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?


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, 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.

Internet Poker Under Consideration in New York?

March 12th, 2013 No comments

Newsday is reporting New York State Senate co-leaders Jeff Klein and Dean Skelos have included language in their proposed state budget that signals their support for “authorizing and regulating internet gaming for games of skill, including poker, to reflect recent changes in the classification of these games.”

Aides to these lawmakers, according to Newsday, claim the basis for authorizing internet poker in New York is a state court ruling that held poker as a game of skill, and not a game of chance.

Say what?

Indeed, there is a very relevant federal court ruling from the Eastern District of New York. Last August, in United States v. Dicristina, Judge Weinstein held that poker is a game of skill, and thus not gambling, under the federal Illegal Gambling Business Act (“IGBA”).

In his opinion, however, Judge Weinstein made very clear the classification of poker under New York State law:

New York courts have long considered that poker contains a sufficient element of chance to constitute gambling under that state’s laws.

Judge Weinstein noted the defendant did raise the argument (which was later waived) that poker should not be considered gambling under state law. The Judge’s response: “[The argument] has no merit.”

Under N.Y. penal law, profiting from unlawful gambling activity is considered criminal promotion of gambling.

I am puzzled about the senators’ purported basis for authorizing online poker in New York. There is no New York state court decision to support this position. Perhaps instead Klein and Skelos meant to suggest that the state legislature should consider the reasons described in detail in Dicristina as a basis for changing the current interpretation of poker as a “contest of chance” under NY law.

There’s likely more to this story than initially reported. Stay tuned.

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.


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.


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.

Intrastate iGaming: Interstate Compacts and Revenue Sharing

January 30th, 2013 No comments

One of the most not only fascinating but also critical issues for state-by-state iGaming legalization is whether states will let their virtual fences down and enter into iGaming compacts with other states. If so, how may states share tax revenue from gaming activity?

Interstate iGaming Compacts

Before evaluating tax revenue sharing possibilities, we must grasp some of the dynamics surrounding interstate compacts.

Look no farther than the State of Nevada, which appears poised to open its doors to intrastate online poker sometime in 2013. But with a population of approximately 2.76 million, Nevada presents profitability concerns for online poker operators offering its product only to customers physically present in the state. This viability issue is compounded many times over as more than a dozen companies have already received preliminary approval to operate in the state.

Sure, some committed poker players may move to Nevada to play online full-time, but it seems unreasonable to expect many recreational players to do so. Certainly not enough to make online poker in Nevada a robust business on its own. And interested parties know this.

In his 2013 State of the State address, Nevada Governor Brian Sandoval urged lawmakers to approve a bill authorizing him to enter into interstate iGaming compacts without first requiring federal legislation authorizing it.

Larger states, however, may not have as strong an incentive to negotiate compacts with smaller states. Consider California, for instance. With a population of over 38 million, the Golden State is larger than every country in Europe but eight.

The Internet Gambling Consumer Protection and Public-Private Partnership Act of 2012 did provide California legislators the alternatives to opt into a federal iGaming system or enter into compacts with other states. The problem with either alternative coming to fruition is that special interest groups in California are mightily struggling to get on the same page for iGaming. That’s why the bill failed to reach committee vote last year. And these groups may hold the belief that if the State reaches compacts for interstate online play, other smaller states would reap the benefits of the pooled liquidity far more than California would.

Another compact concern for California involves losing its residents to partner states. (Note: Expatriation is already a problem for California.) Suppose, however unlikely, that NV presented an attractive proposal to CA for pooling liquidity, such as NV giving CA a significant percentage of gross gaming revenue (“GGR”) generated by the NV players. Once the pooled sites go live, some CA players would move to establish residency in NV and thus avoid paying CA income tax. The analysis of this issue could narrow to whether the additional gaming revenue paid to CA as result of liquidity would exceed the lost income tax revenue from CA expats.

Even if states agree to share revenues based on location of players, as discussed below, there’s likely still an overall benefit to pooling liquidity. By substantially increasing the number of virtual players on a given site, a greater variety and quantity of tables become available for players to choose from. The challenge is figuring out how to distribute the increase in overall benefit so interstate compacting is agreeable to lawmakers and their supporters on all sides of the negotiating table.

With the above in mind, how would states seek to share tax revenues pursuant to interstate iGaming compacts?

