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Three Things Are Certain in Life - Death, Taxes & Wagering on Sports

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June 01, 2016
Bill Geoghegan - Bill@LGTconsulting.com

Taxes have been levied by governments since ancient Egypt. One of the earliest was a tax on cooking oil. Our modern taxaction system has its roots in medieval England, and much of the early history of North America was about taxes.

Recently United States Internal Revenue Service proposed moving the threshold for W-2 G reporting on winnings from a slot machine from $1,200 to $600. Under current regulations, when a slot machine pays a jackpot of $1,200 or more in the United States, it is required that the machine be locked until the player has completed a W-2 G form and the machine is cleared by a slot attendant. While technically the jackpot winnings are not taxed directly, they are considered income and must be reported in any federal tax filing. Gambling winnings may be offset by gambling losses.

The proposed lowering of the threshold drew harsh criticism from the American Gaming Association as well as many casino operators. The $1,200 threshold was put in place years ago at a time when the largest denomination of coin accepted was a quarter. In the early ‘90s it was not uncommon for the payout on a royal flush from a $1.25 bet made in a video poker machine to be $1,199 to avoid the requirement for reporting. With today’s slot machines taking bets of much higher denominations, it has been suggested that the threshold be raised to $4,500 rather than lowered to compensate for inflation.

For residents of other countries with jackpot winnings in the U.S., these jackpots may be subject to a 30 percent tax. Most European countries along with Japan have a tax treaty with the United States that exempts their residence from the withholding. In order to receive the exemption, the player must submit the form W8 – BEN and include their individual taxpayer identification number.

Note that winnings from blackjack, craps, baccarat, roulette or big-6 wheel are not subject to any withholding or tax.

Fantasy sports leagues and college tournament bracket contests now operate under the Unlawful Internet Gambling Enforcement Act (UIGEA) of 2006. This act sets the criteria that must be met for an online game to not be illegal gambling or a game of chance, but instead to be considered a game of skill.

To be consistent with the games’ being defined as not gambling, the fantasy sports league operators based in the United States report participants’ prize money as income using Form 1099-MISC. They do not report using Form W-2G, Certain Gambling Winnings.

The latest flurry of legal rulings and legislation associated with Fantasy Sports has primarily focused on the Daily Fantasy Contests.  Numerous states have declared Daily Fantasy as gambling, while others agree that it is a game of skill, but want to regulate and receive tax revenues from the enterprises hosting the contests.

In its truest form, sports betting has been around for thousands of years, as people have always wagered on the outcome of an event between two competitors. It was commonly known that many Roman emperors enjoyed gambling and for many years it was only legal to place a bet in Rome at the circus or at the chariot races. Much like modern times, the illegality of gambling didn't stop people from partaking in it, however. Some of the biggest culprits were the emperors themselves, with Augustus being one who is frequently associated with gambling activities.

What we know as modern sports betting is a bit more defined, and it takes its roots in the one-time popular event of pedestrianism, which is essentially race-walking. Pedestrianism was extremely popular in early 19th century England. The link with gambling became so widespread that the Amateur Athletic Association was founded in 1880 to help stop race fixing and other devious tactics designed to influence the outcome of events.

While pedestrianism was riding a wave of momentum in Europe, it branched out to other countries. But as history has shown us, where there is money, there are also unsavory characters, and soon pedestrianism had the integrity of modern-day professional wrestling. Fortunately for those who liked to gamble, pedestrianism's decline coincided with the growth of the game of baseball and soon baseball became the bettor’s choice.

There are numerous incidents of gamblers fixing games by paying players to intentionally lose or shave points.  The 1906 Massillon Tigers vs. Canton Bulldogs scandal caused the near demise of professional football.  The famous Black Sox of 1919, and the 1951 college basketball point shaving scandal were all linked to underworld figures and illegal bookmakers.

In 1992, then Senator Bill Bradley (former NBA basketball star) sponsored the Professional and Amateur Sports Protection Act of 1992 (PASPA). This had the strong support of the National Collegiate Athletic Association, National Football League, Major League Baseball, National Basketball Association and National Hockey League. While this legislation has prohibited legalized sports wagering in all but four states, it has done little to inhibit wagering on the outcome of sports events. It has been estimated that $9.2 billion was wagered on the NCAA tournament, with only $262 million bet legally. Americans bet nearly $4.2 billion on the Super Bowl with only 3 percent wagered in legal sports books.
Technology available today is beginning to cause a change in the attitudes toward legalized sports wagering. New Jersey, New York, Texas, South Carolina, Minnesota and Indiana have discussed legislation which would legalize sports wagering, with New Jersey going so far as to pass a bill to legalize sports gambling.

Though the NFL, NBA, MLB and NHL all challenged in court New Jersey’s effort to legalize sports gambling, NBA Commissioner Adam Silver established his personal support in 2014 for an end to federal bans, as long as certain national standards were upheld in a legalized industry. “Times have changed…I believe sports betting should be brought out of the underground and into the sunlight where it can be appropriately monitored and regulated.” said NBA Commissioner Adam Silver.

In blatant hypocrisy, points lines and odds to win tournaments or events are published and quoted in all media outlets. You cannot listen to a sports broadcast without being told that the spread is “New England -6” or the odds of Jordan Spieth winning the U.S. Open are 7 to 1, yet these wagers can only be placed legally in Nevada.

If we are going to protect the integrity of sports, the only way is to legalize and regulate sports wagering throughout the United States. Legal sports books can easily see and report betting anomalies that indicate when game results are being manipulated. Licensing and tax revenues could generate an average of $100 million per year per state.

Geoff Freeman, CEO of the American Gaming Association, said, “As multiple sports league commissioners have recommended, it’s time for a fresh look at our approach to sports betting and the unintended consequences of our federal prohibition.”

Recent scandals, such as the match fixing ring in tennis uncovered earlier this year in the United Kingdom and the ongoing implosion of FIFA, show that such imprudent behavior can lead to severe criminal penalties and incalculable reputational harm to sports leagues, athletes and bookmakers.

“Protecting the integrity of games is vital to sports leagues, professional athletes and fans everywhere. As sports betting explodes in popularity, this mission is growing even more urgent,” Freeman extolled.

A recurring theme is how laws like the Professional and Amateur Sports Protection Act of 1992 and the Unlawful Internet Gambling Enforcement Act of 2006 – though well-intentioned – have largely served to drive sports betting activity underground. In the process, they inadvertently expose consumers, athletes and sports leagues to enormous risks.

Only time will tell if a new administration and new congress are listening.

Bill Geoghegan is a consultant in Las Vegas. He can be reached for comment at Bill@LGTconsulting.com.

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