Sports betting businesses struggle with slim profit margins even though it is generating unheard-of amounts of money for the jurisdictions that permit it. In order to choose their best option, operators will need to analyze the taxation policies of various states for the foreseeable future.
The Professional and Amateur Sports Protection Act, a federal statute that essentially froze legalized sports wagering across the nation, was overturned by the US Supreme Court in 2018. At that time, only Nevada had a significant sports betting sector. Nevada had authorized and regulated full-fledged sports betting before PASPA was passed in 1992, and the statute had left Nevada with a monopoly-like position in the US sports betting market.
After PASPA was declared invalid, each state was free to choose whether, when, and how to allow and control sports betting. In many states, there was a clear desire for such gambling as well as a desire to boost the state’s finances with much-needed funds.
The American Gaming Association claimed that at least $150 billion was wagered on sports illegally each year in the US while the PASPA lawsuit was still being litigated. The efforts to assess the prospects to generate tax revenue from a newly allowed industry were aided by this multibillion-dollar background.
The numbers seem to be very important. Since allowing both brick-and-mortar betting facilities and online sports betting, New Jersey, the state that brought the PASPA lawsuit, has seen an astounding average total wagering volume of $1 billion per month.
In January 2022, New York entered the world of online sports betting, posting $1.67 billion in wagers in its first month, which is noteworthy because it was cut short by a Jan. 8 start date, according to New York online gambling laws and regulations, as explained on newyorkgambling.org. Massachusetts, the most recent state to legalize its sports betting market, aims to replicate New York’s success when it launches in 2023.
A huge industry that turned out to be a low-margin business
Sports betting handle across the country has reached significant figures, yet the operators’ profit margins are very small. Although the stated billions of dollars in bets seem to show how popular the activity is, they do not fully reflect the operators’ eventual financial success. Starting a business in this industry may as well be a shot in the dark.
Sports betting is a costly endeavor. A large portion of the handle is given back to the customers. Only a small portion of the money generated is actually held by the sportsbooks. High expenditures must be covered out of that revenue. In addition to regular operating expenses, spending on customer acquisition has reduced profitability. Operating in this heavily regulated sector carries a hefty administrative cost in the form of taxes and license fees, as well as expenditures related to compliance and responsible gambling standards.
New York State’s approach to monetizing the market
States have pursued sports betting gross receipts taxes in an effort to obtain the high gross income reported by operators. The gross receipts tax may be applied to transactions where the operator really lost money because it taxes an operator according to gross gaming income. To improve growth, Operators may leave a state if the tax rate is too high to fund the operating benefits because it is disproportionate to the profit that operators really make.
This is true in New York, where online sports betting was made legal in January and is subject to a 51% tax on gross gaming earnings. Although the rate may seem high, the impact on operators is really worse than it seems because New York counts promotional bets as gross gaming income, effectively taxing money that doesn’t exist.
Promotional bets can account for a sizable portion of wagers in a new market like New York, significantly raising the effective rate. The industry’s willingness to participate in the New York market may be impacted by these high rates. Operators have already been pressured to reduce promotional bets as a result of disproportionate losses in this first year. These companies might also need to take other actions into account, which will affect the products they can offer customers.
The typical company response to high taxes is to raise customer fees, but that model is flawed in this case. Customers in New York may be inclined to cross the Hudson River to New Jersey for a cheaper offer or may choose fraudulent websites that claim to be authentic but are ungoverned, unlicensed, and untaxed.
Most states have legalized sports betting in some capacity in less than four years. The future of the industry’s shaping by operators and regulators, as well as the viability of the current patchwork of state-by-state tax rates, remain to be seen. In order to make it both a successful business enterprise and a reliable source of state tax income, legislators and operators are working to find the ideal balance.
