New York Sports Betting Background
New York has generated record-breaking revenues since its launch in early January that has dubbed them the leader in the U.S. sports betting market. This is in part because of its population size and density, but also because the state taxes its commercial operators a country-high 51% on its revenue, which includes taxes on promotions. The high tax rate is backed by a hefty licensing fee of $25 million upfront. A desire to tap into the lucrative New York market had these operators willing to shell out cash and pay the 51% but now, five months in, they are questioning whether they can remain profitable in the long run.
Of the more than $7.6 billion that has been wagered in New York, operators retained $534.7 million but only got to keep $262 million because of the New York tax rate. While New York has generated more tax revenue than any other state in the U.S. in just five short months, and while that should come as no surprise given the rate, they may also be shooting themselves in the foot. With New Jersey just a short car or train ride away and a tax rate that is 36.75% lower than New York, users not getting competitive odds from New York sportsbooks can easily get to New Jersey to place their bets.
Including the 30+ states who have legalized sports betting, the national average for state tax on sportsbooks hovers around 19%.
Operators Are Suffering
Sportsbooks like BetMGM, DraftKings, FanDuel, and Caesars are arguing that the steep tax rate is keeping them from any real competitive advantage from its neighboring states as their ability to offer attractive odds to its users are hindered. “Players would never continue to play if the house always won. The house cannot continue to play if it’s always going to lose,” said BetMGM CFO Gary Deutsch.
These large operators have also begun to dial back their promotional offers as those are also subject to taxes, which is something that several states do not enforce. So, should the user lose the “free money” or promotional offer, the sportsbook is still taxed on the transaction despite gaining zero money from the user to place the bet. These big four sportsbooks are fighting for the promotional tax to be lifted and the revenue tax to decrease substantially.
Until then, BetMGM has had to change their game plan in New York in order to offset the heavy taxes. Deutsch explained to their investors in May that they were going to have to cut back on market spending and promotions in the Empire State, which they have already done. “As rational allocators of capital with sophisticated investors in Entain and MGM, we simply can’t apply our capital against an irrational investment thesis,” Deutsch said.
BetMGM is not alone, Caesars, who lost $575 million in its online division in its first quarter, also announced large restructuring plans nationwide.
The New Wave
This push by New York sportsbooks is actually not the first time that they’ve done something like this since the launch in January. In March, Joseph Addabbo, Chairman of the Senate Racing, Gaming, and Wagering Committee filed Senate Bill S8471 to make several reforms to the sports betting bill, of which included a scaled tax cut based on the number of operators in the state. Lawmakers had until the end of the fiscal year on March 31 to pass this bill, and failed to do so, leaving operators to carry on as planned.