Tax Considerations and the Legalization of Sports Betting

The Supreme Court’s decision on May 14, 2018 in the Murphy v. NCAA case struck down the Professional and Amateur Sports Protection Act (PASPA), which prohibited states from authorizing sports gambling within their borders. PASPA banned states from legalizing sports betting after its enactment in 1992, unless a state had already legalized sports betting prior to PASPA’s enactment. PASPA also contained a provision allowing for states to legalize sports betting if done so within one year of PASPA’s passage. The process of permission on such provisions is known as "grandfathering."

The Garden State Looks for an Exemption

New Jersey attempted to take advantage of this carve-out, however it wasn’t until 2012 that New Jersey passed a law legalizing sports betting. In 2012 New Jersey’s law was challenged by the National Collegiate Athletic Association along with the four major professional sports leagues, until the case reached the Supreme Court in May of 2018.

The Supreme Court agreed to consider whether PASPA violated the Constitution, allowing not only New Jersey to enact their sports betting law, but to open the door for all states to authorize and legalize sports betting if they so chose. The Supreme Court ruled in a majority decision that PASPA violated the 10th Amendment of Constitution, specifically the “Commandeering Clause.”

The Commandeering Clause

The core principal of the Commandeering Clause is that the federal government cannot force state or local governments to implement laws; therefore states cannot be forced to act against their will. Not only will this decision allow New Jersey (which has been waiting six years to legalize sports betting) to potentially do so before the 2018 football season kicks off in the fall, but it will clear that path for the nearly two dozen other states considering legalizing sports betting, as well.

Sports Betting Brings in Big Bucks

The economic impact of this decision should not be dismissed. Nevada (which was grandfathered into PASPA) makes over $5 billion in revenue each year in sports betting. Not only do states have an interest in this monumental decision but the IRS will be particularly interested in taxing any gambling winnings of those engaged in legalized sports betting. Any gambling winnings, less any losses, will be included in a taxpayer’s ordinary income. The American Gaming Association estimates that Americans spend around $150 billion on illegal sports wagers each year, which, if now legalized across the states could provide $3.4 billion of taxable income to state and local governments and billions more of taxable income for the IRS.

Offsetting Betting Losses

While the current tax law allows taxpayers to deduct their gambling losses up to the amount of their gambling income (so long as they itemize their deductions), the rules are different for professional gamblers. For tax years 2018 through 2025, professional gamblers must add any expenses, such as travel back and forth from casinos, to their gambling losses when calculating the amount of any deduction they can take instead of being permitted to separately write them off, as they could do previously.

The Long Road in PA

For most states, it could take between three and five years to enact laws allowing for the legalization and regulation of sports betting. Pennsylvania’s current sports gambling law, however, places them in a unique position. Pennsylvania’s law allows for the legalization of sports betting when the federal prohibition on sports betting has ended. This law, which was enacted in October of 2017 also imposes a 36% tax rate on any legalized sports gambling that occurs. This is an exceptionally high tax rate. For instance, Nevada only taxes sports betting at 6.5%, and New Jersey proposed a rate of 8%.

The Commonwealth would also require casino operators in Pennsylvania to pay a $10 million licensing fee in order to engage in sports betting under this law. For states like Pennsylvania, many speculate that illegal sports gambling will continue to thrive due to the increased tax burden on gamblers and Casino.

The Buckeye and Sunshine States May Follow Suit

Unlike Pennsylvania, Ohio may face additional hurdles if they ultimately choose to legalize sports betting. Several Ohio lawmakers say they intend to push new legislation, however this could lead to an amendment to the Ohio Constitution. Many Ohio lawmakers are particularly concerned with the impact sports betting will have on small businesses, notably, the benefits that small businesses would receive if sports bets were allowed in local bars. There is thought to be a $3 billion illegal betting industry located in Ohio alone, and lawmakers seem open to legalizing sports betting if the public shows interest in obliging.

Though both Pennsylvania and Ohio seem open to the prospect of legalizing sports betting within their borders, Florida lawmakers are taking more of a wait-and-see approach. Florida will be looking to other states to see if the potential benefits outweigh any risk. The earliest you can see any movement from Florida in this area would be November, where an amendment on the ballot could potentially move the decision about sports betting into the hands of voters. It is unlikely you will see any changes coming from Florida lawmakers concerning sports betting anytime soon.

New Decision, New Course for Some States

The decision in Murphy has provided the states with a new source of revenue, so it is more likely that the states will work with casinos to set fees and rates that benefit both parties. States like New York, New Jersey, and Pennsylvania are expected to take full advantage of this ruling and push sports betting laws forward as soon as possible. In the meantime, we will have to wait and see if Congress decides to take any action on this matter, or if legalized sports betting is here to stay.

Please contact a member of our Tax Advisory Group at 330-758-8613 if you have questions related to taxes on sports betting.

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About the Author(s)

Cassandra Baubie is an Associate at HBK CPAs & Consultants and is a member of its Tax Advisory Group (TAG).

Ms. Baubie joined HBK in 2017. She works in the firm’s Youngstown, Ohio office after earning a dual Bachelor of Arts degree in Legal Studies and Psychology from the State University of New York, The University at Buffalo and a Juris Doctorate from the University of Pittsburgh School of Law, where she also completed a Tax Law Certification. She graduated from both schools with high honors and spent a semester studying abroad in London, England, as well.

Ms. Baubie has experience in tax law research. Prior to joining HBK, she worked for Jurist.org, a global legal news organization, and was a member of the University of Pittsburgh Tax Law Review Journal. Ms. Baubie also worked for the University of Pittsburgh School of Law’s Low Income Tax Clinic where she performed IRS litigation and Tax Court work, and provided compliance work for low income individuals and businesses. She was an avid volunteer with the Olmsted Center for Sight in Buffalo.

Hill, Barth & King LLC has prepared this material for informational purposes only. Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.

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