Indiana House Representative Alan Morrison (R-District 42) on Monday made good on his promise to introduce a bill that would bring legal sports betting to Indiana gaming facilities. The most notable and, frankly, surprising provision of House Bill 1325 (HB 1325) is the inclusion of an “integrity fee” that would give sports leagues a 1% fee on amounts wagered at state-licensed sportsbooks.

That’s 1% on the total betting handle, not the “hold,” the latter of which is the amount that sportsbooks keep after winnings are paid out. That 1% could amount to a ton of money and a big slice of sportsbook profits considering other taxes and fees that the bill would also impose.

According to a report by ESPN’s David Purdum, the bill materialized after NBA and Major League Baseball officials discussed the matter with Morrison. “We’ve certainly had some input and welcomed some advice and language that makes the leagues feel a little bit more comfortable,” Morrison told ESPN on Monday.

The “money question” — how the leagues would profit from legal, regulated sports betting — has been the last hurdle to expanded sports betting, but this development is surprising because, well, the leagues apparently lobbied for the kind of bill they argued last month would violate federal law before the United States Supreme Court.

Groundbreaking ‘Integrity Fee’ Provision for Leagues in Indiana Sports Betting Bill; Setting a Precedent, Taxes and Fees, Other Provisions of Note

The federal law that HB 1325 would violate is the Professional and Amateur Sports Protection Act (PASPA), which effectively bans sports wagering outside Nevada. HB 1325 could not take effect unless Congress repeals PASPA or if the Supreme Court rules in favor of New Jersey in Christie v NCAA, in which the state argues that PASPA is unconstitutional. A decision in that case is expected to come this coming spring.

Numerous times the NCAA and the professional sports leagues, including the NBA and MLB, have contradicted themselves, hiding the true basis for their objections to legal sports betting under the guise over concerns for the integrity of the games. The true motivation for their resistance is made obvious by their lobbying for this bill before the Supreme Court case has even been decided the case.

Here’s the provision setting forth the “integrity fee”:

Sec. 3. A sports wagering operator shall remit to a sports governing body that has provided notice to the commission under section 2 of this chapter an integrity fee of one percent (1%) of the amount wagered on the sports governing body’s sporting events. The sports wagering operator shall remit integrity fees to the sports governing body at least once per calendar quarter.

The fee referenced Section 2 is contingent on a league notifying Indiana’s governing commission that “real-time information sharing for wagers placed on the sports governing body’s events is necessary and desirable.” If so, the sportsbook operators shall provide that data.

Obviously, the leagues will always deem such information because that’s the type of data regularly monitored by Nevada and international operators. And that’s how they get paid. 

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While HB 1325 contains no explicit definition for “integrity fee,” or how the leagues shall use the fees, the inference is that leagues will use sums collected for integrity monitoring services (one such provider is Sportradar, with which the NBA has already established a data collection partnership). But those services won’t cost anything in the vicinity of the amount they would collect so in effect, it’s a very nice source of revenue. 

A Profitable Precedent for the Leagues

The dubious timing indicates that the leagues want to get out ahead of the Supreme Court ruling, while they have some leverage. If the court were to rule PASPA unconstitutional and open the door for sports betting in New Jersey or the rapidly growing number of states seeking to implement sports betting at casinos, riverboats, racinos, racetracks and elsewhere, what incentive do the states have to pay the leagues 1% of anything?

The states wouldn’t need permission from the leagues, barring a federal framework that imposes a similar “integrity fee,” which in France is more accurately termed a “betting right” (also at 1%). Of course, league officials could lobby members of U.S. Congress for such a fee. 

It’s just semantics but to ambiguously call it an “integrity fee” is comical in the context of a case in which the sports leagues have steadfastly declared that legal sports betting outside Nevada would irreparably harm the integrity of the games. 

The irony in the 'integrity fee' lies with the name itself. Integrity, to me, means either supporting or opposing something based on its actual virtue — not based on a mathematical assessment of your likely profit. https://t.co/tN5YdagDq8

— Marc Edelman (@MarcEdelman) January 9, 2018

As far as the potential integrity fee-generated revenue that could come, let’s consider Nevada’s record $4.5 billion sports betting handle in 2016. So the leagues (apportioned based on the amounts wagered on their respective games) would amount to $45 million (and that’s just Nevada!). 

