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?
Steve Geller named General Counsel of the National Counsel of Legislators from Gaming States (NCLGS); Speaks at NCLGS Winter Conference on casino saturation and what states can realistically expect in terms of Tourism from new casinos.
I attended the NCLGS Winter Conference in New Orleans, which was held from January 4-6. NCLGS is the only organization of State lawmakers that meets on a regular basis to discuss issues in regard to gaming. Members of NCLGS chair or are members of Legislative committees that are responsible for the regulation of gaming in their states. NCLGS does not promote or oppose gaming, but is primarily concerned with proper regulation of the gambling industry.
I was the founder of NCLGS in 1995 and was its long-time first President. I have remained very active in NCLGS, and was named its General Counsel at the Winter meeting.
On Sunday, January 6, I spoke on a NCLGS panel discussion. The topic for the panel was “When developing gaming public policy, legislators often envision casino out-of-state patrons who will do more than gamble in the casino. But with more than 1,000 casinos in 42 states, and with new casinos generally being built to smaller scale due to their proliferation, is it realistic to expect them to be tourism magnets? Are there many markets remaining where destination resorts could be developed to attract tourists? In this panel, operators will provide insight into what states can realistically expect, and what they must do to meet the goal of tourism promotion.”
In my remarks, I discussed the history of recent gaming expansion nationally. This included Indian casinos, “riverboats gambling” (which is generally not conducted on what most people would consider to be “riverboats”, racinos, and commercial casinos. The most common thread on the expansion of all of these except for Indian gambling is the desire for one state not to see its gambling dollars go to another state. Once one state starts a type of gambling, there is increased pressure on neighboring states to have similar types of gambling.
It seems clear that the proliferation of casinos is generally reaching saturation in most areas. For example, in the Northeastern United States, there appears to be a situation where new casinos are cannibalizing revenue from existing casinos. Total gaming revenue may go up, but revenue per casino appears to be going down. I gave quotes from both Moody’s and the American Gaming Association (AGA) discussing that while this appears to be most acute in the Northeast, it is a national issue.
It appears that building casinos by itself is no longer sufficient to attract new tourism. It is unclear if casinos by themselves have been enough to attract tourists in recent years, or if casinos were only helpful as part of a general resort that attracted people. Today, however, there is so much availability of casino gambling without the necessity of travelling that just providing additional opportunities for gambling will not attract tourism.
Many casinos today are being built on a smaller scale, and are designed to attract primarily local patrons as opposed to tourists. It seems that the new casinos that are attracting tourists are the “hubs” of the “hub and spoke” model. This seems to work better with large casino chains with robust loyalty programs where casino patrons can gamble locally, and then cash in player rewards at larger resorts, where casino gambling is only part of the attraction.
Food and beverage, shows, and other diversions are a must to attract tourism dollars. Las Vegas and Atlantic City have recognized this. For example, in Las Vegas in the 1990’s, over ½ of the casino revenue came from gambling, while today it’s down to about 1/3. As younger people lose interest in slot machines, which have traditionally been and remain the biggest gambling money-makers for casinos, casinos will need to do other things to attract people and remain relevant. Some things being discussed are sports gambling, skill-based gaming, E-sports, and even virtual reality gaming.
The most important thing to remember is that the tax rate set by a state will determine what type of gambling takes place in that state. Legislators will need to decide what is most important to them in their states. Hub resort casinos require a lower tax rate to be successful than does a “slots barn”. A state can make money on casino gambling with most tax rates, but lower tax rates result in more investment and jobs, while a higher tax rate can result in more total gambling-exclusive revenue. A tax rate of 6% may get a state a Wynn or Bellagio-style luxury resorts, a tax rate of 25% may get a state a nice hotel franchise casino, a tax rate of 60% may get a state slot machines at convenience stores. All may be viable models; all result in completely different outcomes based on the tax rate.
Geller speaks at NCLGS on the potential effect of Sports Betting on Pari-mutuels (summary below) and Webinar for GiGse on Sports betting
Since my last Post, I’ve spoken to the National Council of Legislators from Gaming States (NCLGS) on July 13 in Cleveland, Ohio, on “the potential impact of Sports Betting on Pari-mutuels”. On July 26 I was a panelist on a GiGse webinar entitled “U.S. Sports Betting & Wire Act – addressing key issues and questions for a successful regulation and operation of sports betting roll-out across states.”. It seems that sports betting is the flavor of the day in Gambling seminars. This post will deal with my NCLGS comments. I intend to post soon on my GiGse webinar comments.
At NCLGS, I pointed out that the absolute fiscal impact of sports betting at the Pari-Mutuels is likely to be negligible, but that the opportunity is great. Let me elaborate.
Nobody knows what is the total amount of wagering that currently occurs on sports betting. The most common numbers I’ve seen are between $100 and $300 billion, so let’s assume it’s $200 billion. Much of that is “sticky” meaning it will stay where it is, with illegal bookies and in office pools, etc. This is even more likely to occur if there are high taxes on sports betting. On the other hand, there may be large untapped demand, which would expand if sports betting is legalized. Anyone that pretends to know what the actual number is probably is just making it up…, excuse me, I meant to say is simply doing exact calculations on an inexact number, to come up with an educated projection. In other words, making it up. However, most of that expansion would occur in Internet sports betting, which, as I will explain in my comments on the GiGse webinar, is probably illegal. Since I can make up numbers as well as anyone else, my scientific calculation is that there will be approximately $150 billion in Sports betting. Just guessing.
The takeout (Gross Gaming Revenue, or GGR) on sports betting is generally around 4-7% in Las Vegas casinos. Let’s assume 5%. 5% of $150 billion is $7.5 billion. If states increase the takeout much more than that, too much of the gambling will stay illegal. If states raise tax rates above a certain unknown number (10-20%??), they will make it unprofitable for operators. Let’s just assume that the state tax rate is 12%, the Federal excise tax rate is .25% of the wagering (not the GGR), the sports leagues and individual teams ask for their percentage (either of GGR or wagering), and we see that there’s not a lot left for the operators to make money on. In Nevada, the expenses for running sports gambling before taxes and the other issues I’ve discussed approach 50%. Further assume that Nevada will continue to attract most big rollers for sports wagering, and we can see that there isn’t much left to spread around as profit for individual operators in the rest of the Country.
However, there is some good news for pari-mutuel operators, if they take advantage of it. I believe that at least initially, most states will restrict sports betting to their existing licensed gambling facilities. I think that this will occur because the existing facilities have substantial political clout in their states, because Internet sports wagering may be illegal (because of the Wire Act, which wasn’t thrown out when PASPA was), and because of a desire to at least start in a more conservative fashion. In Las Vegas, we’ve seen that sports betting isn’t that big of a revenue generator for the casinos. The casinos use sports betting to attract customers to their casinos, and they do this well. If pari-mutuels around the country take advantage of this, upgrade their facilities, diversify their gambling base, and use sports betting to attract new customers, then sports betting may indeed be a huge boost to pari-mutuels. I won’t hold my breath.