Colorado Sports-Betting Tax Filings, Licensing Under Scrutiny

June 15, 2022
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A Colorado state auditor report has voiced several concerns about the first year of regulated sports betting in the state, including processes for temporary licensure, as well as the effect of deductible free bets on tax returns.

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A Colorado state auditor report has voiced several concerns about the first year of regulated sports betting in the state, including processes for temporary licensure, as well as the effect of deductible free bets on tax returns.

A 56-page performance audit released by the Office of the State Auditor on Monday (June 13) found that the Division of Gaming, which regulates sports betting, “did not have an effective process to investigate sports betting operations for temporary licensure.”

The audit used a random sample of five of the 19 operators that had been issued temporary licenses as of April 2021 and determined that division, within the state's Department of Revenue, had not completed the minimum background investigation requirements, including criminal background checks, regulatory history and financial capacity.

“Incomplete investigations increase the risk that the commission is making temporary licensing decisions that are not fully supported or defensible,” said Jenny Atchley, audit manager, in a statement.

The report also determined that the regulator did not properly verify whether tax filings from operators were based on accurate data.

The auditor found a wide variance between daily wagering reports that operators submit and the amount of taxable net sports-betting proceeds reported in monthly tax filings, including one instance where an operator had reported $1.4m more in daily reports than the monthly filing.

State auditor Kerri Hunter also found another example of where an operator had reported $1m less in its daily reports than the monthly report.

“While some variation between the daily and monthly reports is expected, we found that operations do not always submit supporting documentation to substantiate changes to the net sports-betting proceeds that are reflected in their monthly tax filings compared to their daily wager reports,” Hunter wrote in her report.

“The division reports that its approach to tax filing reconciliations includes reliance on the operations to self-regulate their adherence to statute and rule,” the report continues.

“According to the division, there is a low risk of operations filing taxes based on fraudulent wager data and operations are unlikely to misreport data because they have invested large sums of money in obtaining sports-betting licenses, which they do not want to lose, and because they risk criminal prosecution if they commit fraud.”

Despite this, the division said in its formal response to the audit report that it was engaged with the Governor’s Office of Information Technology to develop its sports-betting data management system and said it will implement additional policies and procedures to verify wagering data and the taxes due, with an implementation date of February 2023.

Dan Hartman, director of the Division of Gaming, said the agency has started the process of implementing the report's recommendations, and looks forward to continued dialogue with the auditor as that process continues.

“The entire nation was navigating uncharted waters in the midst of the pandemic, the Division of Gaming was no different,” Hartman told VIXIO GamblingCompliance on Tuesday (June 14) in an emailed statement.

“The temporary closure of Colorado casinos, the cessation of professional and collegiate sporting events and internal hiring freezes posed significant challenges in setting up Colorado’s first regulated sports-betting program.”

Hartman said that, looking back, the division is proud of the work that it has done in meeting the legislative mandate for a May 1, 2020 start date, as well as surpassing expectations for betting handle in the state and “paving the way” for the fiscal beneficiaries of the sports-betting program, which includes responsible gaming stakeholders and the state’s Water Plan.

“We can assure you that under the direction of the Colorado Limited Gaming Control Commission, the Colorado Division of Gaming and the multiple implementation teams who worked tirelessly, we have delivered an effectively regulated market to provide the best economic and social outcomes for Colorado,” Hartman said.

“We appreciate the work of the Office of State Auditor (OSA) and their insight into our first year of operation. The audit highlighted areas for improvement in terms of policy, procedure, and documentation.

“We believe these improvements, especially with a new regulatory structure and an ever-evolving industry, will only make the program stronger.”

The audit was legally required as part of the state law that allowed sports betting to launch in Colorado, with audits mandated for every five years.

The report made ten recommendations in total for the division, each of which Hartman agreed with.

The report was also critical of the ability for Colorado sportsbook operators to fully deduct bonuses and promotional play from taxable revenues, identifying it as a policy issue for legislators to consider.

In the first year, the report found that the ability for operators to deduct free bets and carry over losses led to about $706,000 in reduced tax liability for operators from May 2020 to April 2021.

Since the audit was completed in late April, the legislature has acted, passing legislation last month that limits sportsbook operators to deducting a maximum of 2.5 percent of monthly betting handle, with that limit decreasing by 0.25 percentage points each year through 2026 to as low as 1.75 percent.

The measure also prevents operators from carrying over losing months to offset the following month’s taxes.

That bill, House Bill 1402, which also includes responsible gaming funding provisions, was signed into law last week by Democratic Governor Jared Polis, and the cap on deductions will be effective as of January 2023.

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