Pennsylvania is finally on its way to becoming the fourth US state with legal online gambling.

The PA Senate passed a bill to legalize online poker, online casino games, daily fantasy sports, and sports betting on Oct. 26. Gov. Tom Wolf signed it into law just three days later. The bill, H 271, enacts widespread gambling expansion that extends beyond just PA online casinos.

Here is a look at exactly what the bill authorizes and why changes may be on the horizon if the tax rates on some gambling expansion is not adjusted.

What the amended PA gaming bill includes

After months of back and forth on tax rates, license fees, VGTs, mini casinos, and other details, the bill the Senate passed permits:

Additionally, the changes in the laws resulted in SugarHouse Casino dropping its lawsuit blocking the Stadium Casinos LLC group from building its planned casino in Philadelphia’s Stadium Park. With legal issues gone, the group quickly ponied up the money for a Category 2 license and are moving forward with construction.

Tax rates and licensing fees

Tax rates and license fees for online gambling have been major bones of contention for months.

After a 54 percent tax rate on slots was floated earlier this year, more recently the figure settled into a more-reasonable mid-twenties range. By comparison, the effective tax rate in New Jersey on online slots is 17.5 percent.

The amended version of H 271 returns to that steep 54 percent number. PA would tax the products as follows:

  • Online table games and poker: 14% + 2% local share = 16%
  • Online slots: 52% + 2% local share = 54%
  • Sports betting: 34% + 2% local share = 36%
  • Daily fantasy sports: 15%

Distinct licenses for each product

H 271 establishes three separate licenses:

  • Online slots
  • House-banked games
  • Online poker and other peer-to-peer online games

Operators were required to purchase a license for each vertical they intended to offer. For $10 million, PA casino operators could purchase all three in a bundle. Nine of the 13 eligible casinos chose to do that:

Casinos could also buy a la carte licenses for each vertical. Each license carries a $4 million price tag. So far, two casinos opted to do that. Presque Isle applied for table games and slot licenses. Mohegan Sun Pocono, on the other hand, surprisingly purchased all three at a premium of $12 million.

If the remaining seven licenses are not claimed by existing PA casinos, the process to apply will open up to entities outside of Pennsylvania. Expect that process to begin in October.

Mini-casino licensing

Meanwhile, there are licenses and fee structures for the other gambling expansion elements as well. For example, the 10 mini casinos each carry a $7.5 million fee to offer 350-700 slots. Properties can pay an additional $2.5 million for a right to offer up to 30 table games.

However, that number only covers the license. The mini casinos also feature an auction process. The highest bidders among existing Category 1 & 2 casino license holders in the initial auction obtained a license to pick a qualified location for the property.

After four licenses, the bids dried up, so the process opened up to Category 3 properties. At that point, Category 1 and 2 casinos could bid on a second property. That is what Hollywood Casino did, bidding on a second property.

With five licenses remaining from the 10, outside entities can apply to bid, however, the PGCB has not discussed that possibility.

VGT licenses and fees

The contested video gambling terminal (VGT) legislation made it into the final bill. These machines are only allowed at truck stops that meet a range of requirements. Each truck stop can only have up to five machines. These are the licensing costs and feeds:

  • Manufacturer/Supplier: $10,000
  • Terminal Operator: $5,000
  • Establishment: $250 per VGT
  • Key Employee/Procurement Agent/Principal: $500
  • Any other permit: Up to $100

The pitfalls of high taxation

Industry experts, including Moody’s, have decried the lofty 54-percent tax rate on slots, and for good reason. At that rate, operators will have little left over for marketing, customer acquisition, promotions, and other business-building tools. This could hamper the growth of the industry and thus depress the amount of tax revenue the state is able to generate.

PA already taxes its land-based slots more heavily than any other state in the nation, and only recently have PA casinos managed to break a lengthy slide in slots revenue.

Revenue projections for online gambling

PlayPennsylvania teamed with Online Poker Report to create a white paper breaking down the new law, including all of the following:

  • How much money it should net the state, both in the short and long-term
  • Exactly what is now legal in the Keystone State
  • Trouble areas of the legislation
  • Forecasting what the market will look like in PA
  • Looking ahead to possible interstate compacts

In the report, we also offer a look at a lower tax rate for online casinos, which we firmly believe will help both the bottom line and the stable growth of the industry.

PA Online Gambling Analysis