North Carolina should not count on a tax revenue windfall from online sports gambling.
If legalized, online sports betting could bring the state more than $20 million per year, according to projections from the state legislature’s fiscal research division. That figure could rise if state lawmakers raise the tax rate in the proposed legislation, as some have indicated they might. But even that’s not a huge amount in North Carolina, where the budget is $27 billion for the fiscal year starting July 1.
North Carolina would join about half of the states in legalizing online sports gambling — and the states have adopted a variety of fees, taxation rates, income calculations and regulations on the burgeoning industry. Senate Bill 688, as written, includes lower fees and tax rates than sports gambling operators pay in many states – not a surprise in a state where the Republican-controlled state legislature has worked for more than a decade to cut corporate and personal income tax rates.
Having an operator-friendly law could mean larger bonuses, bigger promotional credits and, perhaps, better odds for gamblers. But some think a reworked bill with higher tax rates could generate more tax revenue for the state.
“We’re not looking for it to be some problem solver, but we do want to get our share of the revenue,” said state Rep.
Jason Saine, R-Lincoln, who sponsored the bill in the House. “If it’s competitive and comparable in that sports betting space, no one is arguing against that.”
Saine and other supporters said they have the votes to pass the bill in the House, and, once passed, plan to introduce additional legislation to raise fees and the tax rate. The bill passed a divided Senate last year. Democratic Gov. Roy Cooper has been supportive of sports gambling legislation.
“Sports betting moving through the General Assembly is positive for North Carolina, and it's important that adjustments are made to ensure North Carolina taxpayers are treated fairly as compared to other states,” Gov. Roy Cooper spokesman Jordan Monaghan told WRAL News in an email.
How much money
The legislation would allow for up to 12 online sports wagering operators to be licensed in the state. Each five-year license costs $500,000 and can be renewed. Operators would pay an 8% tax on adjusted gross revenue – defined in the bill as gross wagering revenue minus cash or cash equivalents paid out as winnings, cash value of any bonus or promotional credits, uncollectible receivables (up to 4%) and excise payments on sports wagers paid to the federal government.
The fiscal note projects between $8 million and $24 million in tax collection in the first full fiscal year of legalized online sports gambling with between $3 million to $11 million going to the general fund, which is used to pay for public education, healthcare and public safety among other priorities.
The rest of the money goes to: the state Lottery Commission to cover its expenses related to implementing and regulating sports gambling; $1 million annually to a fund dedicated to helping problem gamblers; and 50% of the revenue to a new North Carolina Major Events, Games and Attractions Fund. The fund would be used for grants to help promoters bring special events to the state, like a NASCAR All-Star race.
“If a state is going at this from, ‘We need to raise this amount of money to pay for X, Y and Z, the desire to have a higher tax rate and eliminate some of these deductions may be a big motivating factor,” said John Pappas, a Washington, D.C.-based consultant who works for suppliers and a trade association in the internet gaming industry. “In some states, revenue is not a main driver of this policy. Rep. Saine and others have said essentially that. They’re not pushing this as a money maker for the state. This is about good public policy.”
Follow-up legislation could nearly double the tax rate and double the fee to $1 million for operators to obtain a five-year license, numbers that would still keep North Carolina at the low end of rates and fees for sports gambling nationwide.
“There is a 100% chance that the tax rate is close to double by the time the final product goes through the chamber,” lobbyist Ches McDowell, who has been involved in the legislation for several years, told WRAL News. “That’s a done deal. We cannot pass it without that.”
Black market ‘boogeyman’
The Sports Betting Alliance, which represents sports betting operators FanDuel, Draft Kings and BetMGM, has hired four lobbyists in North Carolina this session. The Carolina Panthers, Carolina Hurricanes and Charlotte Hornets—all of whom support the legislation—also have lobbyists at the legislature.
Bonus and promotional credits are used by the operators to attract and keep customers, often in the form of “can’t lose” wagers, free bets or better odds. Spending more on bonuses and promotions is often beneficial for customers, but can lower their tax bill under North Carolina’s proposed law. Those wanting to wager have not been waiting for North Carolina to legalize sports betting.
“This isn’t virgin ground for customers. We’re competing against well-entrenched illegal operators,” said McDowell, referring to off-shore operators through which many Americans place bets. “We have to be competitive. This is one tool in the toolbox. No one wants this to be permanent. We only want this to exist because this is how we acquire customers.”
Operators tend to offer heavy promotions and bonuses when they first launch in a state, hoping to attract as many new customers as possible. As the market matures, operators themselves often pare back those types of offers. Colorado passed legislation reducing over time the percentage of handle that operators can deduct for promotions.
“Even though we’re looking at legalizing sports betting in North Carolina, the reality is mobile sports betting has been alive and well in North Carolina for well over two decades, and the off-shore industry has a firm grip on the consumers there,” Pappas said. “The best way to migrate players from the illegal market to the legal market is through promotional spend.”
Steve Brubaker, a public gaming analyst and longtime horse racing lobbyist, said the industry often uses the black market as a “boogeyman to sell these bills,” while often limiting the bets of professional gamblers and using the promotional dollars to attract novice or bad gamblers. The use of such deductions by operators dramatically reduces the tax rate paid. In Virginia, operators have written off more than $230 million in bonuses and other deductions, reducing their taxable income to $198 million through April. Virginia has collected more than $29.7 million in taxes.
“That’s the game the industry plays. Negotiate a tax rate, then they also want to put in promo deduction, then they don’t tell lawmakers what it does to the tax rate,” Brubaker told WRAL News. “I understand why the business wants that. I want to deduct everything I possibly can.”
