GPWA Times - Issue 20 - March 2012

reduced by contracts with software pro- viders, or promotional costs, amounts calculated as net GGR could be sub- stantially less than total GGR, reducing revenues to the governments. Players opting to play with sites not li- censed in the U.S. incur the liability not only for the deposit tax but also a hefty penalty (50 percent percent), creating a strong enforcement nexus and a deterrent to play with “illegal” sites. Concerns about a deposit tax Some operators and regulators may be concerned that a deposit tax could be eco- nomically risky or burdensome to them. Their concerns are: • Operators would have to pay taxes to the federal and state governments within 30 days, while customers might not generate sufficient revenues for the operators during that time. The deposit tax would not be deductible from player funds, but would instead be paid by the operator. The method puts the busi- ness risk squarely on the operator. • While unlikely in the real world, com- petitors or other malicious persons could “deposit” funds in an account and immediately withdraw the funds with- out activity, with the goal of causing economic injury to the operator. • Each of these concerns can be negated through allowing operators to impose fees for early withdrawal on custom- ers, sufficient to compensate the op- erator from the risk of non-play, or insufficient play, in light of the taxes. All of the Internet gambling bills in- troduced to date permit this approach. Alternatively, a credit on withdrawals may be utilized to eliminate this risk. • A deposit tax could result in higher overall taxes than a GGR, imposing an undue burden on all operators. • The concern of higher overall taxes has not been justified by any inde- pendent study. Estimates by PwC, an independent auditing and accounting firm, suggest that each 1 percent of a deposit tax is the equivalent of 2.6 percent of the GGR currently paid by land-based casinos. Thus, a total fed- eral and state deposit tax of 10 per- cent would be the equivalent of a 26 percent GGR. Many states impose a 25 percent GGR tax, as well as other fees, making a 10 percent deposit tax equivalent to existing taxes on land- based casinos in many jurisdictions. • Land-based casinos face significant costs that do not apply to online casi- nos, for facilities, utilities and person- nel, suggesting that the equivalent of a 26 percent GGR is reasonable in rela- tion to state GGRs today. • If a 10 percent deposit tax proved to be too high, it could be reduced. IV. Other considerations • Online operators would all face the same level of taxes under any scenario, deposit tax or GGR, and could impose other fees, increase “rakes,” or change odds to ac- commodate the tax. This is already done in land-based casinos, which feature odds on slot machines that change from machine to machine, with some ma- chines being more profitable per trans- action due to having lower odds. • Online casinos will have additional revenue sources that are not available to land-based casinos. These could in- clude advertising by third parties offer- ing other entertainment services; tie- ins with other types of businesses, such as airlines and hotels; and the interest on “float” from funds held in accounts, which does not exist in the land-based world. These additional sources of funds could be used to offset some of the taxes paid by the casinos to the gov- ernments under a deposit tax. V. Summary A deposit tax is far simpler to administer for tax purposes and is more transparent and efficient than is a GGR tax applying to Internet gambling operations due to three major factors: First, Internet gambling can take place involving persons from many states, mak- ing it difficult to allocate GGRs accurately to individual states, regardless of whether the GGR is based on the residence of the customer playing or is based on the loca- tion of the customer at the time of a game. Second, in an intrastate operation, the ability to join interstate compacts is en- hanced or impaired by the licensing meth- ods. A deposit tax model may make inte- gration of systems faster, simpler and less expensive than a GGR model and there- fore possible. Third, Internet gambling involves the creation of accounts, which do not exist in land-based gambling, and which have the result of deferring the recognition of what is GGR in any situation in which the customer chooses not to withdraw win- nings (see earlier question re timing of calculation of GGR). This problem could seriously impact revenue collection by the federal government and the states in a system that is based on GGRs at the fed- eral level. The same problems exist in an intrastate system in terms of the recogni- tion of revenue. These problems are avoided entirely through a system involving a deposit tax as an alternative to a federal/state GGR. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sanford I. Millar is a Los Angeles attorney specializing in taxation law with a sub-specialty in taxation of eCommerce including Internet gaming and gaming law compliance. He is frequently consulted as an expert on business and taxation law matters in the gaming and non-gaming sectors. www.MillarLawOffices.com “Online operators would all face the same level of taxes under any scenario, deposit tax or GGR, and could impose other fees, increase ‘rakes,’ or change odds to accommo- date the tax.” EYES ON U.S. REGULATIONS Vertical leap: driving player deposits through targeted promotions