So, what is an “integrity fee?” The answer to that question almost depends on who you ask. But it started off as a fee the professional sports leagues – mainly the NBA and Major League Baseball – were asking for purportedly in order to help them pay for better monitoring of the “integrity of the game” as legal sports betting becomes more widespread in the U.S.
How integrity fees came about
The first mention of an “integrity fee” in the U.S. appeared in January 2018 in Indiana HB 1325. At that time, the leagues were asking for 1 percent of total betting handle, which is equivalent to about to 20-25 percent a typical sportsbook gross revenue. Sportsbooks, as explained here, are a very thin-margin business, and a fee that eats up to 25 percent of revenue could well be the difference between that business operating in the black and the red. The pro leagues were offering virtually nothing in exchange for the fee, but have continued to lobby across the U.S. for the payout.
Since that initial ask, the integrity fee has evolved. It’s now often referred to by the leagues as a royalty, and the leagues admit they’ll provide virtually nothing in return for the fee, rather, they believe they deserve to be paid for the “intellectual property,” for the existence of games, the games that sportsbooks offer bets on. In addition, the leagues have backed off the 1 percent number, and in 2019 are asking for 0.25 percent.
In Missouri, however, the term integrity fee means something else altogether. Rather than a payout to the professional sports leagues, the integrity fee in HB 119 and SB 44 is a payout to the state to be used to maintain, repair or build sports venues. In essence, the professional leagues still get something out of it, but the fee wouldn’t be paid to the leagues.
As noted above, no matter what it’s called, any additional fee off the top of handle is a no-go for operators. Lawmakers, for the most part, also see a fee to the leagues as just more dollars leaving their states. That, in part, is how Missouri lawmakers came up with the idea to charge the fee, but keep it in state.
In mid-April 2019, the Missouri General Assembly became the first move forward a sports betting bill with an “integrity fee.” Since PASPA was overturned by the Supreme Court in May 2018, eight jurisdictions — seven states plus the District of Columbia — have legalized sports betting, and all have spurned the “opportunity” to give a slice of the profits to the professional sports leagues.
Still in 2019, at least three states have legislation that includes league “model legislation” language and a payout to the professional leagues circulating in their state capitals. Missouri’s HB 119, which initially called for a .75 percent cut off the top to the pro leagues or .25 to the NCAA, has been amended to call for a .25 percent cut to either (depending on the event) PLUS a 0.6 percent payout to the state, called an “entry and infrastructure” fee.
That bill moved out of the General Laws Committee on April 15.
Massachusetts S 224 (formerly SD 1110) is one of a handful of comprehensive sports betting bills that has been referred to the Joint Economic Development and Emerging Technologies Committee. The bill calls for a .25 percent royalty to be paid out to the professional leagues. In Iowa, SB 1081, which also calls for a .25 percent integrity fee to be paid to the pro leagues was introduced in January, but appears to have died in committee.
Evolution of the integrity fee push by sports leagues
In 1974, Congress slashed the 10 percent federal excise tax on all sports wagers (on the handle, not hold, like the “integrity fee”) to 2 percent, and lowered it again to 0.25 percent in 1984, allowing the market to flourish without onerous taxes.
Between 1974 and 2017, the extent of the leagues’ efforts in the sports betting arena, to our knowledge, was of aiding in Congress’ passage of the Professional and Amateur Sports Protection Act (PASPA) in 1992, ruled an unconstitutional encroachment on states’ rights in 2018 by the United States Supreme Court.
In the intervening 43 years, the leagues did not attempt to directly extract money from sports wagering from Nevada-based casinos, bookmakers or regulators.
At some point in 2017, perhaps after hearing oral argument in Christie v NCAA (later Murphy v NCAA after governorship changed), the leagues read this white paper by Penn State Law Professor Stephen F. Ross and research fellows, titled “Reform of Sports Gambling in the United States: Lessons from Down Under.” The paper explores a Victorian law that outlines the type of payment from operators to leagues that the leagues are now attempting to accomplish. “The leagues could also charge sports books and casinos licensing fees to use the leagues’ data,” the authors write.
On January 9, 2018, the first known piece of U.S. legislation containing the phrase “integrity fee” emerged in House Bill 1325 in Indiana, introduced by Representative Alan Morrison. We called it a “bombshell” and thought at the time that language might be hyperbole, but it wasn’t, given the magnitude and duration of this fight.
5 Sec. 3. A sports wagering operator shall remit to a sports
6 governing body that has provided notice to the commission under
7 section 2 of this chapter an integrity fee of one percent (1%) of the
8 amount wagered on the sports governing body’s sporting events.
9 The sports wagering operator shall remit integrity fees to the
10 sports governing body at least once per calendar quarter.
11 Sec. 4. The commission shall cooperate with a sports governing
12 body and certificate holders to ensure the timely, efficient, and
13 accurate sharing of information and the remission of proceeds of
14 the integrity fee to the sports governing body under section 3 of
15 this chapter.
“I did not contact anybody,” Morrison told Sports Handle regarding how the bill materialized. “They contacted me and I have not sent out any sort of request for any other leagues to be a part of this.”
On January 24, NBA Executive Vice President and Assistant General Counsel Dan Spillane testified at a hearing on sports betting before a New York State senate committee. He said in his written testimony: “To compensate leagues for the risk and expense created by betting and the commercial value our product creates for betting operators, we believe it is reasonable for operators to pay each league 1% of the total amount bet on its games.”
