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Online and remote gaming
To what extent is online and remote gaming regulated in your jurisdiction? Are there any notable rules and restrictions in this regard?
In 2006 Congress enacted the Unlawful Internet Gambling Enforcement Act (UIGEA) to attack the perceived problem of internet gambling by targeting the processing of financial transactions necessary for the gambling to take place. ‘Unlawful internet gambling’ means a “bet or wager [that] is unlawful under any applicable federal or state law in the state or tribal lands in which the bet or wager is initiated, received, or otherwise made” (31 USC Section 5362(10)(A)).
Only five states – Delaware, New Jersey, Pennsylvania, Nevada and West Virginia – currently permit forms of internet gambling. Nevada allows only poker and sports betting. West Virginia authorises only sports betting. Delaware allows poker and casino (eg, slots, blackjack and other banked games). New Jersey and Pennsylvania permit poker, casino and sports betting. Three of those states (Delaware, Nevada and New Jersey) have entered into an agreement to share liquidity by allowing poker or (except for Nevada) casino gambling between the states, and Pennsylvania – which passed its internet gambling law in late 2017 – is likely to follow suit.
In addition, many states permit off-track telephonic or internet pari-mutuel wagering on horse racing. The Interstate Horseracing Act sets out the conditions under which such wagering can be offered across state lines. Among other requirements, the wagering activity must comply with the laws of the states in which the race and wagerer are located. Lastly, several states sell lottery tickets or, in a few cases, allow lotteries to be played online.
What is the attitude of the courts and regulatory authorities to jurisdiction over foreign operators? Where is gaming activity deemed to take place?
The Unlawful Internet Gambling Enforcement Act (31 USC Section 5362(10)(A)) definitively settled this question in 2006 by defining ‘unlawful internet gambling’ to mean a “bet or wager [that] is unlawful under any applicable federal or state law in the state or tribal lands in which the bet or wager is initiated, received, or otherwise made”. Thus, operators located in other countries may not offer internet gambling to consumers in the United States without a licence issued by the state in which the consumer is located. Only one state (Pennsylvania) has announced an intention to allow offshore operators to obtain licensure. However, foreign operators may obtain licensure as service providers in states that permit remote gaming, then contract with licensed operators.
Are there any licensing requirements for online and remote gaming activities?
Yes. The licensing criteria to operate remote gaming are largely the same as for land-based gambling. While the licensing regime will vary from state to state, it is typically intrusive and requires deep scrutiny of the licence applicant and its key employees. Even certain categories of service providers are subject to scrutiny, although typically at a lesser degree of intensity. Certain activities not traditionally regarded as gambling (eg, daily fantasy sports) may also require licensing or registration in certain states.
Do any taxes or duties apply to online gaming activities?
Yes. Remote, or internet, gambling tax rates vary among jurisdictions. For example, Nevada taxes internet gaming based on gross gaming revenue at the same rates as it does land-based gaming. Conversely, New Jersey assesses a 15% tax on internet gross gaming revenue, plus an investment alternative tax of 5% (or an actual investment of 2.5% in the Atlantic City area).
What is the legal status of and regulatory approach to ‘loot boxes’ or other in-game items in online games?
At this time, no court has held that ‘loot boxes’ or similar in-game items cause a game to be considered gambling, and several courts have held to the contrary – see for example Mason v Mach Zone, Inc (140 F Supp 3d 457 (D Md 2015), aff’d, 851 F3d 315 (4th Cir 2017)) and Soto v Sky Union, LLC (159 F Supp 3d 871 (ND Ill 2016)). The legal status of these items is subject to state law, and states generally define gambling as requiring the presence of three elements:
- price or consideration;
- chance; and
- prize or reward.
As a general matter, all three elements must be present for a game to be considered gambling. So far, courts addressing the status of loot boxes have not found them to constitute a ‘prize’ for purposes of gambling.
That said, in Kater v Churchill Downs Inc (886 F3d 784 (9th Cir 2018)) the US Ninth Circuit Court of Appeals held that virtual chips or coins which extend gameplay – because they extend the “privilege of playing the game without charge” – can be a “thing of value” (ie, prize) under Washington state law. The court’s analysis appears to have rested on the (erroneous) premise that users of the game must purchase additional chips if they exhaust their initial supply and wish to continue playing. The court remanded the case for further proceedings in the district court. Several other cases alleging the same claims against other defendants are also pending in that court and have not yet been decided. As a result, it is too early to assess the implications of the decision, which is at odds with those of other courts to have considered the question under other state laws (see for example Phillips v Double Down Interactive LLC(173 F Supp 3d 731 (ND Ill 2016))).
What is the legal status of and regulatory approach to the use of cryptocurrency in online games?
Cryptocurrencies are treated no differently from fiat currencies for purposes of criminal gambling laws. Use of a cryptocurrency would not allow a game that would otherwise be prohibited as unlawful gambling. Conversely, state regulators have been hesitant to permit licensed operators to accept cryptocurrencies in licensed gameplay.
Foreign and unauthorised gaming sites
What measures are in place to block foreign and other unauthorised gaming sites?
The principal method used to deter gambling on unlawful sites is Regulation GG, which requires financial transaction providers to implement procedures that identify and block unlawful internet gambling. In addition, authorities may seize domains hosting unlawful sites if the domain name registrar or registry is located in the United States. The Department of Justice’s 2011 crackdown on unlawful poker sites – known as ‘Black Friday’ – began with the seizure of two prominent poker domain names.