Tax Considerations for U.S. Internet Gambling Interstate Compacts
August 5, 2013
World Regulatory Briefing Conference USA, Philadelphia, PA, October 2013
This paper explores various tax considerations for states seeking to enter into interstate internet gambling ("iGaming") compacts. To date, three states (Delaware, Nevada, and New Jersey) have legalized regulated internet gambling. Pursuant to an iGaming compact, players from more than one state could theoretically play against each other on the same online poker table. Some of the tax considerations include the incentives of entering into such compacts, possible methods for sharing iGaming tax revenue among states, and parallels with the efforts to establish a unified online sales tax in the United States.
In general, smaller states have strong incentives to combine populations for regulated iGaming in order to host more profitable iGaming operators, while larger states are less inclined to export benefits to other states. States with no established gaming regulatory oversight could benefit from outsourcing the regulation to an experienced iGaming state.
For states to agree on how to distribute the increase in overall benefits from compacting for iGaming, there are two primary tax components: (1) choosing a gaming tax model to apply to the interstate iGaming activity; and (2) sourcing the iGaming revenue based on either location of the player or the operator. Delaware, Nevada, and New Jersey all have adapted their gross gaming revenue tax for brick-and-mortar casino gaming to iGaming. Another model, the deposit tax or a hybrid of the two models may be more appropriate for iGaming, however. Sourcing iGaming revenue based on location of the player offers several options, each with different implications. Sourcing iGaming revenue based on location of the operator presents a bifurcated analysis, depending on whether at least one compacting state does not have regulated commercial gaming.
Gaming industry stakeholders interested in iGaming compacting can also learn from the various efforts to establish online sales taxes in the U.S. for remote sellers. Although there are some differences between the logistical issues presented, some of the methods utilized in the online sales tax arena could be adopted to the movement toward interstate iGaming compacting.
Number of Pages in PDF File: 12
Keywords: internet gambling, interstate compacts, tax, online sales tax
JEL Classification: K34, L83
Date posted: August 9, 2013