Online Gambling not the Tax Boon Many States Had Hoped it Would Be

A recent survey indicates that nearly 8/10 Americans are against the current federal prohibition of online gambling. Only 18.9% of respondents favored an across the board ban of online gambling.[1] Following “free speech,” the most strongly favored argument for lifting the ban was increased tax revenue.” There is good reason for this- state governments are currently running a tax deficit, collectively owing more than $4 trillion dollars. Online gambling taxation represents untapped revenue that states urgently need.

After decades of inaction, desperation has lead many states to consider online gambling legislation. The 2011 DOJ letter regarding wire act enforcement was the catalyst. Following this announcement, states began scrambling to legalize gambling. Several states have passed laws permitting online gambling within their borders. Unsurprisingly, Nevada, the country’s leader in brick and mortar gambling revenue, lead the charge. In April 30, 2013, Nevada launched the nation’s first legal gambling website. With a model in place, other states quickly followed suit. Delaware and New Jersey have passed similar legislation while many states are currently considering similar proposals. These states include California, Hawaii, Illinois, Iowa, Massachusetts, Mississippi, Pennsylvania, and Texas. 6 of these states are on the list of top ten states with the worst debt problems. New Jersey, for example, owes nearly $300 billion.

However, online gambling was not as great a revenue source as Delaware, Nevada and New Jersey were anticipating. New Jersey officials had predicted that online gambling would bring in nearly $180,000 in fiscal 2014. By the end of may, which is just one month shy of the fiscal years end, the state had collected only 9.3 million. Worse yet, April and May collections were less than those in March, meaning that revenue is not growing but declining.

Delaware did not fare better. Because of various startup costs, gambling revenue made no net contributions whatsoever to tax coffers. They had projected a $7.5 million revenue gain.

A similar story unfolded in Nevada. Officials there refused to make any predictions but even they could not have been pleased with the $700,000 revenue gain.

Experts have blamed the slump on marketing and a lack of consumer education. Online gambling “exists in exists in a weird gray area because it was perceived to be illegal for so long, said Chris Grove, editor of the Online Poker Report.[2]

Experts also believe that New Jersey’s revenue predictions were inflated from the start as a way to garner more political support for the legislation. In contrast, New Jersey officials have citied a number of different issues that lead to the less than expected revenue. One of those issues was with the geolocation technology. This technology is a requirement, as it determines whether a prospective gambler is indeed within state borders. Other issues include obstinate banks that refused to process payments and credit card companies that declined charges made to online gambling websites. “A research report released by Morgan Stanley in March estimated that about 60 percent of online gaming transactions in New Jersey were rejected and that about half of those users did not make other attempts to fund their accounts.”[3]

The framework of New Jersey’s online gambling is also partially to blame for its slow start. Gambling was first authorized in New Jersey in January of 2011, but because the state’s constitution only allows gambling in Atlantic City, the legislation specified that all computer servers must be located at licensed Atlantic City Casinos. [4][5]

Currently only five websites are approved to conduct online gambling operations in New Jersey. [6] To obtain a permit in New Jersey, a website must fill out an Internet Gaming Permit Application as outlined in Chapter 69a Subchapter 5.19 of the New Jersey Statutes. That application as well as the regulations and requirements can be found here http://www.nj.gov/oag/ge/docs/Regulations/MergedRegulations110413.pdf.

New Jersey is however, far from accepting defeat. They are looking towards new and innovate ways to promote and expand online gambling options. For instance, they have hired a team of mobile app developers to create games that appeal to the cell phone/tablet market, a market that is growing at a breakneck pace. Still, New Jersey has learned their lesson, and the their forecast for fiscal year 2015 was much more reasonable.

The next serial blog post will cover the international response to online gambling.

[1] CasinoFYI Finds 81% of Americans Do Not Support Online Gambling Prohibition, Marketwired (July 17, 2012, 9:00 AM), http:// http://www.marketwired.com/press-release/casinofyi-survey-finds-81-of-americans-do-not-support-online-gambling-prohibition-16807 43.html. Dallis Nicole Warshaw, Breaking the Bank: The Tax Benefits of Legalizing Online Gambling, 18 Chap. L. Rev. 289, 314 (2014).

[2] http://www.usatoday.com/story/news/nation/2014/06/24/stateline-online-gambling-revenues-fall-short/11306661/

[3] id.

[4] “N.J. Senate Bill No. 490 (2010)”.

[5] Dan Cypra (January 11, 2011). “Intrastate Internet Gambling Bill Passes New Jersey Legislature”. Poker News Daily.

[6] http://www.nj.gov/oag/ge/gamingsites.html

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~ by rzlatkin on December 11, 2014.

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