PA Senate Committees Pass Online Gambling Bill, With Astronomical Tax Rates Included

First, the good news for Pennsylvania online gambling: A gaming bill was amended to legalize and regulate PA online poker and casinos, and it passed easily out of a pair of Senate committees on Tuesday afternoon.

Now, the bad news: The new language includes an extremely high tax rate that threatens to stymie the PA online gambling industry before it even starts. The online casino tax rate would be by far the highest for any regulated market.

What happened for PA online gambling

Previously, the bill in question — H 271  — was acting as a shell for gaming reform in the state. Now, finally, the Senate acted Tuesday to load it up with a number of gaming provisions, online gambling included.

The amended bill surfaced and quickly started making its way through the PA legislative process.

The Senate Community, Economic & Recreational Development Committee voted the bill forward with an 11-3 vote. The bill also cleared the Senate Appropriations Committee 24-2 later in the afternoon.

The bill is reportedly up for a vote of the full Senate on Wednesday.

Inside the new PA gaming bill

Here’s what we know about the bill so far:

Online gambling, at a glance

Here are some of the top line takeaways from the bill’s online gambling provisions:

• Online slot machine and table game revenue is taxed at a rate of 54 percent.
• Peer-to-peer game revenue (online poker) is taxed at a rate of 16 percent.
• Licenses for operating these two types of online gaming cost $5 million a piece, or $10 million total for operators that want to operate both online poker and casino.
• The number of licenses available of each type is the same as the number of land-based casinos licensed in the state. There are currently 12 PA gaming licensees. So there could be up to 12 online poker licenses and 12 online gambling licenses issued.
• The PA Gaming Control Board, not shockingly, will oversee regulation of iGaming.

The tax rate of 54 percent comes as lawmakers have expressed a desire to tax online casino games at the same rate as land-based slot machines in PA.

Daily fantasy sports

The bill also includes language that legalizes and regulates the daily fantasy sports industry.

Operators pay the lesser of $50,000 or 7.5 percent of gross revenue in the state to gain licensure. The minimum payment is $5,000.

Operators are then taxed at a rate of 12 percent after being licensed.

Online lottery

The bill authorizes the Department of Revenue to operate online lottery games. The structure appears to be roughly similar to the handful of other states that have online lottery.

This does not allow the state lottery to offer any type of online casino product, which had been a possibility floated in the legislature.

Other gaming provisions

The bill:

• Authorizes tablet gaming at some airports.
• Fixes the local share assessment for casino host jurisdictions, which had been struck down as unconstitutional last year.
• Does not appear to include language from a separate House bill that would authorize video gaming terminals at private establishments.

Will anyone balk at the licensing fees and tax rates for online gambling?

There is no question that the tax rate for online casinos and the licensing fee for online poker are extremely high, well past industry standards.

But what exactly operators may do is a matter of conjecture, at this point. But here’s what we do know:

• As had been reportedly previously, the bill includes language that appears to allow companies that do not currently have PA gaming licenses to apply, should any casinos in the state balk at applying for either or both online licenses. If they don’t apply during the initial window, casinos would be shut out of licensure for two years.
• Penn National has said “no one will sign up” for online gambling if the tax rate is too high. Those comments came as the 54-percent rate was being bandied about.
• Sands Bethlehem and Parx Casino have vocally opposed online gambling. The chairman of Las Vegas Sands Corp, Sheldon Adelson, is vehemently against iGaming, so it’s difficult to see how Sands would be involved. Parx appears likely to get in the mix, should iGaming be legalized.

Regardless, it seems feasible, if not likely, that all 12 licenses of each type will not be snatched up. That’s particular true of the poker/peer-to-peer licenses.

Problems with the high tax rate/fees

The 54 percent tax rate and the $5 million fees set up some other problems for the state and its casinos:

The poker room problem

Without Pennsylvania immediately compacting with New Jersey (the bill allows PA to compact with other states for iPoker), there is almost no way the state could sustain 12 distinct online poker networks. New Jersey, although a smaller state, supports just three distinct poker networks. Even with compacts 12 licensees for poker only is laughable at best.

That means the state is not getting the full $60 million — $5 million per license — like lawmakers would like to think the state would get. That will result in lost revenue for the state.

The black market and customer problem

The high tax rate would likely mean that the black market isn’t shoved to the side in PA.

It will be difficult for operators to compete with illegal, offshore operators that don’t have to deal with a 54 percent tax before they try to make a profit.

We know how each dollar of online gambling revenue is spent in New Jersey by iGaming operators there. Suffice it to say, there is not 54 cents per dollar going into the casinos’ pockets. PA online casinos will have to cut corners somewhere, and that will not be good for attracting customers or retaining them.

What happens next for PA online gambling

The bill still needs to get through a vote of the full Senate and would return to the House upon passage.

The bill is not a final document, but likely does represent compromises that a majority of senators can agree upon. The House can still choose to amend the bill to find middle ground on things like the high tax rate. Previously, the House has twice passed legislation with online gambling taxed at a much lower tax rate.