That $4.5 billion handle amounted to $219.2 million revenue for the books in 2016 on a 5.4% win. So the 1% integrity fee would amount to about a 20% chop off of last year’s profit.

Accordingly the American Gaming Association said in a statement Tuesday morning:

“While we applaud Representative Morrison’s efforts to bring legal, transparent sports betting to Indiana, handing sports leagues 20 percent of what’s left over after winnings are paid out, undercuts its economic viability. Doing so will ensure the illegal market continues to thrive in the state, and gut the tax revenues available to fund essential public services. We believe Indiana taxpayers deserve better.

“We encourage Indiana to reject this short-sighted, misinformed idea, which simply replaces a failed federal prohibition with bad state policy. Our goal is to eliminate the illegal market, protect consumers and strengthen the integrity of the game. We invite all stakeholders to join us in working together in a thoughtful and transparent fashion.”

For the integrity fee to come from the handle, not the hold, would equate to great deal of money for the leagues and also shield them from sportsbook losses: If some sportsbooks got crushed and took only a 2-3% win or somehow fell into the red, well, it would not impact the leagues’ cut based on handle.

It’s also interesting that the NBA apparently is involved in  lobbying for state-based legislation since NBA commissioner Adam Silver and Senior Vice President Dan Spillane, vocal proponents for the legalization of sports betting, have stated that they oppose PASPA because they’re specifically seeking a federal framework “to help them protect the integrity of the game.” Draw your own conclusions. 

Notably, this integrity fee provision does not appear in an Indiana Senate version of the bill, SB 405, introduced on Monday by state senator Jon Ford. 

Could sportsbooks still turn a profit despite the integrity fee and a 9.25% tax? Probably, but it would crunch the books and perhaps give local bookies and illegal offshore sportsbooks an advantage (lower vigs) that might turn away potential customers to Indiana sportsbooks.

But the casinos would probably be willing to deal, though not without pushback, because the sportsbooks would become another amenity increasing foot traffic to land-based properties where casinos cut a much bigger profit from slot machines and table games. Also more people would come in for restaurants, hotel stays and spas.

Taxes and Fees Under HB 1325

The bills sets up a commission that would promulgate rules and regulations for licensure at a state-licensed gaming facility and satellite facilities — setting rules for accounting, record-keeping, employee background checks, commission representatives to access the sportsbooks for monitoring, and so forth.

Gaming facilities wanting to run sportsbooks would have to pay an initial fee of $75,000, plus $5,000 if it wishes to introduce interactive sports wagering (i.e. Internet-based mobile sports betting), plus a $50,000 renewal fee after five years. This is a heck of a lot more affordable than the $10 million initial fee that Pennsylvania’s HB 271 would levy on sportsbooks (in addition to a ridiculous 35% tax).

Aslo HB 1325 would impose a 9.25% tax on adjusted gross receipts (effectively the hold, or winnings). That’s in the ballpark of the 6.75% fee levied on sportsbooks in Nevada.  The tax would go into a sports wagering fund and applied in the same manner as other public funds.

Three Additional Provisions of Note

(1) The bill expressly permits wagering on collegiate sports in the state where the NCAA is headquartered.  NCAA president Mark Emmert has previously floated the idea of a “carve-out” for NCAA games, in other words, excluding NCAA games from wagering. Morrison’s bill floated a big screw you to Emmert on that. Betting on collegiate football and basketball games represents (give or take several points) about 25% of a typical sportsbooks’ overall handle.

(2) Indiana licensees would be allowed to create online/mobile sportsbooks for other Indiana residents located within in the state (good news for geolocation software operators; and

(3) Licensees would be permitted to offer sports wagering to: Patrons located outside Indiana in a state with which Indiana has entered into a reciprocal agreement to allow sports wagering through an interactive sports wagering platform.

That’s pretty big and could use some clarification. The provision doesn’t go into detail but avoid run afoul of the Federal Wire Act of 1961, sports betting would have to be legal in the outside states where customers are playing. The safe harbor provision would allow that.

Stay tuned for developments on the Indiana bill, which will have to be reconciled with the senate version, as well as developments in a growing number of others states making moves ahead of the Supreme Court decision.

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