Expect leagues to take small percentage, much less than 1%

Jan 30, 2018 3:00 AM

Recent articles by yours truly and other gaming writers have stimulated a few interesting questions from readers on topics such as the NBA seeking a piece of the action on sports wagering, Casino resort comps and the $70,000,000 in bad debt casinos reported through the Nevada Gaming Abstract for the 12 months ended June 30, 2017.

NBA Question

Q. “Your recent article about the leagues not sitting still and waiting to take action on sports wagering till after the Supreme Court’s ruling was right. The NBA is asking for 1% of all the bets to go to the NBA. What do you think will really happen?”

A. In my opinion the NBA has made an opening ask and while that is what they would like, as it will be found money for them, they will probably agree to a much lower percentage. Whatever the ultimate amount is, there will be benefit in getting the league(s) on the side of legal sports betting and they would be great to help deal with any pressures from state and federal legislatures to either excessively tax the business or over restrict it.

In my opinion, the real smart move would be for the legal sports betting industry to partner with the leagues and go to the U.S. Congress and simply get the Feds to redirect the existing .25% sports wagering tax (yes, the federal government collects a quarter percent on every sports bet made) to the applicable league. It would not impact the legal books as they already pay it and the leagues would get a new revenue stream and have a vested interest in supporting legal sports wagering.

Comp Question

Q. “While it’s clear that nothing about the new ‘comp’ rules is clear, answer me this: If a department now would have to record the ‘comp’ as an expense (i.e. a loss) and there is NO revenue (income) entry to offset wouldn’t the property now have more ‘losses’ thus more deductions and finally pay less in taxes? So comps would be encouraged and not discouraged?”

A. Sorry but it does not work that way. The new accounting rules basically will expose complimentary expenses other than for true casino customers as an expense for the service providing department, which will trigger managerial scrutiny as formerly breakeven or small loss revenue centers will show poorer bottom lines.

When senior management starts scrutinizing bottom line performance, they will likely start by reducing executive use of comps for non-casino customers then follow by tightening comp policy and/or increase qualifying requirements for comps to bring up the departmental bottom lines.

For example, last week I ate at a Chinese restaurant at a Strip resort. Much to my surprise the restaurant was packed with resort executives. Under the old accounting rules that restaurant would get comp revenue and the resort executive’s department would have been charged for the comp expense, almost making the executive look like a paying customer.

Under the new accounting rules, the comp expense will not go back the executive’s department, but stay as essentially an expense at the restaurant, very much hurting its departmental bottom line.

While it will not change the company’s overall bottom line, it will invite attention that will mostly likely lead to tighter comp policies. For larger gaming companies, just reducing executive comp excesses will take millions to the bottom line.

Bad Debt Question

Q. “I read where Nevada casinos had bad debt of $70,000,000 for the last fiscal year. With the economy rebounding and stricter casino credit policies that sounds high or am I missing something?”

A. There are facts and there are truths. While it is a fact the casinos reported $70,000,000 in bad debt the truth is found in what makes up that number. There will be a portion of that number that is bounced checks and uncollectable markers, however, given the currently required standards of check cashing and credit issuance the vast majority of that $70,000,000 is less likely to be true bad debt write offs, but discounts to large customers.

Most large customers actually negotiate their terms to play at a casino such that a customer with a million dollar credit line will likely get pre-agreed amounts in comps, travel reimbursement and discount on losses. The discount on losses, pending the terms, line of credit, time of play and other considerations could run from 5% to 20%.

Since Nevada only collects gaming taxes on money collected the more the casino can shift into discount and away from hard dollar cost the more money they will net. Accordingly the truth is the majority of that $70,000,000 bad debt number is less about being truly uncollectable debt and more about discounts on losses from large customers who likely played high limit Baccarat.

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