States of play

While federal prosecutors in the US quietly increase their efforts to seize and forfeit the proceeds of internet gambling and internet poker, some state legislators are rushing to find ways to plug gaps in their state budgets by introducing legislation to license and tax internet gambling and internet poker.

In January 2011, the New Jersey legislature passed what would have been the nation’s first law regulating intrastate internet gambling, and imposing a hefty 20% tax on gross revenue. But earlier this month the New Jersey Governor vetoed the bill on the grounds its constitution requires the measure to be approved in a state referendum. In the meantime, at least four other states are pushing ahead with their versions of internet gaming laws.

California’s measure is the only one of these states to permit forms of intrastate internet gaming other than just internet poker. The California bill would allow gambling permits to up to three operators, but would disqualify any applicant which offered online gambling to any California resident since October 2006. California’s proposed bill would levy a 10% gross revenue gambling tax. This is important because as the tax increases players are less likely to play on licensed sites, preferring instead grey market domestic and overseas sites. If not enough players use licensed sites, they will neither be profitable nor generate the necessary tax revenue each state so desperately needs. A 10% tax is also considered by some to be at the limit of what is feasible even given California’s huge population.

Florida’s bill would also permit licensing of up to three platform or “hub” operators, with Florida’s 23 licensed pari-mutuels able to establish online poker portals pooling liquidity into a single intrastate network, which would be taxed at 10% of gross receipts.

Iowa’s poker-only legislation would license only one operator and impose taxes exceeding 20% on adjusted gross receipts exceeding US$3m. The Iowa bill, like Florida and California, would disqualify any operator that accepted wagers from any resident but at any time in the past and not just since 2006. Iowa’s relatively small population compared to other states means that its high proposed tax rate may require more consideration.

Nevada’s bill is the most palatable to proponents of online poker. It contains no limits on the number of operator licenses and would impose a tax of 6.75% on gross revenue from in-state residents exceeding US$134,000. Licenses for internet poker could be issued to existing Nevada casinos with non-restricted gaming licenses and to other operators subject to regulation by a recognised regulatory body of any other jurisdiction and which operated an internet poker site for at least two years. Unlike the other states, Nevada would not disqualify an operator solely because it previously offered internet poker without licenses in Nevada or the US. Nevada’s bill would also extend interstate internet poker to residents of other states to the extent internet poker is not prohibited by the laws of sister states.

With the race on to be the first state to adopt internet gambling, the position of the US Department of Justice on these measures remains unknown. In the meantime, on 17 March US Congressmen John Campbell and Barney Frank introduced the Internet Gambling Regulation, Consumer Protection and Enforcement Act in the US House to provide for federal licensing and regulation of internet gaming. The federal bill is supported by the one million-member Poker Players Alliance.

The likelihood of the passage of any of these state or federal measures, however, is hard to predict. As for the federal legislation, there is good reason to believe it may be difficult for the bill to be passed by the US House committee considering it. Nevada’s politically progressive approach to gambling likely means its legislation has the best and soonest chance for adoption by the states currently in the race.