GPWA Times - Issue 20 - March 2012

Federal and state taxation of Internet gambling – deposit tax vs. GGR tax By Sanford I. Millar here are currently two models proposed for fed- eral and state taxation of legalized and regulated Internet gambling in the U.S. One model would use the traditional approach relied on by land- based casinos for gambling at their physi- cal locations, which taxes gross gaming revenues (GGR). The second model would adopt a different approach to online gam- bling, in light of the fact that gamblersestab- lish “accounts,” rather than purchase chips solely for immediate play. The approaches discussed below are designed to be applied regardless of whether enabling legisla- tion is adopted under federal (interstate) legislation or state (intrastate) legislation. I. The models Under the GGR model, licensed operators are required to pay a percentage of their revenues to the federal government and to participating states, calculated on the basis of the amount wagered by all of the custom- ersminus thewinnings returnedto theplay- ers, or net sales. In the U.S., state revenues from land-based casinos have been based on a GGR model, supplemented by admis- sions taxes, device taxes and other fees. Under a deposit tax model, licensed oper- ators are required to pay a fixed percent- age of the amounts deposited by players to the federal government and to states wishing to participate in such a federal re- gime, such as 5 percent federal and 5 per- cent state of total deposits. While there are advocates for both tax models for regulated U.S. Internet gam- bling, there are important consequences for the federal and state governments and for licensed operators depending upon which approach is undertaken. II. GGR tax In the context of a land-based casino op- eration, a GGR tax is easily administered, as it represents the funds left to the opera- tor after the gamblers cash in their chips or otherwise receive payment at the end of their gambling activities on a particu- lar day, or in a particular tournament, or at the end of a particular event, such as a sporting contest. As applied to online gambling, a GGR tax can create complex revenue recognition questions, which could have a negative im- pact on federal and state revenue. It would require operators to develop unprecedent- ed procedures, which today do not exist, to determine how to allocate funds to differ- ent states relating to games in which play- ers from different states played one an- other, such as poker. On a strict intrastate system there is no allocation among states, unless and until multi-state compacts are negotiated and implemented. Casino operators are accustomed to GGR taxes, which for them provide a predict- able formula for paying taxes in light of their experience with taxation at the state level. GGRs have been set at low, afford- able levels in states such as New Jersey and Nevada, at 7.9 percent and 7.5 percent respectively, although GGRs have been set much higher in most other states, typical- ly at 20 percent or more and as high as 50 percent for large operators in Illinois. In land-based casinos, where customers buy chips and then cash them in at the end of a game or tournament at a single location, a GGR tax is easy to calculate, representing the difference between the funds that have been given by the custom- ers to the operator, and the amount that the customers have collectively been given back by the operator. Benefits of a GGR tax • Land-based casinos are accustomed to paying GGRs and understand the eco- nomics. By contrast, they have not pre- viously paid deposit taxes. • Operators are never in a position where they are paying taxes on anything other than actual gross revenues to them, lim- iting their risks. • No GGR tax is due until a casino pays out winnings to its customers. Payment is deferred until that amount is calcu- lated. The business risk is therefore shifted to the licensing authority to de- termine compliance accuracy and time- ly payment. Concerns about a GGR tax for online gambling • More complex accounting questions arise about what constitutes “winnings” and what constitutes taxable GGR. GGR is difficult to calculate in an individual account-based system. Calculating win- nings would be based on decisions in T EYES ON U.S. REGULATIONS Federal and state taxation of Internet gambling – deposit tax vs. GGR tax