As the U.S. legal sports betting market continues to expand at a rapid clip, so too has the amount the Internal Revenue Service collects from an obscure tax on sports betting wagers passed nearly 75 years ago.
Enacted as part of the Revenue Act of 1951, the law imposed an excise tax on the total amount wagered on sports per jurisdiction under a so-called turnover or “handle tax.” Last year alone, Americans legally bet more than $20 billion on professional and college sports, bringing millions of dollars to the coffers of the federal government. Five states, including Nevada, owed the IRS at least $4 million on the tax based on their handle from 2020.
On Tuesday, Rep. Dina Titus (D–Nev.) resumed her push to repeal the tax during a challenging period when casinos nationwide have lost millions in revenue and eliminated thousands of positions due to the COVID-19 pandemic and restrictions. Titus urged Congress to eliminate the 0.25% tax on state handle during a presentation before the U.S. House of Representatives Ways and Means Committee Tuesday.
“The handle tax is aiding illegal, offshore gaming operations and hindering the hard-hit gaming industry here at home from rebounding from the COVID pandemic,” Titus said in her presentation.
Titus made the comments during the chamber’s annual Members’ Day hearing, held each year to give House members an opportunity to inform colleagues on broader issues affecting their constituents. Last July, Titus and Rep. Guy Reschenthaler (R-PA), co-chairs of the Congressional Gaming Caucus, introduced a bipartisan measure to eliminate the handle tax. The proposed legislation did not move out of committee.
A fishing expedition
Over the past several years, Titus has urged Congress to repeal the tax, citing its built-in disincentives and onerous reporting requirements. Prior to the Supreme Court’s historic PASPA decision in May 2018, Titus contacted the IRS to learn more on the allocation of the funds. When the congresswoman from Nevada’s 1st District did not receive a response, she pressed to get the funds diverted back to the state. Her district comprises Henderson, Green Valley, and other communities just off the Las Vegas Strip where popular local sportsbooks see millions in handle each year.
Today I testified before the @WaysMeansCmte to urge the repeal of the “handle tax” on sports betting that penalizes legal gaming establishments for hiring more employees. Getting rid of this outdated tax will help Southern Nevada’s economy recover from the pandemic. pic.twitter.com/3rHTjGzrPb
— Dina Titus (@repdinatitus) March 23, 2021
In 2019, Nevada gaming establishments paid about $13.3 million via the tax, according to Titus, which was the highest in the nation. The congresswoman has repeatedly sought clarification from the IRS on the whereabouts of the funds, a legislative source told Sports Handle, but has not received a response.
The IRS does not comment on pending legislation, a spokesman for the agency told Sports Handle Tuesday.
When Congress enacted the revenue act in the 1950s, the was law intended to combat illicit gambling activity on the state level. But detractors of the law argue that the measure had an unintended consequence of propping up the illegal black market, which is not subject to taxes or strict regulatory burdens. Chris Cylke, senior vice president of government relations at the American Gaming Association (AGA), indicated that the practical effect of the law seven decades ago now gives the black market a leg up.
“It’s time for Congress to eliminate this outdated, counterproductive tax which provides little revenue to the federal government and unintentionally impedes our shared goal of moving customers away from the predatory illegal market to safe, regulated betting channels,” Cylke wrote in an email to Sports Handle.
As states have generated millions in additional revenue from sports betting, the IRS has also benefited from the repeal of PASPA. This spring, nearly 150 million Americans could pay taxes on sports winnings from 2020, an increase of about 23 million from last year, Bloomberg Tax reported.
Lost revenue
Between June 2018 and January 2021, sports betting operators paid an estimated $106 million in federal excise tax on nearly $43.5 billion wagered, according to the AGA. For comparison, the figure represents about one-fourth of what operators paid in state and local sports betting taxes ($432 million) during the same period, AGA research found.
Despite the pandemic, Americans legally wagered $21.4 billion on sports in 2020, driven by the pent-up demand for live contests following the global sports freeze last spring. In total, 18 states and Washington, D.C., collected taxes on legal sports wagering, resulting in an excise tax of $53.6 million in aggregate. The handle in six states surpassed $1 billion each, led by New Jersey, where bettors wagered $6.02 billion. Three states — New Jersey, Nevada, and Pennsylvania — owe the IRS a combined $34.6 million from the excise tax.
The federal tax is levied on top of a state tax, which sportsbook operators are assessed on gross gaming revenues (GGR). The majority of states with legal sports betting impose double-digit tax rates on GGR, with Pennsylvania’s rate of 36% among the highest.
In addition, operators are also required to pay a head tax on each worker employed by the sportsbook. The tax provides a disincentive to casinos for fully staffing sportsbooks, Titus noted, at a time when Nevada’s unemployment rate is among the nation’s highest due to the pandemic.
States have collected hundreds of millions in gaming taxes since the Supreme Court overturned the federal ban on sports betting a few years ago, and the IRS wants its fair share. https://t.co/UJyNmUyjHj
— Bloomberg Law (@BLaw) March 22, 2021
Meanwhile, receipts from the excise and head tax are sent to the U.S. Department of the Treasury’s general fund, Cylke explained. While the sports betting industry has dealt with a modicum of nefarious activity in recent months, last week Tennessee Action 24/7 had its sports betting license suspended by the state, it is unclear if proceeds from the tax are being used for heightened enforcement.
“It serves no specific public-policy benefit, which is among the reasons why it should be eliminated,” Cylke said.
Congress has already exempted certain wagers from the handle tax, notably horse racing, Titus said, adding that it should provide the “same treatment” to all forms of sports betting.
Titus plans to reintroduce the bill at some point during the congressional session, said Kevin Gerson, who serves as communication director for the longtime Nevada congresswoman.