Without the deductions, operators could have to pay taxes on so-called “phantom revenue associated with non-cash promotional wagering,” as BetMGM CFO Gary Deutsch explained in discussing the company’s decision to cut back on promotions in New York, which charges a 51% tax rate without allowing for deductions. But the incredible amount of money bet in the state has led operators into the market. From January through April, more than $6 billion has been wagered with online operators, according to the New York Gaming Commission, with $216 million paid in taxes by the operators.
A WRAL poll in April found that the majority of those surveyed (52%) believe sports betting should be legal in North Carolina. A May poll of 500 North Carolinians taken by the Carolina Partnership for Reform — a group that supports Republicans in the NC Senate — found a split with 48% opposed to legalizing sports betting and 45% in favor.
But voters expressed opposition to legalized sports betting (45%/48%) and expanded lottery gaming options (39%/54%).
And interestingly, evangelical voters are driving the difference in voters’ opinions on these gambling issues. #ncpolhttps://t.co/OtuekZeHzG
— Carolina Partnership for Reform (@cprnc) May 27, 2022
Crossing into Tennessee
Tennessee and Virginia have taken different approaches to online sports gambling, offering competing perspectives as North Carolina considers its legislation.
Tennessee launched sports gambling in November 2020. Operators pay a 20% tax, called a privilege tax, on its adjusted gross income, which is gross handle (the amount bet) minus gross payouts (the amount paid out in winnings to bettors). In those first 18 months, bettors in Tennessee have wagered $4.4 billion (gross handle) and been paid out $4 billion (gross payouts). Operators have made $315.8 million in adjusted gross income and paid $62.7 million in taxes, according to monthly reports released by the Tennessee Sports Wagering Advisory Council.
In the first four months of 2022, bettors have wagered more than $1.3 billion.
Some of the gaming is no doubt coming from residents of neighboring states that do not have online sports gambling, including North Carolina. Online sports gambling operators track where you are physically located when you attempt to place a bet.
“I do think there is some crossing over,” Mary Beth Thomas, the executive director of the Tennessee Sports Wagering Advisory Council, told WRAL News. “It’s legal to place a bet in Tennessee, even if you are a resident of another state. We do have a lot of data and we do see a lot of activity around the border.”
Oversight of ‘moving parts’
Tennessee initially put the lottery commission in charge of sports gambling, but lawmakers changed that last year, creating the council, led by Thomas, a former general counsel in the secretary of state’s office.
“The best thing about the change is that now we have a sports wagering council that is completely devoted to sports betting and our staff is now focused completely on sports betting,” Thomas said. “These are tech companies that are really sophisticated and have a lot of different moving parts. It requires a lot of technical expertise and general understanding of how wagering markets work and how the industry overall from the sports perspective works.”
Thomas’ 11-person office is funded by the yearly $750,000 license fee paid by the state’s 12 online operators. Any additional money is given to one of the state’s educational funds. She said her office is in constant communication with the operators, who file daily reports on wagering totals.
“They are facing new issues all the time,” Thomas said. “We’re trying to make sure we have the right regulations in place. It’s not something, states are finding out, where you can just sort of have a one-time legislative initiative and not really go back and look at how the industry is working and evolving. It takes a lot of analysis and adaptability.”
The proposed North Carolina legislation calls for the Lottery Commission to oversee the industry, including reviewing applications, conducting background checks on individuals listed in the application if necessary, issuing licenses, issuing renewals, receiving taxes monthly from operators and settling disputes.
The legislature’s fiscal note says that “additional administrative costs” are “likely minimal.” Pappas said a flexible regulatory environment is key.
“Because this is a very quickly evolving and changing and dynamic industry, regulators need to be able to respond and react quickly rather than go back to the legislature every time they need to make a change,” he said.
Virginia’s formula
Virginia launched sports gambling in January 2021. Operators pay a 15% tax on adjusted gross revenue, a formula that allows them to deduct the value of bonuses and promotions used by registered players, a federal excise tax and other adjustments from their total gaming revenues before paying taxes.
In the first 16 months, bettors in Virginia have wagered nearly $5 billion (gross sports gaming revenue) and been paid out $4.5 billion (gross winnings). Operators have been allowed to deduct more than $180 million in bonuses and promotions and another $50 million in other deductions leaving them with $192 million in adjusted gross revenue, according to monthly reports released by the Virginia Lottery, which oversees sports gambling in the commonwealth.
Operators have paid $29.7 million in taxes on that total — less than half of what Tennessee operators have paid in taxes despite more money being bet in Virginia thanks to a lower tax rate and the ability to deduct customer acquisition costs.
Over time, McDowell said, “Virginia is going to be making more than Tennessee because they have more customers because of promo play.”
Virginia does not allow for betting on in-state college teams. The proposed legislation in North Carolina does not contain the same prohibition. North Carolina had 10.4 million people compared to Virginia’s 8.6 million, according to the 2020 Census.
“[North Carolina] will be even bigger than Virginia, based on the law as drafted today,” Pappas said.
Nearly all (97.5%) of the tax collected in Virginia goes to the commonwealth’s general fund with the remainder put into a problem gambling treatment and support fund.
Stalled legislation in Virginia this year would have created a gaming commission to oversee sports betting in the commonwealth and eliminate the bonus and promotion deduction for operators after one year.
The current legislation in North Carolina calls for the Lottery Commission to “review and issue interactive sports wagering licenses to qualified applicants within 60 days of receipt of a completed application.” If lawmakers pass the legislation, online sports gambling could start in the state as soon as this fall, Saine said.