PA online gambling is set to roll out later this year or early 2019

PA Online Casino Operators Prepare For A Very High Tax Rate On Slot Machine Revenue

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What has Pennsylvania gotten itself into with an extremely high tax rate for online casino games? We’re close to finding out.

In October 2017, PA Gov. Tom Wolf signed massive gaming bill into law, effectively authorizing real money online poker and casino games which will form part of a large-scale statewide gambling expansion.

As regulated US iGaming interests prepare to launch their offerings to the Keystone State market — perhaps as early as this year — here is a look at the 54 percent effective slot revenue tax rate that internet casino operators will be responsible for paying to various statewide interests.

A closer look at the PA tax rate

What do you get when you burden online slot machine revenues with a tax rate in excess of 54 percent? That remains to be seen.

Moments after Pennsylvania House Bill No. 271 was signed by the governor, Online Poker Report regulated iGaming analyst Steve Ruddock posted a detailed explanation of how the state’s effective 54 percent online slot revenue tax rate might affect the industry.

Pennsylvania iGaming operators’ reliance upon slot revenue is expected to be less than that of neighboring New Jersey’s historical figures (thanks to a newly-formed multistate poker coalition between the Garden State, Nevada and Delaware along with an increased focus on more moderately-taxed table games in PA). But that still “doesn’t change the fact that the hefty upfront fee and the tax rate of 54 percent on slots makes it virtually impossible for any operator offering all three verticals (slots, table games, and poker) to realize a profit in its first five years,” according to Ruddock.

That analysis paints a bleak picture of the incoming Keystone State iGaming market — while supporting the notion that existing land-based operators may acquire iGaming licenses more as a “defensive” maneuver to limit competitors’ market access rather than as an opportunity to engage in profitable business activity.

Taxes are great for beneficiaries, bad for businesses

There’s no denying that taxed funds represent a clear benefit to those who receive them, while at the same time representing an equal burden to the companies that pay them. There’s no denying that convincing lawmakers to amend the current 54 percent tax rate for slot machine revenue — both land-based and online — would be a hard sell, either.

What this means is that the time window for opposing such an exorbitant tax rate is quickly closing now that the Pennsylvania iGaming license application process has begun, and that online gambling operators in the state will have to deal with an unfortunate business reality that is unlikely to rectify itself in the short-term… unless tax recipients suddenly decide its in their best interests to agree to smaller payouts.

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Is the 54 percent slot tax unsustainable in statewide iGaming market?

Going by New Jersey online operator statistics that were published in April 2017, regulated US iGaming companies only retain about 5 cents of every dollar in actual profit… and that’s in a statewide market that has a general tax rate of 17.5 percent for all online gambling verticals.

Therefore, the Pennsylvania model for taxing online slot machine revenues at 54 percent would appear to be unsustainable in a future nationwide online gambling market that might include more than just a few states.

It also calls into question whether PA lawmakers’ decision to extract maximum value from online gambling operators from the onset will eventually backfire, which would result in a Pennsylvania iGaming market that is less competitive, untenable and less profitable to Keystone State residents in the long run.

- David Huber has been involved in the online poker and gambling industries as a writer, editor, podcast host and consultant since 2004. His experience covering legislative agendas and legal proceedings dates back to the early 1990s as a broadcaster/news service provider for terrestrial AM/FM radio stations.
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