Posts Tagged ‘Governor Christie’

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: Federal Reporting and Withholding Tax Obligations

January 2nd, 2013 No comments

It’s no surprise Senator Harry Reid could not attach his rumored internet poker bill to must-pass legislation during the lame-duck session in Congress. Now “iGaming” in the United States is likely to emerge over the next few years by state-by-state legalization. Delaware and Nevada have already cleared the initial legalization hurdle, and are carefully taking their next steps in an effort to establish industry standards before permitting operators to accept real money deposits. With an iGaming bill merely awaiting Governor Christie’s signature, New Jersey may not be far behind.

Unless federal oversight legislation is passed, states will have to adapt the current federal laws, including the Internal Revenue Code, to their intrastate iGaming operations. Intrastate iGaming in the U.S. presents a variety of interesting tax considerations for operators, consumers, and third-parties. Of course, I cannot adequately address them in one post. Instead, I begin here a series of posts with the minimum goal of raising awareness and ideal goal of exploring possible approaches to the trickier issues. I also plan to analyze new iGaming legislation signed into law in light of these considerations.

I welcome and encourage topic suggestions, questions, comments, constructive criticisms, etc. Do not hesitate to send me an e-mail (brad[at]taxdood[dot]com) or engage me on Twitter @taxdood. If you are on LinkedIn, consider joining the group U.S. Internet Gaming: Tax Considerations to observe or participate in additional discussion.

Federal Reporting and Withholding Tax Obligations

Regardless of state-specific legislation, internet gambling operators will have to comply with the current federal withholding and reporting obligations under the Internal Revenue Code. In general, brick and mortar casinos determine whether a tax information form (usually either a W-2G or 1042-S) must be issued and withholding is required when a winner seeks to cash out chips or redeem a winning ticket.

In the online space, it may not always be as clear when the tax information and withholding determinations should be made. Let’s assume an iGaming operator would have the taxpayer’s identification information (e.g. taxpayer identification number, or “TIN”) upon establishing a consumer’s online account. (Note: How operators will adequately verify the identification of iGaming consumers is beyond the scope of this post.)

Poker Tournaments

“Closed-universe” situations, such as poker tournaments, are more straightforward. When a U.S. resident wins more than $5,000 (less the buy-in) in a poker tournament, the casino is required to issue a W-2G to the winner. Technically, operators are also required to withhold twenty-five percent of the winnings pursuant to Rev. Proc. 2007-57. Section 6 of the Revenue Procedure, however, provides a safe harbor for operators that do not withhold in this situation:

The IRS will not assert any liability for additional tax or additions to tax for violations of any withholding obligation with respect to amounts paid to winners of poker tournaments under section 3402, provided that the poker tournament sponsor meets all of the requirements for information reporting under section 3402(q) and the regulations thereunder.

In other words, if the sponsor reports the winner to the IRS, then the IRS is okay with no withholding. I should note this IRS safe harbor is not binding law. It remains possible for a court to rule that a poker tournament falls within the definition of a “wagering pool” and thus withholding would be required under section 3402(q) of the Internal Revenue Code.

Cash Games

Onto a potentially more problematic situation: Cash games. In general, gambling winnings are reportable on a W-2G if the amount paid with respect to a wager is $600 or more and the proceeds are at least 300 times the wager; withholding is required if the amount paid is $5,000 or more and at least 300 times the wager.

Let’s apply the rules to No Limit Texas Hold’em. Assume a table seats no more than the usual maximum of ten. In general, the most one can win on a given hand is ten (10) times the amount wagered. This outcome occurs when every player at the table bet at least as much as the winner did. As a result, the withholding and reporting obligations thresholds for U.S. residents would not be triggered for poker cash games in the iGaming space. Well, not so fast.

Some casinos pay bad beat jackpots to the highest hand that doesn’t win. For example, Commerce Casino pays a bad beat jackpot under the following circumstances:

If you lose with a hand of aces full of Ten’s (10’s) or better to a four-of-a-kind or better in Hold’em games, you will receive 60% of the posted jackpot; the winning hand will receive 20% and the other players at the table will split the remaining 20%. The jackpot in an average $3-$6 per Hold’em game might amount to as much as $15,000.

One possibility is to bet $30 in a $3-$6 Hold’em game and win 60% of a $15,000 jackpot, or $9,000. The casino would be required to issue a W-2G in that situation because the jackpot amount is 300 times the amount wagered and more than $600. Withholding would be required as well.

Time will tell whether online poker sites in the U.S. pay bad beat jackpots.

What is a wager?

In the Hold’em context, we assume a “wager” is defined by the sum of all bets made by a player during the course of one hand. What if, in the online space, “wager” is interpreted as all bets made with deposited funds by a player while seated at a Hold’em table? Or even more broadly, all bets made with deposited funds by a player while logged into an account? These interpretations give rise to the possibility of a player leaving a Hold’em table or logging out of an account after winning more than 300 times amount wagered. These possible outcomes, however unlikely, mean the iGaming operator’s software may have to be programmed to detect when these situations occur.

In my opinion, wager should be defined by the sum of all bets made by a player during the course of one hand. As a result, winnings of U.S. residents for the substantial majority—if not all—of poker cash games would go unreported to the IRS.

Would Congress take action to change this result? Probably.

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


At the outset, intrastate iGaming will likely be offered only to those who are physically present in a state regulating iGaming. This group could include individuals who are not U.S. residents. How are the above considerations different with respect to nonresident aliens?

In general, gambling winnings of nonresident aliens are subject to thirty percent withholding and the payee is issued Form 1042-S. Again the issue is raised: When would the iGaming operator make the reporting and withholding determinations? After each hand played? After each table session? After a player logs out? At year’s end?

iGaming operators must also consider how to handle claims of treaty benefits made by nonresidents. An applicable tax treaty between the U.S. and a treaty partner may reduce the withholding rate or eliminate it altogether. Claimants must provide the operator Form W-8BEN or Form W-8ECI to obtain treaty benefits.

If operators do not put mechanisms in place to accommodate such claims, the nonresident alien’s recourse could be to file Form 1040NR and claim a refund for the withheld funds. This alternative is far from ideal for the player, however, because the 1040NR is not filed until after year’s end. Withholdings from January, for example, would probably not be returned to the player until far more than a year later.

Next time we’ll examine applicability of the Bank Secrecy Act to intrastate iGaming operations, including implications of player-to-player account transfers.

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