The Supreme Court’s seminal decision in Murphy v. NCAA (formerly known as Christie v. NCAA) removes the federal ban on sports betting and returns to the states the ability to regulate sports betting. Some may believe the Supreme Court’s decision to invalidate the Professional and Amateur Sports Protection Act (“PASPA”), the federal ban on sports wagering outside of Nevada and a few other jurisdictions, legalizes sports betting across the United States. That is incorrect. Instead, the ruling affords states the opportunity to legalize and regulate sports betting at the state level as they once did before PASPA. The ruling would also allow Congress to regulate sports gambling directly if it so chooses. Senator Orrin Hatch (R-UT) announced he will introduce federal legislation regarding the issue. The likelihood of Congress enacting legislation in the short term is low because of the waning legislative calendar and the pressures of the impending mid-term elections. However, Congress may hold hearings and begin the process of crafting a bill that could pass during a post-election lame duck session or early in the next Congress if the sports leagues pressure Congress to pre-empt a multitude of state regulatory schemes. To quote the Majority opinion, “Congress can regulate sports gambling directly, but if it elects not to do so, each State is free to act on its own.” While the Court’s ruling may appear straight-forward, the path toward regulating sports betting across the United States may be anything but simple.
Within the last few years, more than 20 states have either introduced and/or passed legislation regulating sports betting in anticipation of the Court’s decision in Murphy as a way to increase revenue. According to the American Gaming Association, Americans wagered an estimated $4.76 billion on the Super Bowl in 2018.1 Yet, Americans only wagered 3% of that amount, legally, in Nevada. As of today, only seven states have legalized sports betting: Connecticut, Mississippi, Nevada (which has allowed and operated sports betting since 1949), New York, Pennsylvania and West Virginia. The states which are currently debating sports betting bills include: California, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maryland, Michigan, Missouri, Oklahoma, Rhode Island and South Carolina.
It is important to understand some of the key issues states are facing when it comes to sports betting; taxation frameworks, Tribal Gaming laws, and the ability to place mobile sports bets.
There is a widespread misconception that sports betting will bring in potentially hundreds of millions of dollars to states in the form of increased revenue due in no small part to the amount of money people wager on sports in a given year. Historically, sports-betting has not resulted in significant tax revenues in Nevada. According to the Nevada Gaming Control Board, sports bettors wagered roughly $4.87 billion in Nevada in 2017.2 However, Nevada receives only a fraction of that money as tax revenue. The amount wagered, also known as the “handle,” is the money placed by bettors (the $4.87 billion in 2017 for Nevada). This number is significantly different from “revenue”, which is the money that remains after paying out the prize distribution, the federal sports betting handle excise tax, and the Nevada state sports betting tax. Nevada taxes sports betting at a rate of 6.75% of the gross adjusted revenue,3 and took in an estimated $16.8 million in taxes in 2017.4
Other states are contemplating different taxation frameworks to increase tax revenues, but higher taxation may inadvertently chill the sports-betting market in any given state. West Virginia’s sports betting bill requires sports betting operators to pay a weekly 10% tax on the adjusted gross sports betting receipts. Pennsylvania’s law requires sports betting operators to pay a 36% tax of its daily gross sports betting revenue. The laws in Connecticut, Mississippi, New Jersey and New York are currently silent on their taxation frameworks, or leave such regulation up to a state agency. New York has a new bill in front of its senate which proposes to tax sports betting operators at 8.5% of their sports betting gross revenue. Understanding varying tax treatment will have a profound impact on sports betting in the coming years.
Tribal Gaming Laws:
Nearly 30 states may also have to re-negotiate or amend Tribal-State compacts under the federal framework for Indian Gaming in the United States, the Indian Gaming Regulatory Act (IGRA) if a State wants to regulate sports betting. Under IGRA, states cannot tax tribes. Instead, the states and tribes often agree to a fee arrangement wherein the tribes pay a portion of gambling revenue from tribal lands to the states for regulatory purposes.
Under the IGRA, tribes who desire to operate games such as sports betting must enter into Tribal-State compacts between the tribe and the state where the tribe is located. Once the Tribal-State Compact is complete, the parties submit the compact to the Secretary of the Interior for approval. Once the Secretary of the Interior approves the Compact, it is recorded in the federal registry. Therefore, a state must first legalize sports gambling before tribes within that state could operate a sports book.5
Some Tribal-State compacts have exclusivity provisions, giving tribes a virtual monopoly on gambling within that state in exchange for the state’s receiving a portion of the revenue. Allowing commercial entities to operate sports books could violate certain compacts and create legal problems for the state. The potential legal issues regarding amending or negotiating new tribal-state compacts could be both complex and serious. Whether a tribe would be willing to negotiate a new compact or amend its compact with a state is unknown.
Mobile Sports Betting:
States will also have to determine whether they allow mobile sports betting (phone apps/ and or internet sports betting) or whether the states will mandate sports bettors must be physically present in a casino or sports book operating facility to place a bet. While states with struggling brick and mortar casino industries may prefer increased foot traffic at casinos and could cite the greater likelihood of increased revenues from spending on food and beverages and potentially even betting by those physically present at a casino, consumers presumably would prefer the flexibility of being able to place bets either at their local casino or via their phones/ the internet. The state legislators will have to weigh these competing concerns.
While the Murphy decision represents a victory for sports bettors across the country, as noted above there are a number of stakeholders and other constituencies who will impact the laws that states ultimately adopt. So, while there will likely be a rush in some states towards legalized and regulated sports betting, dealing with issues like taxation, tribal gaming laws, and mobile sports betting, to name just a few, will undoubtedly cause the process to take longer than most expect.