interstate compact might not.

We should continue to think on this issue. As I’ve previously discussed, how states seek to pool virtual liquidity may prove critical on how the internet gaming market thrives in the United States.

In the meantime, NJ Assemblyman John Amodeo said he is working “to get these [proposed amendments] passed by the Legislature as soon as possible and back onto the Governor’s desk for consideration.”

Yesterday’s conditional veto was a very significant step along the path towards regulated internet gambling in the United States.

Anonymous Lottery Winner Bill Introduced in New Jersey

September 6th, 2012 No comments

A few months ago I received an e-mail from someone claiming to hold a Powerball ticket good for a seven figure sum. This someone, however, was seeking to claim the ticket anonymously, and wanted to know if I had any ideas.

I suspect this someone came across my post about an unclaimed winning lottery ticket in Iowa. In that case, the Iowa Lottery refused to honor the ticket unless the recipient came forward. In both situations, state law required the winner’s name and location to be made public information.

So I wrote back and said it could be considered fraud if someone other than the actual winner claims the prize. I added that I don’t have any viable courses of action to present, and thanked the person for the inquiry.

There are countless reasons why anyone would want to claim a lottery ticket anonymously. The primary reason, of course, is to avoid the public spotlight. Unfortunately, far too many times lottery winners have fallen victim to scam artists or physical harm.

New Jersey Assemblyman John Burzichelli believes lottery winners shouldn’t have to face the fame with their fortune. He recently introduced bill A2982, which would give New Jersey lottery winners the option of remaining anonymous for one year.

The NJ Lottery is likely to lobby against the bill as is. The State Lottery claims that “transparency gives taxpayers increased confidence that lottery games are fair and honest.” But I see a far more significant reason for its opposition: Lost publicity. No one is going to care about a press conference for a lottery winner a year after the fact.

Expect some sort of compromise, such as a prize amount threshold.

I don’t think we should preserve the publicity at the expense of continuing to expose lottery winners to evil. The states generate plenty of revenue from their lotteries and almost certainly could afford to take a small hit, if any. Plus, there are other ways to accomplish transparency.

Sports Betting Bill Introduced in New York

May 29th, 2012 No comments

Last week, the New York Post reported Sen. Tony Avella introduced a bill that would authorize wagering on professional sporting events in New York. Proceeds would be applied to education in the State.

This news isn’t surprising, considering last March Governor Cuomo reached an agreement with lawmakers to allow seven new casinos in the state.

For either new casinos or sports betting to have a chance to come to New York, a constitutional amendment is required.

To amend the New York Constitution, the proposed amendment must be adopted by two successive legislatures, and then approved by a public referendum. The current legislative session in New York has until June 21 to approve the measures.

The sports betting bill introduced by Avella, S.7401, would authorize

wagering on professional sporting events at betting facilities located at thoroughbred and harness racetracks operating in this state, in simulcast theaters operated by off-track betting corporations and in any constitutionally authorized casino facility, as may be prescribed by the legislature….

Under the current language of the bill, you could place bets on professional sporting events at any of New York’s five tribal casinos or nine racinos, as well as at any other NY racetracks or OTBs. And, if commercial casinos are approved in New York, then you could place bets there as well.

Wait, but isn’t sports betting illegal under federal law? In general, that is correct.

The Professional and Amateur Sports Protection Act (“PASPA”) is a federal statute enacted in 1992 that expressly prohibits states from operating a gambling system based on professional or college sports. Four states were exempted: Delaware, Montana, Oregon, and Nevada.

So how does S.7401 get around PASPA? Well, one day NYers might thank NJ for taking care of it.

Late last week, New Jersey Governor Chris Christie announced his State will proceed to take the steps necessary to offer sports betting at Atlantic City casinos and the State’s four horse tracks.

New Jersey is far ahead of New York in the process, as Governor Christie signed a bill into law in January 2012 that authorizes professional sports wagering in NJ. New Jersey will likely encounter in the near future efforts by federal authorities challenging such legislation on the basis of the Supremacy Clause. NJ will argue PASPA is unconstitutional.

Christie’s comments all but ensure an imminent showdown:

“We intend to go forward,” the Republican governor said. “If someone wants to stop us, then let them try to stop us. We want to work with the casinos and horse racing industry to get it implemented.

