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Key states that permit deductions of bonuses and promotions from taxable sports wagering revenue missed out on more than $170m in tax revenue in 2022, as different markets continue to take varied approaches to tax deductions.
The issue of promotional play and tax deductibility remains a key lobbying point for leading U.S. sportsbook operators, particularly in states where tax rates are higher to offset heavy marketing costs.
Operators claim those states that fully tax revenue earned from player credits and promotional play are effectively double-taxing companies on their own money, and that promo wagers lost by players would not count toward taxable revenues in other industries.
As things stand, at least 17 states allow some form of promotional play tax deductions, whether that be a full deduction of all bonuses from taxable revenues, a capped deduction, or a plan that phases out over a period of several years.
In six states where information on bonus deductions is available, operators were able to retain more than $178m in potential tax liabilities compared to states with no promotional play deductions, after operators deducted more than $892m from taxable revenue during 2022.
The largest of those states is Pennsylvania, where operators have utilized the state allowing full deductions to offset a 36 percent tax rate on gross revenues, one of the highest tax rates in the country for a state with a competitive sports-betting market.
Operators deducted about $198m in promotional play from the state’s $597m in reported gross revenues. After the deductions, operators paid more $144m in state taxes, but without the allowance, the sports-betting tax bill would have increased to $254m, a $110m difference.
In other states, the difference in potential state tax revenue is less stark, but largely because of the lower tax rate in those states.
In Michigan, which also allows full deductions of promotional play, operators deducted more than $168m from taxable revenues, but saved only about $12m due to the state’s 8.4 percent tax rate.
Other states have elected to allow larger deductions early, as companies build market share and convert players into the regulated market while phasing out those deductions over time.
For example, Arizona allows operators to deduct an amount up to 20 percent of wagering handle from taxable revenue during the first two years of sports-betting operations, which will culminate this September. After that, the amount declines to 15 percent of handle in year three, 10 percent in years four and five, followed by promotional play deductions ceasing altogether in 2027.
Arizona operators deducted more than $184m in promos in 2022, allowing them to save $19m in tax liabilities compared to a state without such an allowance.
Colorado was the first state to initially allow full deductions, only for the legislature to go back and pass new legislation in June 2022 that capped promotional play deductibility.
Last year was the final year of full deductions for promotional play, with 2023 beginning a three-year phase that starts with allowing companies to deduct up to 2.5 percent of handle and slowly declines through July 2026, when the figure decreases to 1.75 percent of handle.
In its final calendar year of full deductions, Colorado operators deducted $150m in promotional play and saved about $15m in taxes as a result.
Newer sports-betting markets, such as Maryland and Kansas, underline an updated promo playbook from operators that have become more cost-conscious regarding marketing as investors seek more immediate signs of profitability from sports betting.
The result has been an all-out blitz in promotional play spending in the early weeks of legal sports betting, before a quick pull-back.
In Kansas, where mobile sports betting launched in September, operators claimed $56.7m in promotional deductions on $73m in reported gross revenue in 2022.
The most glaring example would be Maryland, where mobile betting launched in late November. In the first nine days in the market, operators spent $63m in fully-deductible promotional play, and almost $135m through the end of 2022.
The state’s regulations permit full promo deductions for the first year, whereas in following years it caps deductions at no more than 20 percent of each operator's gross gaming revenue.
As a result, in the roughly five weeks the state was active in 2022, mobile wagering only produced about $44,000 in tax revenue for the state despite $108.2m in reported gross revenue, saving operators about $16m in tax spending.
“Deducting promotional play obviously has an impact on the bottom line, and that’s why we have a cap that takes effect after each operator’s first full fiscal year,” said Maryland Lottery and Gaming Director John Martin shortly after launch. “It protects the state’s interests and ensures that sports wagering will generate revenue for education, as intended.”
“By awarding large amounts of promotional play in their first fiscal year, the sportsbooks’ promo play amounts will be limited in their second year.”
In terms of new state legislation, states have not taken a uniform approach to promotional play deductions.
Kentucky, the lone state to adopt sports betting legislation so far in 2023, did not include promotional play deductions in its legislation, although it did not explicitly prohibit regulators from allowing operators to deduct bonuses via regulations.
Massachusetts legislators took a similar approach last year, triggering a debate among regulators as to whether they were empowered to do so.
To date, the Massachusetts Gaming Commission has not permitted deductions of bonuses, but the issue remains live as the commission continues to seek stakeholder input.
In North Carolina, a mobile sports-betting bill that cleared the House of Representatives last month includes full deduction of promotional play through January 2025, with a phased-out plan that would cap deductions at 2.5 percent of gross revenue in 2025 and 2 percent of revenue in 2026, before eliminating deductions as of 2027.
