An In-Depth Look at Pennsylvania’s Current Sports Betting Disaster

by Rick Rockwell
on July 19, 2018
15

Minute Read

In the latter part of 2017, Pennsylvania legislators legalized sports betting, which put them ahead of several other states, as part of a package of broader legislation that permits online poker. The October 2017 law had an activation clause that was recently met by the U.S. Supreme Court’s decision to strike down the federal ban on legal sports betting outside of Nevada. With individual states now permitted to set down their own rules surrounding sports betting, Pennsylvania was one of the first states ready to go with legalized sports betting. But are they, really?

The beginning of football season isn’t far off, and as of right now, there are zero PA casinos to apply for a sports betting license with the state. We’ll look at why this is, and what Pennsylvania will have to do in order to entice casinos to jump on board.

Pennsylvania’s Sports Betting Legislation

Pennsylvania Legislature passed its own sports betting law last year ahead of the SCOTUS decision, which could have been construed as being forward-thinking. However, when lawmakers did this, they set the highest taxes and fees in the country for operators to participate in legal sports betting.

With an estimated $150 to $400 billion dollars of sports wagers booked annually offshore (illegally), it only makes sense that lawmakers want to grab some of that money for themselves. Around 20 other states have set in place some kind of legislation to allow sports betting, but none have set a rate anywhere even close to the 36 percent that Pennsylvania wants.

How Pennsylvania Would Calculate the State Tax on Sports Bets

State taxes placed on sports betting are determined by a casino’s gross winnings, called the “hold” from betting, and not the total amount bettors wage. PA’s legislators based the outrageous 36 percent tax on “gross sports gaming revenue,” which is the amount of money placed after the cash paid back to winners is subtracted. For example, if a casino’s hold is five percent, it keeps $5 for every $100 bet. The Pennsylvania tax of 36 percent is calculated on the $5, which means that the state would take $1.80 from every $100 bet placed.

The 36% tax will be divided as follows: 34% will go to the Keystone state and 2% will go to the local governments that host the sports betting facilities.

Comparatively, the federal sports betting tax is determined, not on the gross gaming revenue, but on the total amount bet, which is called the “handle.” This handle tax is firmly listed at 0.25 percent of the total amount bet, so for every $100 bet, no matter how much the casino takes, the federal government gets $0.25.

Put all that together and Pennsylvania doesn’t have much draw for casinos and bookmakers to come to the table.

How PA Compares to Other States

Nevada, which is the legal sports betting pioneer in the United States, taxes at only 6.5 percent. West Virginia and New Jersey set taxes at 10 percent and 8 percent, respectively. Other states that are still hammering out their sports betting framework, like Michigan, are discussing rates around 10%. As you can see, not one state on the horizon of legalized sports betting is considering a tax rate at even 1/3rd of what Pennsylvania is demanding.

Critics of Pennsylvania’s Fees and Taxes

Critics of the legislation say the $10 million license fee, plus a 36 percent tax rate are huge deterrents for in-state bookmakers. The tax rate is four times higher than New Jersey’s and no other states have a license fee higher than $1 million. That gives bookmakers exactly zero reason to apply for and set up sportsbooks in Pennsylvania.

There are 12 casinos in Pennsylvania, and as of July 19th, not one of them has applied for a license in order to take advantage of a potential multibillion-dollar enterprise. Dan Shapiro, the VP of Business Development of William Hill USA, talked about how other states provide better opportunities for William Hill, according to an article by Press of Atlantic City:

“With a 36 percent tax and a $10 million license fee, there are other states that are more interesting to us. It’s just not something we’re looking at seriously right now.”

William Hill USA is a huge British bookmaker that runs two out of the three legal sports books in New Jersey: one at Ocean Resort in Atlantic City and the other at Monmouth Park in Oceanport.

The tax being placed on legal sports betting in PA is high enough that some industry insiders are uncertain as to how quickly or widely it will be implemented. Brett Smiley, co-founder of SportsHandle, he believes that there’s probably some backdoor discussions going on. In an article by BillPenn.com, Smiley made the following comments:

“It’s absolutely ludicrous. I would be shocked if there aren’t versions happening right now between casino operators and the state to lower that tax.”

Greenwood Entertainment, which owns the Part Casino in Philadelphia, has recently stated that the $10 million license fee is not economically feasible to expect of a slot machine licensee. And, there are many casino owners and sports betting operators that agree.

The American Gaming Association on PA’s Regulations

There American Gaming Association, with members all across the nation, hasn’t specifically commented on Pennsylvania’s fees and taxation rate. However, the organization has said in a general statement that high tax rates could be a problem for legal sports betting markets. In an article by SportsHandle.com, the AGA made the following statement:

 “States and sovereign tribal governments should focus on the customer experience and empower licensed, regulated operators to offer a competitive product that protects consumers. High tax rates hinder the legal market’s ability to compete with, and shut down, illegal sports betting operators who pay no U.S. taxes and are largely unregulated.”

What Sports Betting Insiders Say about PA

It’s most likely that one or several of the larger casinos will apply for their sports betting licenses, but time is running out for them to do so for the start of the NFL season in September. While operators in other states are moving quickly and already offering sports betting, wagering on sports in PA is effectively stalled. As previously mentioned, there have been exactly zero applicants for the state’s 13 sports betting licenses, which would cover each of the 12 existing casinos plus one that will be opened in Philadelphia.

What Happens if the Licenses Go Unused?

If no casinos apply for the sports betting licenses, they’ll just sit there unused, since they were specifically designated for casinos only. Any operator without a brick-and-mortar location is not permitted to apply.

What PA Lawmakers Believe Will Happen

Ironically, Pennsylvania lawmakers are betting on the fact that the state’s casinos will eventually cave to the higher taxes and fees in order to capitalize on a fanatical sports betting market. Rep. Rob Matzie believe that it will be a chain reaction once one casino decides to apply for a license. In the same Press of Atlantic City article referenced above, Matzie made the following comments:

“For these casinos, competition is everything. “If the Sands in Allentown decides to do it, or the Rivers in Pittsburgh, or the SugarHouse in Philadelphia, then all of a sudden everyone will fall in line, and they’ll all want to be part of that.”

Final Thoughts on Pennsylvania’s Sports Betting Mess

In general, sports betting offers a low-margin profit, and with the state drooling to take almost half the earnings, casinos don’t seem too enthusiastic to hand over their money. Conversely, this also means that illegal bookies are reaping the benefits and aren’t anywhere close to shutting the doors to their businesses just yet.

The tax burden in PA will likely allow illegal sports betting to continue thriving, with the more established bookies growing as competitors to casinos, at least until laws start to be enforced more stringently. And, until, casinos start applying for licenses, this sports betting mess won’t clear up anytime soon.

Ultimately, lawmakers are betting on casinos giving into their high demands while the casinos are betting on lawmakers coming down on those demands if all of the casinos continue to hold out. This game of chicken is leaving Pennsylvania sports bettors an in-state option for placing wagers. If this continues, we’ll see PA residents continue to place wagers online with offshore bookmakers and/or head over to New Jersey to visit brick and mortar sportsbooks. Whatever way you look at it, Pennsylvania is losing out on millions of dollars and potentially a whole lot more.

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