Since a U.S. Supreme Court decision from last May struck down a federal ban on sports gambling, dozens of states have rushed to introduce measures to legalize it through either the legislatures or voter approval. Colorado unveiled House Bill 1327 less than two weeks ago on April 18. It had its first committee hearing last Monday, and the bill got final approval on the House floor last Wednesday.
The bill lays out a tightly controlled rollout of legal sports gambling. For now, the state will only issue licenses to people and businesses who already have limited gaming licenses, such as casinos, who will be allowed to contract with licensed retail and online sports gaming operators. According to the bill, any expansion of who can get licenses has to be approved by Colorado’s voters.
One possible reason to restrict sports gambling licenses to already licensed gaming operators is the existing tight regulations around them, meaning sports gambling won’t be operating in the Wild West. But Elizabeth Paulsen, a shareholder at Brownstein Hyatt Farber Schreck, said political and economic motivations have probably played a significant role. Operating a casino takes significant financial investment, and Paulsen said those businesspeople can use that as leverage.
“[Casinos] have been effective in lobbying their various state congresspeople to say, why would you open up the competition to people who haven’t made that investment in their community like we have?”
Colorado will have a unique task taxing sports betting because of the state’s distinctive regulatory framework for taxes under the Taxpayer Bill of Rights. So for this component of HB 1327, the guidance Colorado can get by looking at how other states tax sports betting is limited.
Under the bill, legalizing sports gambling includes putting a ballot question to voters for a 10 percent tax on net proceeds of gaming. According to the bill, Colorado’s water plan is among the purposes funded by the tax revenue.
Mike Feeley, a shareholder at Brownstein Hyatt Farber Schreck, said to avoid running afoul of TABOR the gaming statute has to lay out explicitly what the tax is and where the tax will get spent. He said he believes HB 1327 does that.
“If you ask voters to raise taxes and don’t tell them what it’s for, those things tend to lose. This bill has a very explicit hierarchy of the use of the funds,” he said. “It’s probably not analogous to any other state’s particular approach. Because of our TABOR voting requirements, we have to come up with it on our own, tell people what they’re voting [for] and hope for the best.”
The bill states its framework for legal sports betting won’t go into effect unless the ballot measure for taxing the gaming passes in November. Paulsen said comparison to other states’ taxing of sports gaming comes in looking at the rates they have put in place and how they affect businesses deciding have a sports gaming license.
“In Colorado, based on what the cost is and based on the tax structure, every single casino is going to take one of these licenses,” she said. “They would never not take that.”
HB 1327 limits the licensing fee for sports betting to $125,000. By contrast, Pennsylvania has a $10 million licensing fee for gaming and a more than 30 percent tax rate. Paulsen said as a result of the high cost of entry, not all the sports gambling licenses Pennsylvania made available were taken.
Even though last year’s Supreme Court decision allowed states to legalize sports gambling, the federal government still has authority to regulate it also under the Wire Act. The law prohibits interstate sports wagering. Current controversy swirls around whether it applies to all types of online and mobile betting, stemming from the Department of Justice’s course reversal earlier this year on a 2011 opinion that the Wire Act only applies to sports gambling.
Adrian King, a Philadelphia partner at Ballard Spahr who co-leads the firm’s gaming practice, said complying with the prohibition on interstate betting probably takes more effort from online operations than operators with brick-and-mortar locations.
“That’s fairly easy with a retail sports book,” he said. “When you get into mobile or internet [gambling], people are careful to set up their systems so that servers are located within the four corners of the state.”
King said overall, betting operators take a lot of caution to make sure they stay on the right side of the laws they’re subject to so they don’t put their licenses at risk. The stakes are especially high for operators who do business in more than one state, because if they run afoul of laws in one state, they have to report that in every other state they operate in as well.
“You cannot risk having adverse licensing outcome because you did not comply with the law or the [regulations].”
— Julia Cardi