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Posts Tagged ‘interstate compacts’

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.

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