Revenue Sharing Pursuant to Interstate Compacts

States that have or are considering legalized online gaming are including their own licensing and taxation regimes in the legislation. We should expect any state’s iGaming legislation to permit an operator to operate in the state only if licensed in the state. In other words, foreign operators in general seem unlikely, at least in the early stages of this emerging industry.

The natural progression to interstate iGaming compacts would seem to involve an operator licensed in more than one state to pool its liquidity among those states. But it’s not necessarily a smooth ride to get there.

New Jersey’s pending iGaming bill, for instance, requires all iGaming servers to be located in Atlantic City in order to comply with the New Jersey State Constitution. If PokerStars is licensed in both NV and NJ and pools its liquidity, for example, then PokerStars would have to ensure all servers running virtual tables with NJ players are located in Atlantic City. If NV players were on these tables as well, would such conduct run afoul of the NV interactive gaming laws? I suspect this type of issue would need to be addressed in the interstate compacts themselves.

As an aside, the notion of requiring operators pursuant to an interstate compact to be licensed in each state it seeks to operate ironically defeats another purpose for compacts: Avoiding paying license fees in multiple states.

With the above considerations in mind, how would states share gaming revenue pursuant to an iGaming compact? Let’s assume, as discussed, that each state will have in place its own gaming taxation model. The result is that operators could be required to apply more than one state’s taxation model to activity taking place on the same online poker table.

Suppose again that PokerStars is licensed in both NV and NJ. NV’s tax is 6.75% of GGR. The pending NJ iGaming bill calls for a 10% tax on GGR. If liquidity is pooled between the states, there could be both NV players and NJ players on the same PokerStars cash game tables. Gaming revenue to PokerStars would be the collected rake for each hand played.

The question then becomes, how do the two state’s gaming taxation models apply to each online poker hand played? A few possible approaches:

  1. The rake is subject to tax in both states;
  2. The rake is subject to tax in the state that the winning player of the hand resides; or
  3. A proportion of rake is subject to tax in state “A” based on the ratio of total wagers made by players in state “A” to total wagers made by players in both states “A” and “B.”

Approach #1 obviously requires modification, otherwise operators would pay GGR tax of the full amount to both states. Operators could be entitled to some tax credit for GGR paid to another jurisdiction. The states would need to negotiate the mechanics of the tax credits as applied to each state.

Approach #2 would seem to be the easiest to implement. Operators would already be required to know the location of all of its players, so the added step of attributing a location to rake collected for each hand does not seem too burdensome. Of course, split pots present more complex situations, but are likely far from insurmountable.

An interesting issue arises with Approach #2, however. States themselves would then be biased with respect to the outcome of each hand in favor of its own residents. The more its own residents win over nonresidents on the pooled tables, the more overall gaming revenue to the state. The bias would be more pronounced with poker tournaments, as the prize distributions are more skewed. Clearly, states themselves should not have preferred winners for quantifiable reasons in games they are regulating.

Approach #3 would be more complicated to implement than #2, but it removes the state bias issue. Let’s try an example for #3 to clarify the mechanics.

Suppose there are three NJ players and three NV players at the same online poker table with a rake of $5 for each hand played. At the conclusion of one hand of Texas Hold’em, player 1 (NJ) wagered $5, player 2 (NJ) wagered $0, player 3 (NJ) wagered $10, player 4 (NV) wagered $25, player 5 (NV) wagered $25, and player 6 (NV) wagered $10. Player 4 won the hand. NJ players wagered a total of $15, and NV players wagered a total of $60. The percentage of rake attributable to NJ would be 15/(15+60), or 20%. Percentage of rake attributable to NV would be 80%. For this hand, $1 of rake would be subject to the 10% GGR tax in NJ, and $4 of rake would be subject to the 6.75% GGR tax in NV.

Any of the three above approaches are viable if each state has a similar GGR model. How would states share revenue if one state taxes gaming revenue based on GGR and another imposes a deposit tax? I will leave that question open for us to think about.

I’m very interested in hearing reactions to this post. Does anyone envision a different path to pooling virtual liquidity in the U.S.? Are there more efficient or agreeable ways that states could seek to share revenue? Consider contributing your thoughts at the LinkedIn group U.S. Internet Gaming: Tax Considerations.

