Online Gambling Legislation Out Of Committee With Doomsday Tax Rate

Written By Robert DellaFave on May 23, 2017 - Last Updated on October 17, 2022
Nuclear explosion

[toc]On Tuesday afternoon, an amended version of gaming reform bill HB 271 passed through the Pennsylvania Senate Community, Economic & Recreational Development Committee by a vote of 11-3.

The bill then swiftly passed through the Senate Appropriations committee (24-2 in favor). It will be up for a full Senate vote sometime on Wednesday.

While this wave of progress sounds like a net win for online gambling proponents, the bill came affixed with an outrageous tax rate. If instituted, the rate will potentially kill the industry before it has the chance to find its footing.

The particulars of HB 271

  • All online casino revenue will be taxed at an oppressive 54 percent tax rateslots and table games. This is higher than the land-based casino tax rate in Pennsylvania, which is 54 percent on slots and 16 percent on table games.
  • Peer-to-peer gaming, which is effectively online poker, will be taxed at 16 percent, paralleling the land-based rate.
  • Licenses for peer-to-peer online gambling and house-banked games will be $5 million each, or $10 million should operators want to support both online poker and casino.
  • The language of the bill indicates that online poker player pooling with other states would be permissible, paving the way for an interstate liquidity sharing compact between New Jersey and PA.

Other online casino provisions

  • Daily fantasy sports will be legalized and regulated. Operators will pay $50,000 or 7.5 percent on gross revenue, whatever is less, for a license. The tax rate going forward is set at 12 percent.
  • The Department of Revenue is authorized to operator an online lottery.
  • Tablet gaming authorized at select airports
  • The local share assessment would be resolved.

What are they thinking?

The untenable tax rate on online casino is approximately 10 percent higher than the effective tax rate on land-based gaming. Beyond that, the $5 million licensing fee on online poker comes off as overbearing.

US online poker hasn’t exactly been a boon. In New Jersey, the vertical generates approximately $2.1 million per month and trending flat, as opposed to nearly $20 million a month (and rising) for online casino.

Even industry-leading PokerStars NJ has only generated $11.67 million in gross gaming revenue over the past 12 months. And in the only slightly bigger state of PA, it wouldn’t stand to do too much better.

Suffice it to say, it’s difficult to see many operators opting in to online poker only. Especially as their path to profitability will long and hard fought (in NJ there isn’t a single poker-only operator).

Which leaves the other option: concentrate on online casino first, and supplement with online poker. Problem there is, again, operators aren’t incentivized to enter an industry where the tax rate on their sole means of generating revenue is astronomical.

For more on why a 54 percent rate on online casino is far too high.

Hope in the House?

The sole bright spot in all of this, besides the fact that at least there’s been some forward momentum on PA online gambling legislation, is that HB 271 is not yet in its final form.

In a likely scenario, the House will amend the bill in favor of operators. A few conceivable scenarios:

  • An amendment so that the upfront licensing fees count against future taxes owed, effectively negating it long-term.
  • Lower tax rate on online casino. Prior House proposals called for 16 percent on online casino, so we could see the two houses meet somewhere in the middle. Around 30 percent is a good guess.
  • It’s possible that the license fee drops to something more reasonable.

The problem is, the tax rate and licensing fees are starting from such a high point that it’ll be difficult for the House to compromise down to something that is advantageous to operators, and by extension, players.

Is a $5 million fee and a 30 percent tax rate sustainable? Perhaps, but not without significant concessions.

In either case, stay tuned for more as this story develops.

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Robert DellaFave

In addition to being an ardent poker player, Robert DellaFave works as a contributor to and editor of several online publications dedicated to regulated US online gambling, including the legal PA online casino and poker markets. Based in New Jersey, Robert also works as a game developer.

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