In a surprising move, an Ohio state senator, Senator Niraj Antani (Miamisburg), recently introduced Senate Bill 190 aimed at slashing the state tax rate on sports betting operators in half, potentially reducing tax revenues by tens of millions annually. Currently, a significant portion of this revenue is earmarked for K-12 education.
Pre Cleveland.com the bill proposes a reduction in the gross receipts tax on sportsbooks from the current 20% to 10%. When Ohio's sports betting program kicked off on January 1st of this year, casinos were subject to a 10% tax on gross receipts. However, the rate was later doubled to 20% in the state budget that was passed during the summer – this was, again, primarily directed to support both public and private K-12 education.
Sen. Antani's plan is in reaction to Ohio Governor Mike DeWine's concerns, who supported the higher tax rate on the grounds that he thought certain operators were using unethical advertising tactics. The Governor's proposal for a higher tax rate was spurred by incidents involving regulatory sanctions against large operators like as DraftKings and Barstool Sportsbook. The effects of these legislative changes have been clearly seen; Ohioans have wagered $5.2 billion on sports, winning $4.5 billion of it, but losing $700 million overall.
The Legislative Service Commission has not yet released a revenue projection, thus the financial effects of Senate Bill 190 are still unknown. However, between January and October 2023, bookmakers in Ohio had already paid roughly $102 million in taxes. It should be noted that months like November and December, when the NFL, NBA, college basketball, and college football are all in season, are not included in this. These are potentially profitable months.
Sen. Antani emphasized the need for a more methodical approach to an emerging sector like sports betting in an interview that was published in the Cleveland.com piece. Sen. Antani chastised the legislature for raising the sports betting levy within the state budget. Although the higher tax may appear to be directed at sportsbooks, he contended that bettors will ultimately suffer from worse odds and more restrictive promos. It is imperative, in Antani's opinion, to return the tax rate to 10%, however a lower rate might be taken into consideration.
Since 2018, the tax environment on sports betting has changed nationally as 30 states and the District of Columbia have legalized sports betting and imposed taxes on it. Lessons from places with well-established legal frameworks become increasingly important as more governments consider legalization, particularly with regard to revenue base design. One example of the disparities in state policies is the high 51% tax rate on gross gaming revenue that New York imposed on online sports betting establishments.
Ad valorem, or value-based, taxes on gross gaming revenue are imposed by the majority of states, which is supposedly in line with the negative externalities linked to gambling. Few states, nonetheless, set aside a sizable portion of their budget for problem gambling treatment; instead, the money is diverted to general budgets or unrelated initiatives. The difficulty is in the way gross receipts taxes are designed, which are supposed to target the gross gaming revenue (GGR) or gross receipts of sports betting providers. The intricacy stems from the fact that GGR frequently takes operator-offered promotional bets into account and does not accurately reflect actual gross revenue.
Promotional bets, such as "free" or "risk-free" bets, constitute a significant portion of GGR, capturing transactions that don't involve monetary exchanges. Ohio's move to reduce the tax rate reflects a broader challenge faced by many states. A Tax Foundation study found that only a handful, including Arizona, Colorado, Connecticut, Michigan, Pennsylvania, and Virginia, allow operators to exclude specific expenses from adjusted gaming revenue. Excluding the genuine cost of promotional plays from the tax base ensures a more accurate representation of money inflows minus outflows.
In a larger picture, the national spread of sports betting has resulted in various state tax regimes and generated $3 billion in tax income since May 2018. Based on statistics from the American Gaming Association, tax rates vary; Nevada, Iowa, and Indiana have lower rates because they were among the first states to allow gambling. States like New Hampshire and New York, which tax online sports betting profits at a rate of 51%, are examples of higher-tax states, especially in the Northeast.
The Ohio decision emphasizes the significance of careful tax base design and its direct impact on operators and bettors as states continue to negotiate the difficulties of sports betting legislation. For other states trying to decide how best to implement a fair and efficient sports betting tax structure, the outcome of Senate Bill 190 may prove to be a crucial model.
More on Sports Betting Taxation
It's critical to comprehend how complicated gambling winnings taxation is. Netted wins and losses do not exist. Gains are shown on an individual's tax return as income, whereas losses are only deducted for those who itemize their deductions on Form 1040 Schedule A. As a result, people who use the standard deduction are unable to deduct their gaming losses and must pay taxes on their whole profits. This opens the door to further tax pitfalls related to gains from gaming.
We have highlighted some key points below.
Impact on Adjusted Gross Income (AGI):
- The full amount of gambling winnings contributes to a taxpayer's AGI.
- AGI is crucial in determining eligibility for various tax benefits, and higher AGI can limit said benefits.
Tax Traps and Social Security Benefits:
- Gambling winnings, even if an individual had a net loss, can push their AGI over Social Security Administration thresholds.
- This may lead to up to 85% of Social Security benefits becoming taxable, creating unexpected tax consequences.
Health Insurance Subsidy Reduction:
- Gambling income in addition to a family's earned income can result in reduced health insurance subsidies.
- Families may end up paying more for health insurance coverage, and if subsidies were applied in advance, they might have to repay some or all of it during tax filing.
Medicare Premiums Impact:
- For those covered by Medicare, the AGI determines the Medicare B premiums.
- Gambling winnings inclusion in AGI can lead to higher Medicare B & D premiums, causing a significant increase in healthcare costs.
International Accounts and Reporting Obligations:
- Regardless of winning or losing, if an individual's online sports betting account is located outside of the U.S. and exceeds $10,000 at any time during the year, FinCEN Form 114 (FBAR) filing is required.
- Non-willful violations may result in civil penalties of up to $10,000, while willful violations can incur penalties of $100,000 or 50% of the account balance at the time of violation.
FBAR Penalties and Adjustments
- For non-willful violations, civil penalties can reach up to $10,000. Willful violations may result in penalties of greater than $100,000 or 50% of the account balance at the time of violation.
- As of January 21, 2022, both penalty amounts are subject to adjustment for inflation.
Understanding the tax implications of sports betting winnings is crucial for individuals to make informed financial decisions. Whether a winner or loser in the gambling arena, being aware of these considerations is essential to avoid unexpected tax burdens and compliance issues.