I plan to revisit this topic sooner than later. In about one week, we’ll learn whether iGaming becomes legal in New Jersey. If it does, I’ll cover that next time. If not, I’ll delve into state income tax considerations for both iGaming operators and players.

Intrastate iGaming: State Gaming Taxation Models

January 23rd, 2013 No comments

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.

Intrastate iGaming: Federal Wagering Tax

January 16th, 2013 No comments

So far, we’ve discussed how federal withholding and reporting obligations and the Bank Secrecy Act may be implicated with intrastate internet gaming activity in the U.S. This time we examine the possible applicability of another type of tax imposed by the Internal Revenue Code (“IRC”), the excise tax on wagers made under section 4401.

The federal wagering excise tax may apply for bets accepted on U.S. internet gambling sites. For accepted wagers authorized under state law, the excise tax is 0.25 percent of the wager amount and is paid by the entity accepting the wager. For all other wagers (i.e. wagers not authorized by state law) the tax jumps to two percent.

To determine whether the tax may apply to intrastate iGaming, the first question we must ask: What is a taxable wager under the statute?

IRC section 4421 provides taxable wagers include those placed:

  1. on a sports event or contest with a person engaged in the business of accepting such wagers;
  2. in a wagering pool on a sports event or contest conducted for profit; or
  3. in a lottery conducted for profit.

As an aside, any wager placed in a sweepstakes, wagering pool, or lottery which is conducted by an agency of a State acting under authority of State law is exempt from the tax. So if a state or an agency of a state operated an iGaming site, then the federal wager tax wouldn’t apply to wagers accepted on the site.

In general, the federal wagering tax applies on wagers accepted by race and sportsbook establishments in the U.S.

Online horse wagering exists today, and operators are required to collect and remit the tax on wagers placed. (Note: Parimutuel horse race wagers pursuant to state law are exempt.) Online sportsbooks at this time are not authorized under any state law, so those accepting wagers would be required to pay the tax at the higher two percent rate.

Does the tax apply to offshore online sportsbooks accepting wagers from U.S. customers? Probably not, unless the party accepting the wager is a U.S. citizen or resident.

IRC section 4404 provides that the tax applies only to wagers:

(1) accepted in the United States, or

(2) placed by a person who is in the United States (A) with a person who is a citizen or resident of the United States, or (B) in a wagering pool or lottery conducted by a person who is a citizen or resident of the United States.

This provision extends the wager tax to cross-border wagers accepted by American bookies. If the bookie located offshore is not a U.S. citizen or resident, then the tax should not apply. If, however, the bookie is located in the U.S., then the wager placed is taxable regardless of where the person placing the wager is located.

What types of bets may fall under the third type of a wager subject to the tax, “a lottery conducted for profit?”

Treas. Reg. 44.4421-1(b)(1) states “lottery” includes the numbers game, policy, and similar types of wagering. A lottery conducted for profit

includes any scheme or method for the distribution of prizes among persons who have paid or promised a consideration for a chance to win such prizes, usually as determined by the numbers or symbols on tickets as drawn from a lottery wheel or other receptacle, or by the outcome of an event.

Poker may be considered a lottery conducted for profit.

The regulation at least implies that the game must be one of chance. In IRS Revenue Ruling 57-521, the Service considered whether a puzzle contest was a lottery conducted for profit. Because “the element of skill rather than that of chance determines the winners” in the puzzle game, the IRS stated, the puzzle contest was not considered a lottery. Applying the skill versus chance analysis to poker, there is at least an argument that poker is not a lottery conducted for profit, especially in light of the recent Dicristina decision.

Even if poker falls within the definition of a lottery conducted for profit, it may nevertheless be exempt from the wager tax.

IRC section 4421(2)(A) provides that the term lottery does not include any game of a type in which usually the wagers are placed, the winners are determined, and the distribution of prizes or other property is made in the presence of all persons placing wagers in such game. Treas. Reg. 44.4421-1(b)(2) applies the exemption to card games and concludes, “no tax would apply in the case of card games.”

It’s clear that in-person poker cash games and tournaments are exempt. It’s far from clear, however, that we can deduce the same conclusion with respect to online poker wagers.

One can argue that the standard for “in the presence of all persons” is not merely physical presence, but also extends to virtual presence on the same online poker table.

