In a significant development for the gambling industry, Tennessee Governor Bill Lee has signed a new sports betting bill into law, changing the state’s taxation system and removing a controversial hold requirement. Effective from July 2023, the law introduces a unique approach by taxing sports betting handle rather than gaming revenue. Under this new system, legal online sportsbooks will be subject to a tax rate of 1.85% on their total handle, marking a departure from the previous structure that imposed a 20% tax on gross gaming revenue.
The decision to shift towards taxing handle rather than revenue follows a prolonged controversy surrounding the state’s minimum hold requirement for sportsbooks. Tennessee’s legislation had mandated that sportsbooks maintain a minimum hold of 10% on their handle each month, aiming to generate higher tax revenue and foster competition. However, operators expressed concerns that this requirement posed challenges to their operations within the state.
When Tennessee legalized sports betting in 2019, it introduced two notable restrictions not observed in other states.
Firstly, it exclusively authorized online sports betting without provisions for legal retail sites. Secondly, it implemented a 20% tax on gross gaming revenue, aligning with standard practices in other states. However, the state also included the particular provision of the minimum 10% hold requirement on sportsbooks.
Typically, the hold requirement in other jurisdictions is lower, ranging from 5% to 8%. Tennessee’s 10% hold mandate aimed to ensure more significant revenue and penalize sportsbooks that failed to meet the requirement. Additionally, it sought to level the playing field, preventing larger sportsbooks from operating at a loss to gain a larger market share and potentially monopolize the industry. However, sportsbook operators argued that the 10% hold requirement made it challenging to remain competitive against offshore books. They highlighted the difficulty in offering competitive odds, enticing bonuses, and promotions to attract new users, ultimately affecting the overall user experience.
The new legislation brings relief to sportsbooks by eliminating the minimum hold mandate and freeing them from the obligation to maintain a 10% hold or face fines.
A fiscal note attached to the bill reveals that nine out of the state’s 11 sportsbooks had to pay fines of $25,000 for failing to meet the minimum hold requirement.
While the shift to taxing handle may have potential financial advantages for the state, estimations suggest that if Tennessee had initially implemented the handle tax and accounted for the failure to meet the minimum hold requirement, it could have collected approximately $15 million more in revenue compared to the 20% gross gaming revenue tax. However, if the minimum hold mandate had been successful, Tennessee could have collected approximately $11 million more than the estimated amount.
The reform of Tennessee’s sports betting laws reflects ongoing efforts by states to navigate the challenges of regulating the gambling industry effectively. By adjusting taxation structures and removing contentious provisions, states aim to strike a balance between generating revenue, fostering competition, and providing a favorable environment for operators in an ever-evolving gambling landscape.
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