Sports Gambling: Federalism and Potential Federal Legislation

In the days since the Supreme Court’s decision in Murphy v. National Collegiate Athletic Association (Murphy), there has already been substantial activity among states seeking to legalize or pursue legalization of sports betting.  As the “laboratories of democracy” have gotten to work, their piecewise approach to legalization has led to calls from industry stakeholders for federal intervention and standardization—especially among commissioners of professional sports leagues.  Here, as part of O’Melveny’s ongoing series of alerts on the Murphy case and its impact, we analyze (1) the different ways in which state legalization regimes have developed thus far and (2) potential issue areas that are likely to increase pressure for federal regulation. 

I. The State by State Approach to Legalization

Integrity Fees

Integrity fees are essentially state imposed taxes on sports betting but are unique in two respects.  First, rather than going into the pockets of regulators, integrity fees are paid to professional sports leagues on the theory that leagues are responsible for costs associated with policing the “integrity” of the sport.  Second, integrity fees are collected as taxes on “handle,” or the total amount wagered by bettors, rather than revenues.  As such, integrity fees actually realize a much higher net dollar amount than do taxes on revenue at a comparable rate. 

Several of the major sports leagues are lobbying hard for integrity fees in states considering legalization, placing integrity fees front and center in much of the early debate about sports betting.  Nonetheless, thus far no state that has legalized sports gambling has passed legislation requiring payment of an integrity fee.  Moving forward, Indiana and New York are two states to watch as major testing grounds for the future of integrity fees, which are included in currently pending legislation in each state.  In New York, there are two proposed laws that would include a fee paid to professional leagues; while both bills feature a one percent fee for the leagues, one proposal rebrands integrity fees as “royalty” fees.

Betting Origination and Online Betting

Another key area of distinction among states’ regimes is the way in which they accept online bets.  Nevada, which was exempt from PASPA and therefore has the longest established legal sports gambling laws in the country, accepts online bets anywhere in the state so long as the gambler has previously registered in person at a sportsbook.  Other states that have not yet started accepting online bets, like West Virginia and Delaware, have provisions in their laws that would allow for a process similar to Nevada’s.  Mississippi, however, employs a far narrower approach, with its regulations only allowing bettors to place online sports bets using an app if the bettor is within the confines of the sportsbook or casino.  And New Jersey’s sports betting law places only flexible geographical restrictions on online sports betting—indeed, a provision of the New Jersey law even leaves open the door for allowing wagers placed in other states:  “All wagers on sports events authorized under this provision shall be initiated, received and otherwise made within this State unless otherwise determined by the division in accordance with applicable federal and state laws.”¹  

In practice, this distinction is significant.  It means that while a gambler in Nevada could place a bet online, using an app, sitting in the seats at a Las Vegas Knights NHL game, in Mississippi, a gambler could only bet using an app while he or she is in a casino or sportsbook and not while he or she is at an Ole Miss football game. 

In light of the varied approaches and the potential for allowing sports betting at professional and college sporting events, online sports betting is also one of the issues driving critics’ calls for federal regulation.  Additionally, online betting will likely be a major source of future attention because of its potential effect on Congress’s authority over interstate commerce and existing federal law.  Indeed, potential tension may arise between the Unlawful Internet Gambling Enforcement Act of 2006, the Interstate Wire Act of 1961, and state gambling laws.  Furthermore, limitations on locations at which bettors can place online bets may lead to the proliferation of black-market workarounds, like geolocation spoofing, that aim to facilitate out-of-state bettors who wish to take advantage of certain states’ legalization of online betting.

State Tax Rates

Thus far there has been a wide divergence among the tax rates on sports betting in states that have passed legislation legalizing the practice.  Integrity fees—if they are included in future legislation—will also likely substantially affect tax rates because (as discussed above) the fees are counted against all bets placed rather than revenue earned.

A sample of state tax rates on sports betting is below:

• New Jersey – for casinos:  8.5 percent for land-based sports betting revenue, 13 percent for online wagering run by casinos; for racetracks:  8.5 percent for land‑based sports betting revenue, 14.25 percent for online wagering run by racetracks.  Taxes are paid to the State General Fund.
• West Virginia – 10 percent rate on all bets.  Taxes are paid to the newly created West Virginia Lottery Sports Wagering Fund.
• Pennsylvania – 34 percent effective tax rate.  Taxes are paid to State General Fund.

The Definition of “Sports”

A fundamental question on which states are already disagreeing is “How do we define ‘sports’?”  This answer has significant ramifications for sports betting, as a broader definition may allow for a broader pool of activities on which gamblers can place bets. 

