NJ iGaming Player’s Tax Guide Part III: Residents from Other States

NJ Online Gambling Tax Guide
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This is Part 3 of a series covering tax implications stemming from regulated New Jersey online gambling. Read Part 1 here and Part 2 here.

The state tax consequences for New Jersey residents playing on New Jersey online gambling sites are straightforward.

For players who are residents of other states and travel into New Jersey to play online, we cannot say the same.

Tax obligations for nonresidents

Nonresident gambling winnings sourced within New Jersey are generally subject to the State’s gross income tax. (See N.J.S.A. § 54A:5-8(a)5.)

Residents are taxed on everything by their home states, if anything at all (some states do not impose a personal income tax).

So, a player from Maryland, New York, Pennsylvania, or another state who travels into New Jersey may also be subject to paying to his home state income tax on gambling winnings from New Jersey sites.

Dealing with nonresident gambling losses

Online gambling losses sustained in New Jersey by players who travel into the state are deductible only to the extent of gambling winnings from New Jersey sources.

A player from New York, for example, cannot offset NJ gambling winnings with gambling losses sustained outside the state for NJ income tax purposes.

Nonresidents claim NJ gambling winnings and losses as “net gambling winnings” on Line 20, Column B of NJ-1040NR.

Winnings may be subject to home state taxation

Players from states that impose a tax on all income are potentially subject to paying multiple states income tax on their NJ online winnings.

A player’s resident state, however, may alleviate this burden with resident income tax credits.

The concept is a resident state acknowledging that income was generated in and taxed by another state, so the taxpayer shouldn’t have to pay tax to the home state as well, right?

Maybe.

Each state has its own tax code, so the definitions for the resident tax credits vary. We will look at the applicable resident tax credit rules of some states surrounding New Jersey.

New York

New York allows a credit for income derived from sources within another state that is also subject to tax in NY. (See N.Y. Tax Law § 620.) A regulation (20 N.Y.C.R.R. 120.4(d)) defines “income derived from sources within another state” as:

  • compensation for personal services performed in the other jurisdiction;

  • income from a business, trade or profession carried on in the other jurisdiction; or

  • income from real or tangible personal property situated in the other jurisdiction.

The good news: It’s clear that professional gamblers from New York with online gambling winnings that are taxable in New Jersey may at least partially offset against NY income tax the tax paid to NJ on those winnings. The good news ends here, unfortunately.

Gambling winnings for amateurs don’t fit into any of the above three bullet points.

The regulation does exclude from the definition “intangibles,” which typically consist of items of income not tied to a geographic location, such as dividends or interest. Gambling winnings are probably not considered intangibles, either.

Can we argue that the regulation’s list of “income derived from sources within another state” is not inclusive?

The NYS Department of Taxation and Finance said no in a 2002 advisory opinion. New York does not impose an income tax on gambling winnings of nonresidents won in its state (except for lottery winnings), such as at Turning Stone or Resorts World Casino.

The Department’s logic goes something like this: Since NY does not source (and tax) gambling winnings of nonresidents as within NY, then it would be inconsistent to source gambling winnings of NY residents won in another state like NJ as within that state.

Because the law is not explicit on this point, it remains possible for a taxpayer to challenge the Department’s interpretation. The challenge would be an uphill battle.

New York’s bottom line: NJ online gambling winnings of NY residents who are amateur gamblers are subject to income tax in both NY and NJ. Professional gamblers from NY, however, may claim a partial or full credit against NY tax for income taxes paid to NJ on NJ online winnings.

Pennsylvania

Pennsylvania allows a resident to claim a credit against PA income tax “for amounts paid to another state for any income tax…measured by gross or net earned or unearned income imposed upon income which is also subject to tax….” (See PA Code § 111.3.)

This provision is very broad, capturing gambling winnings of both professional and amateurs. PA residents may claim the credit on Schedule G – L (downloads as a PDF).

Pennsylvania’s bottom line: PA residents with NJ online gambling winnings may claim a partial or full credit against PA tax of the tax paid on those gambling winnings to New Jersey.

Connecticut

The situation for Connecticut residents is very similar to that for NY residents.

The law allows a general credit against CT income tax “on income derived from sources” and taxed in another state. (See Conn. Gen. Stat. § 12-704.) A regulation (Conn. Agencies Regs. § 12-704(a)-4) defines income as ”derived from or connected with sources within” another state to include:

  • compensation for personal services performed in the other jurisdiction;

  • income from a business, trade or profession carried on in the other jurisdiction; or

  • income from real or tangible personal property situated in the other jurisdiction.

The regulation also excludes intangibles. Sounding familiar?

Applying the law to gambling income, the Connecticut Department of Revenue Services essentially copycatted New York’s interpretation in an informational publication:

Neither a resident nor part-year resident is eligible to claim a credit against his or her Connecticut income tax for income tax paid to another state on gambling winnings.

Professional gamblers from CT are still entitled to the credit, however.

Connecticut is not identical to New York on this issue, because gambling losses are not deductible against gambling winnings at all for Connecticut income tax purposes.

CT residents with NJ online winnings must pay NJ income tax on net gambling winnings AND Connecticut income tax on all gross gambling winnings. Ouch.

As an aside, lottery winnings of CT residents won in other states may be creditable against CT income tax.

Connecticut’s bottom line: NJ online gambling winnings of CT residents who are amateur gamblers are subject to income tax in both CT and NJ. Professional gamblers from CT, however, may claim a partial or full credit against CT tax for income taxes paid to NJ on NJ online winnings.

Maryland

Maryland generally allows a resident to claim a credit against state income tax for state tax on income paid to another state for the year. (See Maryland Code, Tax-General Article § 10-703(a).)

There are some exceptions, none of which appear to apply to a MD resident paying income tax to another state on gambling winnings.

Similar to that of Pennsylvania, the MD credit provision is very broad, capturing gambling winnings of both professional and amateurs. MD residents may claim the credit on Form 502CR.

Maryland’s bottom line: MD residents with NJ online gambling winnings may claim a partial or full credit against MD tax of the tax paid on those gambling winnings to New Jersey.

Delaware

Delaware allows a resident to claim a credit against state income tax for “any income tax imposed for the taxable year by another state of the United States.” (See Delaware Code § 1111.) This is another broad resident credit provision, including all gambling winnings.

A taxpayer seeking to claim the credit may report the amount on Line 10 of Form 200-01, and must attach to the DE return a signed copy of the income tax return filed with the other state.

If claiming a credit for taxes paid to more than one state, the taxpayer must also complete DE Schedule I and attach it to the DE tax return.

Delaware’s bottom line: DE residents with NJ online gambling winnings may claim a partial or full credit against DE tax of the tax paid on those gambling winnings to New Jersey.

The final installment of this series will cover tax consequences for nonresidents of the United States who play online in New Jersey.

Disclaimer: Nothing contained in this article is specific legal advice, as each person’s situation is different. Contact a tax professional to discuss particular facts and circumstances.

IRS Circular 230 Notice: This article is not intended to be used, and it cannot be used by any taxpayer, for the purpose of avoiding federal tax penalties that may be imposed on a taxpayer.

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Brad Polizzano
- Brad is a tax attorney and accountant in New York, and assists gaming industry stakeholders with evaluating various tax considerations for entering into the U.S. internet gaming space. He also represents taxpayers in disputes with the Internal Revenue Service and the New York State Department of Taxation and Finance. E-mail: [email protected] Twitter: @taxdood