Tennessee legislators have proposed a change to the state’s controversial rule that requires mobile sportsbook operators to have a 10% revenue hold each month. The proposed change would bring a unique taxation arrangement to Tennessee’s sports betting market.
HB 1362 would remove the 10% hold rule and instead require that operators pay a monthly tax of 1.85% of handle. A similar bill in the Tennessee Senate, SB 475, would tax handle at 2%. It’s worth noting that adjusted gross revenue in Tennessee is currently taxed at 20%.
Based on calculations by Sports Handle, a 1.85% tax on handle would have led to tax revenue of $71.2 million in 2022. The state, with its 20% tax alongside the minimum 10% hold rule, reported $68 million in tax revenue in 2022. That’s with several operators missing the mandatory minimum hold, though. The 2% handle tax would have generated tax revenue of $77 million.
|Total handle at Tennessee sportsbooks in 2022||2022 adjusted gross revenue (AGR)||2022 total state tax levied (20% AGR)||Aggregate 2022 taxes if based upon 1.85% handle||Aggregate 2022 taxes if based upon 2% handle|
|Difference =||Difference =|
HB 1362 was “rolled to the heel” at Wednesday’s House Finance, Ways and Means Subcommittee hearing, meaning it was pushed down the pile of bills to be heard by the committee. The bill doesn’t seem like an immediate priority, but it can be discussed later in the state’s legislative session, which is set to end on May 4. SB 475 is set for a Senate committee hearing on Tuesday.
The reason for the change
Members of the Tennessee Sports Wagering Advisory Council (SWAC) were frustrated earlier this year upon learning that several mobile sports betting operators failed to reach the 10% hold minimum in 2022. Operators decided to pay a small fine of $25,000 rather than make up the difference between what they paid in taxes and what they would have had they met the 10% hold requirement.
The SWAC believed the preferred acceptance of the fine was leading to about $10-12 million in unrealized tax revenue for the state. As a result, the SWAC asked the legislature to take a look at the rule to better ensure Tennessee realizes its maximum potential tax revenue from sports betting. The SWAC previously considered increased penalties for mobile sports betting operators that failed to hit the 10% hold, including a possible temporary suspension of licenses. Instead, the legislature is considering a tax on handle.
Operators in Tennessee include major mobile sportsbooks like BetMGM, Caesars Sportsbook, DraftKings, and FanDuel. The SWAC believes the state’s robust mobile betting market has the potential to provide larger tax revenue in coming years.
While the proposed change could lead to increases in tax revenue, no other state applies a levy to handle instead of revenue. The proposal also doesn’t guarantee increased tax revenue. If a 2% tax on handle is implemented and a monthly hold falls below 10% — the industry average is about 7% — operators will pay more taxes than they currently do. If, however, the handle tax is 2% and the monthly hold checks in at over 10%, operators will pay less in taxes than they do in the current system.
Official league data changes?
SuperBook Sports and Betly recently appealed to the SWAC about the need to use official league data sources for NFL wagering. The SWAC punted the decision to the legislature, which added language to HB 1362 and SB 475 that would remove the state’s official league data mandate.
This would allow SuperBook and Betly to use data sources other than Genius Sports’ NFL feed. The two sportsbooks argued that the terms of the mandated agreement with Genius Sports are not commercially reasonable.