Text of Steve Geller’s remarks to NCLGS on Sports Gambling. Discussion and case law of legality of Internet Sports; Does the Dormant Commerce Clause affect Sports Integrity laws?; What are appropriate tax rates for Sports Betting?

Below are the lightly edited remarks which I made at the National Council of Legislators from Gaming States (NCLGS) conference in Minneapolis on July 12.  I was the Founder of NCLGS in 1995, served as its first President, and currently serve as General Counsel of NCLGS. I have added some case citations and slightly expanded one or two topics.

I have 5-7 minutes to discuss “Sports Betting – The results and lessons after one year.” There were several things I wanted to discuss, and realized that I didn’t have the time.  So, instead of discussing one item, I’ll raise questions about 3 items. Most of this Session will be the Q & A, and I’ll be happy to elaborate on the questions I’ve raised in the Q & A.

First, let’s talk about the legality of internet sports wagering.  Many states have permitted this, mostly through affiliations with land-based sports gambling sites.  In some cases, actual physical registration at a land-based site is required.  A different model, however, is the legislation which Maine Governor Janet Mills just vetoed which would not have required any affiliation with a land-based entity.

Many people think that when the US Supreme Court threw out PASPA in Murphy v. NCAA (832 F. 3d 389, 2018)  that this meant that states could legalize sports betting, including internet sports betting.  I  disagree.  The Wire Act (18 U.S.C 1084) is still valid law.  There have been recent court challenges to the November 2018 OLC opinion that the Wire Act applies to types of gambling other than sports betting; in fact a Federal District Court in New Hampshire (New Hampshire Lottery Commission V. William Barr, opinion 2019 DNH 091P) recently ruled against the OLC opinion, but there has never been any question that the Wire Act applies to Sports Wagering.

Section 1084 (a) of the Wire Act creates criminal liability for using a “Wire Communication” for the transmission of bets or wagers in Interstate or Foreign commerce.  Section 1084 (b) creates a “safe harbor” for transmitting information “assisting in the placing of bets… on a sporting event… from a State… where wagering on that sporting event or contest is legal into a State… in which such wagering is legal”.

There have been a series of cases that hold that the Internet is a wire communication, and further that even if a signal starts and ends in the same state, but has been transmitted through a hub, exchange, or server in another state, that means that it’s been used in Interstate Commerce.  I have a series of cases which show this.  (See, for example, U.S. v. Yaquinta, 204 F.Supp 276; U.S. v. Kammersell, 196 F.3d 1137 10th Cir, 1999; U.S. v. Cohen, 260 F.3d  68 2d Cir, 2001; U.S. v. Lyons, 740 F.3d 702, 1st Cir, 2014) Many people have claimed that the Wire Act didn’t apply in their cases because they were in locations where Internet gambling was legal, or for other reasons. They continued these arguments while they were serving their sentences in Federal Prisons.  My advice is not to argue with the people with guns and badges.

Reading all of this together, it seems that there are two serious issues here. 

First, it appears to me that unless a completely in-state based system is set up, and that’s what wireless gambling is based on, any type of internet or wireless gambling that goes out over existing systems is probably in violation of the Wire Act.  Understand that geofencing is probably not sufficient, that the system would need to be set up in a fashion that ensures that no part of the signal ever leaves the state.

Second, even in land-based casinos, if information on a sporting event is transmitted from a state that hasn’t adopted sports betting, is that legal? Remember that the “Safe Harbor” applies to information on wagering “from a State… where wagering on that sporting event or contest is legal into a State… in which such wagering is legal”. If the Utah Jazz is playing a basketball game against Portland Trail Blazers, and the game is occurring in Utah, where all types of gambling are illegal, can a wager be placed on that game in California, assuming that sports betting is legal in California?  I offer no opinion; I merely raise the question.

Second Topic – One that will really excite you – The Dormant Commerce Clause!! Simply put, this Constitutional interpretation says that a law can’t discriminate against out-of-state actors or have the effect of favoring in-state economic interests over out-of-state interests. Several states, for example Delaware, New Jersey, Illinois, and others permit wagering on sporting events in other states, but make them illegal or illegal for college sports in the state where the wagering takes place for integrity reasons.  Does this mean that the states are protecting their own sports teams from improper acts, but don’t care about the integrity of sports teams in other states?  If so, it probably violates the Dormant Commerce Clause.

Last Topic – What’s an appropriate tax rate?

Let me begin by saying that I don’t know, and I believe that no one else does.  Tax rates on Sports Gambling are all over the map.  Literally. Nevada is 6.75 %, New Jersey is 8.5% for land based, and up to 14.25% for racetrack based online, Mississippi is 12%, West Virginia is 10%, Delaware and Rhode Island are trickier to figure out because they’re Revenue Sharing models but appear to be 50 and 51%, and  Pennsylvania is at 36%, plus very high licensing fees ($10 million).

Everyone thought that if the tax rate was too high on Sports Betting, that the Bookies would have an advantage, and cut into legal gambling.  I believe that the Jury is still out on this, and that it’s too early to tell. 

The next question in determining tax rates is the question of why you’re having the Sports Betting.  In Nevada, where they have a very low tax rate, it seems that the main reason for Sports Betting is to attract people to their casinos and hotels, generating other tax dollars and jobs. In Pennsylvania, the reason appears to be primarily about generating tax dollars.  Both are valid, but very different reasons. Understanding this dichotomy, it appears that it may make sense to have different, higher rates for online sports betting, assuming that the online sports betting is set up in a legal manner.  I say this because generally online sports betting doesn’t generate the same amount of jobs or economic activity in a state that gambling at bricks and mortar locations generate.

I feel very comfortable in saying that we still don’t know what the effect of higher tax rates will be on promoting illegal gambling, and that states need to look carefully at what their goals are when they set tax rates for sports betting.  Is it to maximize gambling tax dollars, or to create jobs, tourism, and overall business taxes?

 

Thank you.

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