By February 12, Major League Baseball had publicly joined the NBA in a far-reaching lobbying effort that would eventually span about two dozen states, including Illinois, Indiana, Iowa, Kansas, New York and West Virginia. The pace of hearings and the introduction of new sports betting bills quickened.
On February 17 at the NBA All-Star Weekend, Commissioner Adam Silver was asked a question about sports betting and the so-called integrity fee. “This notion that as the intellectual property creators that we should receive a 1 percent fee seems very fair to me,” Silver said of levying a fee on potential operators. “Call it integrity fee, call it a royalty to the league.” This forced the leagues into the position of having to shift their justification for a cut. With Silver using the term royalty, Spillane and his MLB counterpart Bryan Seeley could no longer testify (with a straight face) at various hearings that the fee would finance only “integrity” measures.
On February 20, Sports Handle published the leagues’ “Model Legislation” for sports wagering, which was distributed to Indiana and every other state where they had lobbied. Section 6(3) says: “At least once per calendar quarter, a sports wagering operator shall remit to the relevant sports governing body a sport betting right and integrity fee of one percent of the amount wagered on its sporting events.” The same language appears in bills in Kansas, Illinois and other states.
On March 2, West Virginia passed the first new law of 2018 to legalize sports wagering — pending a change in federal law. MLB Commissioner Rob Manfred himself, seeking to stave off a bad precedent, got directly involved. The bill became law after five days of sitting on Governor Jim Justice’s desk.
Ironically, during House debate on sports betting bill, MLB Commissioner Rob Manfred was on a conference call w/ https://t.co/0dOtN7erog. media urging its defeat unless pro sports get a cut of the action via an "integrity fee."
— Phil Kabler (@PhilKabler) March 2, 2018
On March 7, New York State senator John Bonacic introduced S7900(A), which included an integrity fee of 0.25 percent, capped at 2 percent of operator gross revenue, and for which the leagues would have to apply for reimbursement. (Some math on that here.)
On April 2 at a hearing in Connecticut, the leagues appeared to officially lower the bar for their ask from 1 percent to 0.25 percent. “This fee is lower than we originally asked for,” said Morgan Sword, Senior Vice President League Economics and Operations at Major League Baseball. “In spirit of compromise, we are willing to accept a 0.25% fee.“
On April 4, he PGA Tour publicly aligned with the NBA and MLB on sports betting regulation.
On April 12, the players’ unions for the four major U.S. sports leagues staked a claim to the conversation and for a share of revenues.
As the date of a decision in Murphy v NCAA continued to near, the phrase “integrity fee” began to pick up steam in the mainstream media. We turned to entrepreneur and reputation expert Eric Schiffer for his assessment of the “integrity fee.” He bluntly called it “extortion.”
On May 14 the Supreme Court ruled in favor of New Jersey (Murphy), opening the door for states to legalize sports wagering — with or without any fee or payment benefiting for the leagues.
On May 21, the NFL announced its “core principles” for sports wagering, which made no mention of a fee or royalty, signaling a public break in strategy for monetization of sports wagering. There are rumors that the NFL is pursuing a strategy through Congress, for a new bill with not-yet-known concessions, or possibly carving a pathway through modification of the Wire Act.
On May 22, Seeley told The Athletic, “Obviously, some of that fee is designed to cover our costs that I talked about. But we acknowledge that the fee is going to be more than our costs, so that revenue would go to our clubs just like any other revenue would.”
On May 24, NBA spokesman Mike Bass told the Associated Press: ”As the intellectual property creators for this content, our games serve as the foundation for legalized sports betting, providing casinos the ability to earn revenue off our games, while we bear all of the risk that accompanies sports betting and will incur additional expenses to expand our existing compliance and enforcement programs.” He continued, “As a result, we believe it is reasonable for casinos to compensate the NBA with a small percentage of the total amount bet on our games.”
On June 5, Delaware began taking full-fledged sports wagers. Governor Jay Carney placed the first wager — $10 on the Phillies to win at the Cubs, and won. The leagues collected nothing from this wager, directly, under Delaware’s regulatory framework.
On June 8, Seeley said that other states should not look to Nevada — which pays the leagues zero percent — for guidance on regulation. “It makes no sense,” he said, per Reuters. “We should adopt regulations that fit 2018.”
On June 11, New Jersey Governor Phil Murphy signed into law New Jersey’s sports betting law, which likewise does not include any payment — royalty or integrity fee or otherwise — for the leagues. No surprise there after New Jersey racked up $9 million legal fees fighting the leagues for nearly a decade in court for the ability to offer sports wagering. Monmouth Park in Oceanport, NJ announced that it will take its first legal wager on June 14.
On Jan. 31, Missouri’s SB 327 was introduced. It calls for a .75 percent integrity fee to be paid to the professional leagues and NCAA.
So as of Present, No Piece of Legislation Has Passed Anywhere That Pays the Leagues a Direct Cut.
Some respected industry people including Roxy Roxborough have made the case for giving the leagues a small cut. There remain many opportunities for private commercial data deals or sponsorship agreements between the leagues and state-licensed operators or state lotteries regulating sports wagering. And Congress could, at any time, drop a bill that regulates all states in one framework, forcing all to pay a percentage.
This story is very much to be continued.