New York’s sky-high tax rate has forced mobile sports betting operators to lobby lawmakers for some relief and scale back their marketing spend to reduce ongoing financial losses, as industry executives urge other states not to replicate the model.
The state’s online sports-betting market yielded tax revenue of more than $300m in the first half of 2022 following a launch in late January, leading Governor Kathy Hochul to laud that the market had "far surpassed every other state, as well as the [New York] Division of the Budget's FY2022 revenue projections."
But with each operator required to pay a 51 percent tax rate to the state for ten years, DraftKings, FanDuel, BetMGM and other operators are lobbying New York legislators to change the current tax rate.
During an investor day in May, BetMGM CFO Gary Deutsch confirmed that the company had diverted marketing budget away from New York during the first quarter, just weeks after launching there.
He cited the state’s 51 percent tax rate, among the highest in the nation, as the main reason for pulling its marketing spend.
Operators in New York are also taxed on promotional revenue, so if a bettor receives and loses a free $100 promotional wager, it is booked as $100 in taxable gross revenue for the sportsbook.
New York state Senator Joseph Addabbo, a Democrat who chairs the Senate’s Racing, Gaming and Wagering Committee, acknowledged at a conference in May that lawmakers “need to figure out how to make it better.”
Addabbo said he expected lawmakers sometime down the line to increase the number of operators and discuss whether to tinker with the 51 percent tax rate.
“It was too premature to do it in this year’s budget,” he said.
Former Michigan state legislator Brandt Iden believes New York’s high tax rate and tax on promotional credits makes it untenable to run a sports-betting business in the Empire State.
“The New York model is problematic,” said Iden, now head of U.S. government affairs for Sportradar. “And by the way, surprise, a 51 percent tax rate and suddenly, we’re shocked that operators are not profitable in New York! It just doesn’t work.”
Iden said state policymakers and other stakeholders need to make sure that the “industry is sustainable and in order to do that we need to start making it profitable.”
“I think that single digit tax rates make the most sense,” said Iden, a Republican and former member of the Michigan House of Representatives. He was also the prime sponsor of the bill that legalized iGaming and sports betting in Michigan in December 2019.
The current average tax rate in the sports-betting industry is about 20 percent, he said.
“I still think that is too high. This is a low-margin industry,” Iden said. “We go to many states that are talking about these exorbitant double-digit tax rates that really don’t make any sense for the industry.”
Currently, 36 states and the District of Columbia have legalized sports betting. New Jersey taxes online sports betting at 14.25 percent, while Pennsylvania imposes a 36 percent tax rate but with the ability to deduct promotional play that drops the effective rate to around 24 percent.
“When you come in and you pile on the taxes and then whatever else is part of the process … it is very unsustainable,” said Iden.
Luisa Woods, vice president of marketing, gaming and entertainment for Delaware North, said as more states have legalized sports betting, she has noticed that some states have started out with a high tax rate and then tried to find ways to mitigate that.
“Things like being able to write off your bonuses, being able to carry forward negative balances,” Woods said. “We need to start considering the implications of that language.”
Woods said what the industry saw in Michigan was operators “essentially bonusing their profits in a bid to gain market share.”
“Suddenly an effective tax rate of [8.4 percent] is an effective tax rate of less than half of that,” Woods said.
“Who is paying for that? Who is picking up the tab? If you are allowing operators to push the costs of charge backs onto essentially the taxpayers, what are the implications in terms of what the operator is going to do with the risk of that product?”
Woods stressed that starting out with one tax rate was optimal because then there was no need to find alternative ways to mitigate the rate’s impact.
Iden and Woods discussed the impact of tax rates on the industry during a panel discussion on how legal sports betting has affected the business of sports at the National Council of Legislators from Gaming States (NCLGS) summer meeting. The four-day conference was held July 7 through July 10 in Boston.
“I’m hopeful that states would go back and start to think about does 20 percent make sense. Can we go back and reduce this in some capacity?” Iden said. “I’m skeptical about that. States typically only have the tendency to push tax rates one direction, which is up.”
“At the end of the day,” Iden said, “I would hope that we could be a little bit more realistic about taxes.”