Tennessee to Lower Tax Rates for Sportsbooks as the State Hopes to Improve Revenue Metrics

On April 21, the Tennessee legislature passed a bill that would drastically change the tax structure of sports betting taxes if it gets the governor’s final signature.

The New Tennessee Tax Structure Reduces the Burden on Operators

The bill – SB 475 – would change the tax structure from a 20% tax on gross gaming revenue, which includes a minimum 10% hold for operators, to a 1.85% tax on total handle. The initial bill sought a 2% rate but was amended by the House then later approved by the Senate. It’s now off to Gov. Bill Lee’s desk for his signature. If signed, the handle tax will be the first of its kind in the country.

The 1.85% would be a monthly tax payment on total handle, less canceled or voided bets. In essence, operators won’t be able to deduct payouts and promo credits from their taxes but can deduct federal excise tax on sports betting from the handle amount. So, assuming the governor signs the bill, operators will pay the 1.85% monthly tax on roughly 99.75% of their total handle for that month.

How Does Tennessee Benefit?

Despite the steep drop in percentage, Tennessee legislators are expecting it to increase revenue for the state. It remains to be seen if this will be the case.

Using 2022 numbers as an example, Tennessee saw a $3.8 billion handle in the year, of which the state hauled in roughly $69 million using the current tax structure. If SB 475 had been in effect for last year, the state would have taken in $75.4 million in tax revenue. That being said, variables such as hold percentage play a big part in the increase (or lack thereof), so an increase is not always guaranteed.

10% Not Feasible Long-Term

According to Legal Sports Report’s state revenue tracker, Tennessee’s average hold rate for operators — since PAPSA was repealed in 2018 — is 9.4%; which, still, despite record-breaking revenues, falls below the 10% minimum.

Getting rid of the 10 percent hold rate for operators is a big reason behind the passage of the bill. By the end of 2022, nine of the state’s 11 sportsbooks failed to reach the 10 percent hold threshold and were fined $25,000 as a result. This led to a loss of $11.6 million in potential tax revenue for Tennessee last year, per comments from a March 1 meeting.

On March 1, the Tennessee Sports Wagering Advisory Council (SWAC) — now renamed the Sports Wagering Council per SB 475 — agreed that the 10% hold is too steep for its operators. SWAC Executive Director Mary Beth Thomas acknowledged that some operators have failed to meet the 10% mark for two years in a row.

“After multiple discussions over the past couple of weeks with representatives of the sports betting industry and specifically with representatives of those who are in that category for two years in a row, I feel competent and have been given appropriate assurances,” Thomas said in the meeting. “I believe that the industry is willing to come to the table to work out the details of a legislative fix.”

Just over a month later, the “legislative fix” has been found. Now it waits in the wings of Lee’s approval queue.