“Am I expecting there may be legal action taken against us to try to prevent it? Yes,” the governor said. “But I have every confidence we’re going to be successful.”

Christie has a reputation of actually doing what he says he’ll do. This is already a great story, and the best is likely yet to come. I’ll address the merits of the legal arguments in a future post.

Atlantic City Casino Property Tax Appeals Settled

March 25th, 2012 2 comments

Some Atlantic City casinos just became richer. It’s not because of a massive losing streak from its patrons, however. Instead, it’s because of a recent tax-appeal settlement cutting property values of three casinos by 35 percent.

Atlantic City has agreed to give $26.96 million back to Caesars Entertainment Corp. From 2009 to 2011, Caesars had paid property taxes for Bally’s Atlantic City based on the property being valued at $1.5 billion.

The Atlantic City Council agreed to settle the appeal filed by Caesars by reducing the Bally’s property valuation to $700 million.

Previously, property values for casinos were based on their land and buildings. Since the economic downturn, the casinos opted to take financial performance into account.

Atlantic City Mayor Lorenzo Langford claims the change to how casino properties are valued for purposes of the property tax is not fair:

“If the state of New Jersey really wants to assist the city, they should mandate that the casinos be assessed in the same way and manner as residential properties,” Langford said. “Property taxes are not reduced on the residential side if a property owner suffers a reduction in income or mismanages their financial affairs. Why should casinos be treated differently?”

Because the casinos are now paying less property tax, a budget shortfall is expected. The ultimate losers of these settlements may be the other local property owners.

U.S. Online Poker: Legislative Update

March 18th, 2012 No comments

Discussion about the possible legalization of online gambling in the U.S. has been gaining more and more traction for some time. An update here on the current legislative developments is long overdue.

California: In late February, Senate Bill 1463 was introduced. The bill would legalize online poker in California, and has a goal of raising $200 million for the state general fund. The bill is co-authored by Senate President Pro Tem Darrell Steinberg. According to the complete bill history for Senate Bill 1463, the bill may be acted upon on or after March 26.

Iowa: This past Thursday, Iowa House Speaker Kraig Paulsen said the State House does not plan to take up Senate File 2275, which would legalize intrastate online poker in Iowa. The State Senate had recently approved the bill in a 29-20 vote. The bill is all but dead.

Mississippi: In late February, House Bill 1373 was introduced. The bill would have legalized online gambling within the state. The bill is now dead.

Nevada: Nevada is far ahead of any other state in this area, having legalized intrastate online poker late last year. In January, the Nevada Gaming Control Board finalized the Technical Standards for Gaming Devices, and the Minimum Internal Control Standards were finalized in February. At this time, it is unclear when online operators will be permitted to accept real-money deposits. Some speculate late 2012.

New Jersey: In early February, Senate Bill 1575 was introduced. The bill would legalize online gambling within the state. Just over a year ago, Governor Christie vetoed a bill that would have legalized intrastate online gambling, citing constitutional concerns. Current bill sponsor Senator Lesniak believes he has addressed these concerns. The bill failed to advance through the legislature during the final voting session this past week, however, so it may not be subject to a vote for at least six more weeks.

Taxation of Gambling Winnings in New Jersey

August 16th, 2011 No comments

Over the weekend I came across this “Biz Brain” article from NJ.com. It addresses the question whether New Jersey lottery winnings are subject to New Jersey income tax. The answer: Maybe.

For taxable years beginning on or after January 1, 2009, New Jersey lottery winnings are subject to New Jersey income tax only if the prize amount exceeds $10,000. The prize amount is the determining factor.

For example, in 2011 if you win the $25 million New Jersey PowerBall and score a $5,000 win from a Pick 4, only the PowerBall winnings are subject to New Jersey income tax. Of course, all $25,005,000 is subject to federal income tax.

What the article doesn’t address is the question whether the $10,000 minimum prize threshold applies to all gambling winnings in New Jersey. The answer is no. All other gambling winnings in New Jersey are fully subject to the state’s income tax. See this N.J. Technical Bulletin for more details.

Furthermore, as I’ve written before, if an out-of-state resident travels to Atlantic City and wins big playing blackjack, he may be on the hook for paying income tax to both his state of residence and New Jersey.

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