A recently released audit revealed significant flaws in the Colorado Division of Gaming’s regulation of sports betting. Several key concerns were discussed in the audit, which was conducted by the Colorado Office of the State Auditor.
The audit found that during the state’s first year of regulated sports betting — Colorado legalized sports wagering via referendum in November 2019, while mobile sportsbooks launched in May 2020 — the Division of Gaming lacked “an effective process to investigate sports betting operations for temporary licensure, or to collect sufficient documentation to determine if sports betting operations’ monthly tax filing were accurate.”
In March, 90% of Colorado’s 39 licensed sports betting operators held temporary licenses. According to the audit, those licenses were issued despite only limited background investigations of the operators, which are allowed to act as if they’re permanent licensees.
The lack of thorough background checks left the auditors wondering about the suitability of the operators. To this end, of five licensees scrutinized by the auditor, none were subjected to minimum background investigation procedures by the Division of Gaming.
Tax filing discrepancies
An additional concern discussed in the audit relates to tax filings. The auditors looked at 22 sports betting tax filings from May 2020 through April 2021, where they “found wide variation between the amount of wagering activity (i.e., bets, free bets, and payments to players) that operations reported after each gaming day compared to the totals they reported in their monthly tax filings.”
The variances on the monthly tax filings were around $1 million at times, which concerned the auditors.
Among key findings in Colorado's scathing inaugural sports betting audit:
•$millions in reporting irregularities
•90% of operators haven't undergone thorough background checks
•Operators reduced tax liability by $706k/a year by carrying net operating losses forward
— Sam McQuillan (@sam_mcquill) June 14, 2022
“While some variation is expected since wagers may be altered, voided, or canceled after they are placed, operations do not always submit supporting documentation to substantiate changes to their reported net sports betting proceeds,” according to the report. “As a result, the Division could not demonstrate if or how it verified that the tax filings were based on accurate data.”
A major theme of the audit seemed to be the Division of Gaming’s failure to sufficiently monitor sports betting operators. Being able to accurately examine tax-filing discrepancies and properly vetting licensees are important aspects of regulating legal sports betting in a state, yet Colorado’s Division of Gaming seemed to fall short in those areas.
Lost tax revenue?
One interesting suggestion from the auditors related to an operator’s monthly losses. There was concern from the auditors that Colorado, which has a tax rate of 10% on gross gaming revenue, is missing out on potential tax revenue.
“The General Assembly may want to consider the effects of a Commission rule that allows sports betting operations to deduct and carry forward monthly operating losses, thereby reducing their sports betting tax liability, and whether that practice aligns with voters’ and legislative intent,” the audit reads.
The audit found that Colorado left hundreds of thousands of dollars in tax revenue on the table with its policy.
“Between May 2020 and April 2021, the State collected $6.6 million in sports betting tax,” according to the audit. “Our analysis of the 324 tax filings reported during this time period determined that if operations had not been allowed to deduct and carry forward operating losses, the State would have collected $7.3 million, or an additional $706,600, in sports betting tax during that first year.”
Colorado legislators seem to understand the auditors’ broad point about lost tax revenue. A bill signed June 7 by Gov. Jared Polis, relating to sports betting taxes, will gradually eliminate tax write-offs for sports betting promotions like free bets. Beginning on Jan. 1, 2023, no more than 2.5% of an operator’s monthly betting handle can go untaxed as free play. That percentage decreases by .25% for a couple of years until 2026, when operators can’t have more than 1.75% of their monthly handle go untaxed as free play.
The new law also addresses problem and responsible gambling funding, increasing the state’s spending rate in those areas from $130,000 per year to about $3 million.