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States in the United States hold divergent views on the most effective approach to tax the burgeoning online sports betting industry amid its rapid expansion.
The tax rates for sports betting operators vary widely across the country, starting as low as 6.75% and reaching as high as 51%.
Launches are being delayed due to tax legislation, which is a major concern as more states are on track to legalize.
Michigan continues to have one of the nation’s lowest sports betting tax rates. However, determining the ideal rate for this rapidly growing industry remains a question.
Where Michigan sports betting tax rate sits
Both mobile and retail sports betting in Michigan are subject to an 8.4% tax rate.
The only states with a lower rate than 6.75% for both retail sports betting and online wagering are Iowa and Nevada. In Arizona, the rate for retail sports betting is 8%, while online wagering is taxed at a rate of 10%.
Indiana is the sole state, apart from the rest, that boasts a tax rate lower than 10%, specifically at 9.5%.
The highest tax rate of 51% is observed in New York, followed closely by Pennsylvania at 36% and Tennessee at 20%.
High rates may not be sustainable
Despite New York’s satisfaction with the substantial monthly tax revenue generated by its newly established online sports betting market, the industry’s growth potential may be hindered due to the high tax rate.
According to the 2021 U.S. Sports Betting Regulatory Survey, the majority, 21.1%, of respondents identified high state tax rates and license fees as the primary obstacle hindering growth. Slower than anticipated rollout of iGaming ranked second, with 14.1% of participants selecting it.
Operators in Michigan have the advantage of using promotion credits to reduce their taxable revenue, a privilege not enjoyed by operators in other states. The lack of generous promotion credits in those states raises concerns among operators about their long-term prospects for success.
Andrew Winchell, Director of Governmental Affairs at FanDuel, expressed that not having an exemption for promotional credits would lead to an increase in the effective tax on operators from the perspective of taxpayers. He further mentioned that while this may be more manageable in states with lower tax rates, it raises concerns about the long-term sustainability in states like New York, where the tax rate is 51%.
Winchell drew a comparison between the inability to utilize promotional credits and operating a pizza shop with a half-price pizza promotion, while still being taxed for the full price of the pizza. This situation effectively subjects the current state tax rate to further amplification, consequently increasing the overall impact.
Other major markets on the verge of legalization may adopt New York’s tax laws, causing concern among operators who anticipate New York to become the leading sports betting market in the United States in the future.
iGaming alleviates sports betting stress
Michigan can relax about its low tax rate for sports betting because it has already achieved success with online casinos and online poker. Among the six states that have legalized online casinos, Michigan stands as one of them.
Michigan imposes a 20% tax on online casinos and poker with a gross revenue of less than $4 million, while the tax rate increases to 28% for those with a gross revenue exceeding $12 million.
In Michigan, the tax revenue generated from iGaming is 26 times higher than that from sports betting.
According to Deputy Director David Murley of the Michigan Gaming Control Board, governments will not generate significant revenue from sports betting. Instead, he believes that tax revenue will primarily be derived from iGaming.
Since its launch in January 2021, Michigan’s iGaming tax revenue has surpassed $427 million, demonstrating consistent growth. The state’s performance is commendable when compared to its counterparts in Pennsylvania and New Jersey.
New Jersey has generated $358 million in iGaming tax revenue since Michigan’s launch, whereas Pennsylvania has surpassed that with $618 million.