Some slightly bad news: In Rev. Rul. 79-146, the IRS applied a physical presence standard to certain types of keno games. We shouldn’t place too much emphasis on this particular revenue ruling, however, because it was written well before virtual poker tables were around.

Another possible argument is online poker wagers are placed in “coin-operated devices,” as the wagering tax does not apply on any wager placed in a coin-operated device. Treas. Reg. 44.4402-1(b)(2)(v) says the following is an example of a coin-operated device:

A coin-operated machine that displays a poker hand or delivers a ticket with a poker hand symbolized on it that entitles the player to a prize if the poker hand displayed by the machine or symbolized on the ticket constitutes a winning hand.

Of course, nobody is putting coins into their computers to play online poker. (Note: Bitcoin enthusiasts may disagree.) But there have been indications the definition of a “coin-operated device” is not strictly construed to require actual insertion of coins to play poker, giving rise to an argument for regulated online poker wagers in the U.S. to fall under the exemption.

As you can see, intrastate iGaming in the U.S. raises more questions than answers for purposes of the federal wagering tax. Next time we will shift the tax discussion from federal to state by examining some gaming taxation models that states may consider adopting.

Intrastate iGaming: Bank Secrecy Act and Player-to-Player Transfers

January 9th, 2013 No comments

Last week we discussed some federal withholding and reporting considerations for intrastate iGaming. The Internal Revenue Code is not the only federal law implicated in this emerging area, of course. This time we examine the applicability of the Bank Secrecy Act (“BSA”).

The BSA is aimed at preventing and detecting money laundering and other financial crimes. Because casinos handle large amounts of cash, they are prone to serving as a vehicle for illicit activity. In order for the government to monitor notable money movement, Congress enacted rules requiring casinos that fall under the definition of a “financial institution” to report certain financial transactions.

A casino or “gaming establishment” (including, for example, a card room) is considered a financial institution if:

  • (a) its gross annual gambling revenue exceeds $1 million; and
  • (b) it is a licensed casino or gaming establishment under federal or state law.

It seems clear iGaming sites regulated pursuant to state law would be considered financial institutions under the BSA. What types of transactions on iGaming sites may operators be required to report? Qualifying financial institutions are required to file with the Financial Crimes Enforcement Network:

  1. Currency Transaction Report by Casinos (FinCEN Form 103); and
  2. Suspicious Activity Reports by Casinos and Card Clubs (FinCEN Form 102).

A casino must file Form 103 for each transaction involving either currency received or currency disbursed of more than $10,000 in a gaming day. Among other things, the form includes the name, address, and social security number of the individual making the transaction. So, if I open an account on a U.S. regulated iGaming site that is a qualifying financial institution and make an initial deposit over $10,000, the site would be required to file Form 103.

Money launderers may seek to avoid triggering the Form 103 filing requirement by making two or more smaller deposits under the $10,000 threshold. This is a no-no.

The practice of conducing financial transactions in a specific pattern with the purpose of avoiding a Form 103 filing is called “structuring,” and is illegal under the BSA. One may go to jail for structuring.

Financial institutions are on the lookout for “structuring” activity. A U.S. iGaming site, for example, must treat multiple transactions as a single transaction if the iGaming site has knowledge that:

  • (a) they are made by or on behalf of the same person, and
  • (b) they result in either Cash In or Cash Out by the casino totaling more than $10,000 during any one gaming day.

If I deposited $6,000 in the beginning of the day and then another $6,000 later in the day on the same site, that iGaming operator would probably have to treat the transactions as a single transaction for purposes of determining whether Form 103 would have to be filed.

A single deposit of $9,999 might seem harmless on its own because Form 103 wouldn’t have to be filed, but such activity may instead require an iGaming operator to file Form 102, Suspicious Activity Reports by Casinos and Card Clubs.

