New York Keeps Making Online Sports Betting Process Difficult

New York Keeps Making Online Sports Betting Process Difficult
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Despite the example of what some consider the gold standard for a sports wagering business model next door, the New York sports betting market has taken a direction that’s been politically contentious and, even as the road nears an end-point, raises questions about sustainability.

That gold standard would be New Jersey sports betting, where online sportsbook operators are tethered to one of the Atlantic City casinos or the state’s racetracks. The tax rates are straightforward: 8.5% for retail sportsbooks and 13% for the much higher-volume online sports betting businesses. The results: A record-breaking $1-plus billion in handle in September with an estimated 20% (or more) of that action being so-called bridge-and-tunnel money from New York.

After much-wrangling that included the heavy-handed influence of former New York Gov. Andrew Cuomo, New York is lurching toward adopting online sports betting. As an aside, there are already modest retail sportsbook operations at a handful of upstate casinos. But as anyone who has looked at sports wagering for five minutes understands, the real money is in the internet wagering.

Where New York has landed is on a system where it will award online licenses — after a bidding process — to one or more groupings of platform providers and operators, that are either allied or single. According to a tax rate matrix, depending on how many operators are licensed, the tax rate will be as high as 64% or as low as 35%.

Considering the bidders who have come forward, and considering their configurations of platform providers together with operators, a reasonable estimate is that the tax rate will fall on the matrix in the range of 50% to 58%.

I know this all sounds complicated — but that’s only because it is.

After a public outing of the tax rate matrix, J. Gary Pretlow, the assemblyman for the 89th District of Mount Vernon and Yonkers, as well chairman of the racing and wagering committee, tweeted: “While the former Governor had a very limited vision for how a sports betting market could operate in New York, we now have the opportunity to get this right. We should license all applicants and allow them to compete for the business of New Yorkers.”

Such a solution would actually simplify the New York situation as best as it can be given the huge mess that was created over the last few years.

Why Enter NY Under Such Conditions?

Of course, one might wonder why gambling companies would even want to be licensed in New York if they have to pay 50% or more in taxes on top of licensing fees of $25 million a pop. The answer is that gambling companies have been notorious for overestimating the profitability of a market in some cases. New York, because of its population and perceived gambling appetite, is considered a plum for operators and they just can’t help themselves, regardless of tax rates and licensing fees.

To wit, BetMGM CEO Adam Greenblatt speaking at a sports business forum arguing that an open-market approach would be best but … “We just need to work within the framework that is within what is possible. So, we’re going to do the best we can with it, and that definitely participating in New York is essential.”

BetMGM is in an alliance that features heavyweights Bally Bet and DraftKings with FanDuel the primary applicant.

However, as New York flirts with a sport wagering tax rate that could be at 50% or higher and with operators champing at the bit, some history is in order.

New Orleans Casino Lesson

More than 20 years ago, a casino was being planned in New Orleans. The operator would get exclusivity in the Big Easy. As it turned out, a casino did open in New Orleans with the operator agreeing to incredibly difficult conditions, among them were that the casino would not operate a hotel or fancy restaurants and it would guarantee tax payments of $100 million a year, which some estimated eventually amounted to a 40% tax on winnings.

That’s how important exclusive market access was to the operator, that it agreed to such a deal in the first place. In short order, the casino – a Harrah’s – was foundering and threatening to close and lay off thousands of people.

Naturally, the casino clamored for relief from those original conditions.

Eventually, the tax break came and the restrictions on amenities were lifted. Today, the New Orleans casino has an obligation of the greater of 21.5% of gross revenues, or an annual fee of $60 million. The casino is scheduled for a name change to Caesars and is undergoing a $325 million renovation that includes a second hotel tower. Recently announced was the introduction of an upscale Nobu restaurant that will join a culinary lineup that already includes steak houses and other eateries.

Could NY Become More Reasonable?

OK, back to New York.

Let’s, as BetMGM’s Greenblatt phrased it, “work within the framework that is within what is possible.” Can a sports betting tax rate of 50% work for operators? Or can even a 35% tax rate work while also understanding there would be less exclusivity in the New York sports betting market?

Pennsylvania’s total tax rate on sports gambling revenue is 36% but current conditions there also allow operators to deduct promotional spend from the gross revenue yielding a smaller taxable revenue. It would appear that operators in New York won’t get the same generous tax break. In its Request for Applications, New York says, “Promotional spend shall not be deducted from revenue or added to loss when calculating gross gaming revenue.”

It’s a reasonable presumption then that the operators’ abilities or willingness to offer juicy promotions will be inhibited in New York, and that means customers will ultimately be the losers as a result of the high tax rate and other conditions of the sportsbooks operating in the state.

Still, there’s no question that operators will fall all over themselves to be licensed in New York.

And there’s no question that operators will eventually feel the pinch of the conditions they will be agreeing to in order to get into New York.

The only question is the over-under on how long it will take for operators to ask legislators, regulators or whoever for relief.

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