Colorado Gaming Taxes Stable, Exchange Wagering On Hold

June 21, 2023
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Tax rates on adjusted gross gaming proceeds in Colorado will remain the same for the next fiscal year, but efforts to approve exchange wagering regulations have been tabled for now by regulators over concerns about a potential tax loophole.

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Tax rates on adjusted gross gaming proceeds in Colorado will remain the same for the next fiscal year, but efforts to approve exchange wagering regulations have been tabled for now by regulators over concerns about a potential tax loophole.

The Colorado Limited Gaming Control Commission decided not to take any action last week on proposed rules for exchange wagering, a form of sports betting offered in New Jersey that allows gamblers to wager against each other.

Commissioners raised concerns about how “external market makers” would be taxed, what level of licensure they would be required to have, and what entities qualify as external market makers. The delay will give the Colorado Division of Gaming time to revise its proposal.

External market makers are typically used in exchange wagering to create liquidity and ensure the opposite side of a customer’s bet is taken. In terms of taxation, external market makers are usually treated like a customer.

Richard Nathan, the commission’s chairman, expressed concern that exchange wagering could go against the state legislature’s intent that sports-betting operators pay a 10 percent tax on their gross revenue.

The exchange wagering company makes money by keeping a commission from the bets, which is usually 2 percent to 2.5 percent, but would be required to pay the state’s 10 percent tax on sports betting.

“We are creating a new model that flies in the face of the legislature,” Nathan said.

Exchange wagering is permissible under current state law, but the commission wants to develop rules specific to the segment. At the present time, an operator can offer exchange wagering if regulators approve a commission rate.

Currently, New Jersey is the only state to allow exchange wagering, but regulators have not created specific rules to oversee betting exchanges.

Gaming Tax Remains Unchanged

As of July 1, casino gaming tax rates in Colorado will remain the same for the 2023-2024 next fiscal year, after the commission voted unanimously to keep the current structure in place.

“We are all served by the current tax structure,” Nathan said last week. “We are still well served, at least for the next fiscal year.”

The commission reviews tax rates annually and may raise or lower rates so long as they do not exceed 40 percent.

Beginning on July 1, the first day of the state’s fiscal year, adjusted gross proceeds are taxed at accelerated rates, with casinos paying 0.25 percent on their first $2m in adjusted gross proceeds, and a 2 percent tax on its next $3m.

The tax rate tops out at 20 percent at $13m. Gross casino gaming revenue in fiscal year 2021-2022 was $1.41bn, with tax revenue from land-based casinos at $187.7m.

Prior to the commission deciding to keep tax rates unchanged, Stephen Cole, city manager with the city of Black Hawk, submitted a three-page letter expressing his concern over any change to the tax rate and the increase in state spending while the gaming industry has declined in size.

Cole noted the number of casinos in Colorado has decreased from 42 in 2008, to 33 last year. The number of slot machines, he said, has dropped from roughly 17,000 in 2008 to less than 11,000 in 2022.

“The city has aggressively marketed gaming and attempted to transition the city into a resort destination, which ultimately would drive higher revenues for the state,” Cole wrote.

“The city of Black Hawk currently provides water, police, fire, and public works services along with other amenities to the gaming community. These obligations continue to grow, yet through prudent fiscal management, the city has met these obligations.”

Cole noted that the casinos in Black Hawk contribute more than 83 percent of gaming taxes to the state but the city is budgeted to receive $4.1m in 2023, compared to a pre-coronavirus pandemic high of $3.97m.

Colorado allows casino gaming in the cities of Black Hawk, Central City and Cripple Creek.

Paul Harris, finance director for the city of Cripple Creek, agreed, saying gaming taxes are crucial to the city's ability to meet the its financial responsibilities. Harris reminded commissioners that the three gaming cities do not receive any direct financial benefit from legal retail and mobile sports-betting in Colorado, as established by a 2019 state law.

Had the three gaming cities received a portion of the revenue from sports betting, Harris said, “the financial health of each entity would be significantly better.”

“It is hard to understand why the gaming communities do not receive any of the sports-betting taxes generated,” he added.

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