An iGaming site would be required to file Form 102 if a transaction involves or aggregates at least $5,000 in funds or other assets, and the site knows, suspects, or has reason to suspect that the transaction (or a pattern of transactions of which the transaction is a part):

(i) Involves funds derived from illegal activity or is intended or conducted in order to hide or disguise funds or assets derived from illegal activity (including, without limitation, the ownership, nature, source, location, or control of such funds or assets) as part of a plan to violate or evade any federal law or regulation or to avoid any transaction reporting requirement under federal law or regulation;
(ii) Is designed, whether through structuring or other means, to evade any requirements of 31 CFR Chapter X or of any other regulations promulgated under the Bank Secrecy Act, Public Law 91-508, as amended, codified at 12 U.S.C. 1829b, 12 U.S.C. 1951-1959, and 31 U.S.C. 5311-5332;
(iii) Has no business or apparent lawful purpose or is not the sort in which the particular customer would normally be expected to engage, and the casino knows of no reasonable explanation for the transaction after examining the available facts, including the background and possible purpose of the transaction; or
(iv) Involves use of the casino to facilitate criminal activity.

Institutions must file these forms pursuant to the BSA E-Filing System. With respect to the BSA, the challenge for iGaming operators in the U.S. will be how to implement practices to ensure compliance.

These practice standards may also be required by state gaming commissions before an iGaming operator is approved for accepting real money deposits in a specific state. Nevada, the only state with internet gaming regulations at this time, requires iGaming operators to comply with the BSA pursuant to NV Gaming Comm’n Reg. 5A.080:

Each operator shall implement procedures that are designed to detect and prevent transactions that may be associated with money laundering, fraud and other criminal activities and to ensure compliance with all federal laws related to money laundering.

We should expect similar minimum standards from other states promulgating iGaming regulations in the future.

Player-to-player transfers

A major part of the game of poker that you don’t see on the table: Staking. As I’ve discussed before (here and here), a “staking arrangement” arises when the “staker” backs up, or puts up, the funds for another player, the “stakee.” The staker and stakee share the winnings, if any, by some predetermined agreement. Given the popularity of staking, iGaming operators have strong incentives to explore the feasibility of making staking easy for its players.

The more straightforward aspect to staking in the iGaming space is handling the distribution of winnings among the staker and stakee. The IRS is aware that gamblers sometimes share winnings, and created Form 5754 to allow for allocation of winnings among multiple recipients for reporting and withholding purposes. If I won $20,000 in an online poker tournament and my U.S. resident backer collects $10,000 of the winnings, we could theoretically submit a completed 5754 to instruct the U.S. iGaming operator to issue two W-2Gs for $10,000 each instead of one W-2G for $20,000 to me. Whether the operator actually acknowledges the form is another story.

The more difficult consideration involves how the “staker” could supply the initial funds to the “stakee” to engage in gambling activity on a U.S. iGaming site. The most convenient method, of course, would have the “staker” transfer funds from his online poker account to the account of his “stakee.” Player-to-player transfers are permitted on the most popular online poker site in the world, PokerStars. PokerStars, of course, is not licensed and regulated in the U.S. If it were, would player-to-player transfers take place between U.S. customers?

My guess is probably not at the outset, for various reasons. One major obstacle is how would an iGaming operator adequately monitor whether player-to-player transfers are for a legitimate purpose such as staking or for something illicit?

As discussed above, casinos must file a Suspicious Activity Report (FinCEN Form 102) if it suspects that a transaction involves or aggregates at least $5,000 has no business or apparent lawful purpose. Will iGaming operators put themselves in a position to have to make that determination each time a transfer request of such amount occurs? Perhaps the “business or apparent lawful purpose” standard could be met if the transfer recipient was required to wager a certain amount of the funds on the iGaming site before being permitted to cash out the funds.

In Nevada, player-to-player transfer issues are academic at this time. NV Gaming Comm’n Reg. 5A.120(9) reads, “An operator shall not allow an authorized player to transfer funds to any other authorized player.”

I spoke with a Nevada lawyer regarding this provision. Although regulators and potential operators are well aware of the attractiveness of player-to-player transfers, regulators don’t want to deal with this difficult issue upon opening the State’s doors to iGaming. After some time of successful operations, perhaps Nevada will soften its stance on the issue and begin to permit player-by-player transfers under limited and controlled conditions.

To learn more about financial transaction considerations for iGaming in the U.S., be sure to check out fellow gaming attorney Stuart Hoegner’s draft paper Cash Is Not King: Thoughts on Financial Transactions in Internet Gaming.

Next time we return to the Internal Revenue Code to examine the possible applicability of the federal wagering tax to intrastate iGaming activity.

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