Online gambling sites lose money at the rate PA is proposing

If Pennsylvania Taxes Online Casinos At A Rate That’s Too High, Pennsylvania Won’t Have Online Casinos

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If Pennsylvania wants to have online gambling, it has to tax it at a reasonable rate.

If it doesn’t want to have regulated online casinos, lawmakers should pass a prohibitively high tax rate.

It’s as simple as that.

The backstory on PA online gambling

After failing to pass legislation in 2016, Pennsylvania lawmakers have spent the first few months of 2017 working on a comprehensive gaming package. That package will hope raise enough revenue to fill a major hole in the state’s budget.

The centerpiece of this legislation continues to be the legalization and regulation of online gambling, which will generate an estimated $400 million over the next five years.

Per analysis by Robert DellaFave, Pennsylvania would realize the following revenue from online gambling:

  • 2017 – $126 million (licensing fees)
  • 2018 – $46 million
  • 2019 – $52 million
  • 2020 – $59 million
  • 2021 – $66 million
  • 2022 – $77 million

Unfortunately, a proposal being considered in the Pennsylvania Senate could turn that $400 million into $0 by taxing online casinos at the same rate as land-based casinos.

According to recent chatter, the proposal being pushed for by Sen. Robert Tomlinson (which is reportedly gaining traction) would tax online table games and poker at 16 percent and online slots at 54 percent. That would mirror the tax rates imposed on land-based casino operators in the Keystone State.

If this came to pass, Pennsylvania’s land-based casino operators would pass on online gambling, putting the kibosh on a billion-dollar opportunity.

Here’s why.

Where’s the beef for iGaming?

In New Jersey, online casino games are the big money maker.

In March, the state’s online poker sites generated $2.25 million in revenue, whereas the state’s online casinos generated $19.5 million — more than an eight-to-one difference.

More important to the Pennsylvania discussion, online slots (which would be heavily taxed) represent in the neighborhood of 80 percent of that $19.5 million (this varies by operator). That equates to about $15.6 million, or over 70 percent of all online gambling revenue in New Jersey.

Tracing a dollar wagered online

New Jersey taxes all online casino revenue at 17.5 percent. Even at this reasonable rate (three times less than the proposed online slot tax rate in Pennsylvania), New Jersey online casino operators aren’t printing money.

Based on information from several online casino operators in New Jersey, here’s a look at where each dollar of online gaming revenue goes:

  • 24 cents to advertising
  • 20 cents to player reinvestment (player promotions and retention costs)
  • 18.5 cents to payment processing, KYC, geolocation costs, and platform and content royalties
  • 17.5 cents to taxes
  • 12.5 cents to general and administrative needs, including staff
  • 2.5 cents to other regulatory fees

After accounting for all these things, online operators get about five cents of profit from each dollar of revenue.

Land-based casinos can overcome a tax rate of 54 percent on slot revenue because they have better margins. (New Jersey casinos reap roughly $0.15-$0.20 of profit for every dollar wagered.) They also generate revenue from their hotels, dining, drinks, retail and entertainment.

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Increasing the tax rate kills any opportunity

If the tax rate on 70 percent of its business rose to 54 percent, every New Jersey online casino operator would be forever in the red. Casinos would make five cents on 30 percent of their revenue (online poker and table games). They would lose 31.5 cents on 70 percent of their revenue.

There is zero business opportunity if the online gambling tax rate goes above 20 percent.

There is zero incentive for casinos to pursue such a business. That is particularly the case when Pennsylvania is charging an upfront licensing fee of $8 million.

Instead of Pennsylvania yielding $126 million in upfront licensing fees and tens of millions in annual tax revenue, the state will get nothing. Any potential stakeholders will likely avoid online gambling like the plague.

- Steve covers nearly every angle of online poker in his job as a full-time freelance poker writer. His primary focus for OPR is the developing legal and legislative picture for regulated US online poker and gambling.
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