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As concern mounts among investors that states will follow the lead of Ohio and Illinois to raise headline tax rates on sports wagering, promotional play deductions remain a significant source of savings for operators that a few states have since looked to revisit.
According to Vixio GamblingCompliance research, operators saved over $150m in tax payments on mobile sports wagering during 2023 in just six states where some form of promotional play deduction is allowed and amounts are disclosed in state revenue reports.
The bulk of those reduced tax payments comes from Pennsylvania, where operators were able to deduct more than $228m in promotional play from the state’s $643m in reported gross revenue in 2023.
The state’s 36 percent headline tax rate remains one of highest in a competitive U.S. market, currently trailing only New York’s 51 percent tax and soon to be trailing the upper levels of Illinois’s newly-enacted graduated tax of up to 40 percent of revenue, pending Democratic Governor JB Pritzker’s signature.
However, unlike those two states, Pennsylvania allows full tax deductions on promotional play, reducing the tax burden on operators to an effective tax rate of about 23 percent in 2023. Sports-betting operators still made about $151m in tax payments, but deducted more than $80m from their report gross revenue.
The second highest amounts of tax deductions came in Maryland, with operators saving over $27m in taxes after deducting $182m in promotional play from almost $498m in spending in the state’s first full year of mobile sports wagering following a late 2022 launch.
Maryland marked a key test of a new operator playbook that is becoming more the norm as prominent operators seek to show profitability to investors concerned about several years of losses in the pursuit of acquiring customers.
Instead of maintaining heavy promotional spending for the long-term, operators are pivoting more to a plan that has seen them deliver an all-out blitz in new states at launch, before then quickly tapering off their bonuses and promotions.
Compared with $182m in deductions for the whole of 2023, Maryland operators deducted almost $135m in the final six weeks of 2022 alone.
That playbook was even on display in one state that does not currently allow promotional deductions, with Ohio operators reporting more than $698m in promotional play in the first year of operations following a January 1 launch.
That promotional spending helped the state to report more than $913m total gross sports-betting revenue in 2023, but the wall-to-wall advertising also attracted the wrong kind of attention, and was heavily cited by Republican Governor Mike DeWine as part of his push to double the state’s tax rate from 10 to 20 percent on gross revenues last July.
Of the states that report such data, the only state that saw a year-on-year decline in reported promotional spending in 2023 was Colorado, where regulations went into effect to cap the amount of permitted deductions.
Operators are only permitted to deduct up to 2.5 percent of handle beginning January 1 through June 2023, with the figure declining annually until July 2026, when deductions will be capped at 1.75 percent of handle.
The result was a decline from estimated promotional deductions of $150m in 2022 to just over $117m in 2023, despite an increase in gross gaming revenue from $348m to $390m.
Colorado taxes sports betting at 10 percent of net revenues, which also includes loss carryover for individual licensees, and in total, the state’s effective tax rate went from about 5.4 percent in 2022 when deductions were uncapped, to just under 7 percent with the new provisions.
Other states that report deductions showed about $19.6m in tax savings in Arizona, $11.8m in Michigan and about $7.8m in Kansas.
States that permit deductions but do not segment deductions in revenue reporting include Nevada, Iowa, Arkansas and South Dakota.