• New Jersey has taken the narrow position that sports, for the purposes of sports betting, shall not include “any collegiate sport or athletic event that takes place in New Jersey or a sport or athletic event in which any New Jersey college team participates regardless of where the event takes place,” as well as “all high school sports events, electronic sports, and competitive video games” and “fantasy sports activity.”²
• Mississippi’s regulations broadly define “sports pool,” i.e., sports betting, as “the business of accepting wagers on collegiate or professional sporting events or athletic events or other similar events.”³
• West Virginia has a similar broad definition of “sports event”:  “‘Sports event’ or ‘sporting event’ means any professional sport or athletic event, any collegiate sport or athletic event, motor race event.”⁴
• Delaware similarly defines “Sports lottery,” but cuts out Delaware college sports:  “‘Sports lottery’ shall mean a lottery in which the winners are determined based on the outcome of any professional or collegiate sporting event, including racing, held within or without the State, but excluding collegiate sporting events that involve a Delaware college or university and amateur or professional sporting events that involve a Delaware team.”

These issues touch on only some of the many challenges arising as sports gambling spreads.  Nonetheless, they provide a roadmap for the potential areas on which leaders in the sports and regulatory communities will focus moving forward. 

II.  Possible Areas for Congressional Regulation

Given the potential impact some state legislation may have on out-of-state bettors, it’s possible that Congress may choose to intervene and put forth a federal framework to govern aspects of sports betting.  Senator Orrin Hatch (R-Utah), one of the original co-sponsors of PASPA, has expressed an interest in federal legislation regulating sports gambling.⁵  Support for such a federal framework extends to team owners and league commissioners.  Mark Cuban supports a federal, uniform approach to sports betting “as opposed to everybody having to deal with each state individually.”⁶  Similarly, NFL Commissioner Roger Goodell and NHL Commissioner Gary Bettman have both called for congressional action following Murphy.⁷  Federal legislation may touch on the following issue areas:

Anti-Money Laundering and Corruption

Sports betting may also become an avenue for illicit money laundering and tax evasion.⁸  Additionally, there is a growing concern about players, referees, medical staff, team owners, or others impacting results and placing bets, interfering with the integrity of the sport. 

Cryptocurrency

Sports betting could take place on blockchain markets in addition to traditional markets.  For example, BlitzPredict, a blockchain-based platform, is an aggregator of sportsbooks and prediction marketplaces.⁹  The aggregator constantly refreshes in order to provide users with the best available odds.¹⁰  Given Congress’s interest in regulating cryptocurrency—and the interest taken by other federal regulators—the Federal Government may be inclined to include statutory provisions or regulations addressing the use of cryptocurrency in sports betting.

Consumer and League Protection

Congress may seek to impose age restrictions prohibiting minors from engaging in sports betting.  In addition, Congress may choose to implement safeguards to prevent sportsbooks from taking advantage of bettors with gambling addictions.  Congress may also ask leagues to implement integrity protocols (and perhaps could also implement integrity fees to fund such an effort, as outlined above) or other safeguards to protect their proprietary league data.¹¹  Leagues may also ask Congress to implement restrictions on professional teams’ direct involvement with gambling.¹²     

Media Rights

The legalization of sports betting may drive up viewership of live sporting events, as fans may now have an increased interest in seeing the outcome of a particular match.  With the potential for higher audiences, sports television networks stand to gain increased revenue opportunities by obtaining the rights to air particular leagues or matches, possibly drawing the attention of the FCC.  Not only do traditional television rights become more significant as sports betting spreads nationally, but streaming rights also rise in import, to the extent bettors are placing bets on out-of-state matches.

As sports betting increases viewership, sportsbooks may seek to advertise their services on television.  Congress may seek to implement a federal framework governing sports gambling ads, particularly as sportsbooks based in one state seek to advertise their services across state lines.

Data Privacy

Sports betting could expand the universe of potential bets beyond the actual results of a match and into other aspects of an athlete’s ability or other sports-related data.  Representatives of the MLBPA, NBPA, NFLPA, and NHLPA have expressed concerns as to the privacy rights of their players with the legalization of sports betting.¹³  Congress may seek to protect athletes’ privacy through a sports betting regulatory framework, limiting the universe of potential bets to match-related bets.  Additionally, sports betting enterprises themselves could become targets for hackers, possibly elevating Congress’s interest in developing stronger privacy protections. 

Federal Securities Laws

Nevada state law permits “entity betting,” in which a hedge fund may make large sports wagers with money pooled from investors.¹⁴  While Nevada requires the entities be based within its borders, the individual investors can come from other states.¹⁵  It’s possible these wagers and wager derivatives could be traded nationally, opening up another potential avenue of regulation. 

Conclusion

A national regulatory framework may address some of the discord between and amongst the states as they develop their own regime for sports betting.  It may also, however, trigger potential federalism concerns as states are already off and running to implement their own sports betting laws.  Regardless, the next several months will be fascinating to monitor.