Kentucky’s sports betting launch is almost here — 42 days from now, to be exact — and Gaming Today spoke with an industry expert to get his thoughts on the quick lead-up.
C.J. Fisher is the Co-Chair and Partner of Fox Rothschild LLP’s Gaming Department. He has worked with a number of states like Indiana, Tennessee, and West Virginia on handling licensing, compliance, and other regulatory approvals.
Regulators of the Kentucky sports betting industry sought advice from several other states. However, according to Fisher, Kentucky’s launch and regulatory environment will still be distinctive.
Lots of Hoops to Jump Through With a Quick Turnaround Like Kentucky’s
Fisher told Gaming Today that he’s worked with a number of other jurisdictions with similar turnarounds like Kentucky. The common theme is that states want to launch legal sports betting before the NFL season since football is king.
Fisher explained that companies will need to review their operations, hardware, and software and make sure they are equipped to meet Kentucky’s operational standards.
“It’s a lot to do in a small period of time,” he said.
There’s plenty of good advice to be given from the surrounding states. Illinois, Indiana, Ohio, West Virginia, and Tennessee all have their own legal sports betting markets.
But, Fisher explained, each state is different. It’s unlikely Kentucky would ever completely mirror one of its neighbors.
“Each state regulates sports betting differently from the other,” he said. “There might be some similar themes. Some similar applications that an applicant needs to provide. There are a number of differences.
“Even though they’re neighboring, you can find a lot of differences in what’s required. I would say that if there’s an issue in one state, you might not necessarily find it in another.”
Don’t Expect Kentucky to Start Taxing Betting Handle Like Tennessee
Kentucky’s neighbor to the south made history this summer.
Tennessee changed its tax structure. Now, it taxes the sports betting handle, not the revenue. It’s the first state to make such a move, as the rest collect taxes off the operators’ revenue.
As of now, Kentucky does not have any plans to mirror Tennessee. Kentucky will tax online revenue at 14.25% and retail at 9.75%. Both are on par with the industry.
Gaming Today asked Fisher if he believes Kentucky could ever make a similar switch to Tennessee, albeit down the road.
“I think it’s unlikely given the way gambling revenue has traditionally been taxed in the casino context, iGaming context,” Fisher said. “I think there would be a lot of pushback if more and more states moved toward the handle of taxing the handle for sports betting. Sports betting margins are already low, and I think if more states moved toward a model of taxing the handle, you’d have less and less operators ultimately in the industry. Overall, it might not be a benefit to the state if that occurs.”
Keep an Eye on Operator Promotional Spend in KY
This topic is especially key right when a state launches its betting industry because that’s when promo spending is at an all-time high.
During the first year or two of operation in a specific state, operators attempt to capture customers for life, in a sense. The average person will have an account with one or two operators — traditionally, the ones with the better promotions or the easiest platform to navigate.
That, of course, takes money. And Fisher believes the dollar figure will be high.
“With the number of skins and potential operators that could enter the state, it should be a competitive market from the standpoint of having a number of operators seeking to get market share in Kentucky,” Fisher said. “If you have several operators competing against each other, certainly they’re going to market and have promotions to try and gain market share.”
Using Sportsbook Promotional Spend as a Tax Write-Off
To be clear, nothing in Kentucky’s emergency regulations says whether or not the state will allow operators to use their promotional spending as a tax write-off.
“The initial approach in many states is to allow basically a deduction for promotional spend,” Fisher explained. “But the pendulum is starting to swing in the other direction where states are either prohibiting that or putting a cap on that.”
So don’t be surprised if Kentucky opts not to allow sportsbook operators to write off their promotional spending. There could be a cap, too, like Fisher mentioned, or Kentucky could take a page out of other states’ playbooks and slowly decrease the write-offable spend over time.
Because at the end of the day, an uncapped promotional spend write-off takes money away from the states.
“What was happening in some of these jurisdictions is with an uncapped deduction on promotional spend, companies could keep spending on different promotions and then offset their income by that spend,” Fisher said. “The taxable income for the state at the end of the year, there wasn’t much there. The tax revenue the state thought it was getting, it wasn’t happening. Certain states are amending or seeking to amend their regulations to remove that deduction on promotional spend or put a limit on it, so it can’t be used to an extreme amount by operators.”
One of Kentucky’s Neighbors Doing Something ‘Unprecedented’
One growing concern with sports betting is the protection of student-athletes.
Kentucky’s emergency regulations did not include any specific protections for college athletes. Kentucky colleges aren’t adding protections either. That could change over time if Kentucky adds another layer to its responsible gaming.
And if so, it could be wise to look at what Ohio’s doing.
The Ohio Casino Control Commission can ban bettors from wagering on sports if they are found to have threatened student-athletes or others associated with an event.
“I think what (Ohio’s doing) is almost unprecedented,” Fisher said.
He explained that another popular method of protection is that some states don’t allow bettors to wager on in-state collegiate teams. One of those states is New Jersey, a state Fisher is familiar with.
“(New Jersey) had in its legislation provisions that basically prevent sportsbooks in New Jersey from accepting wagers on teams that are based within the state,” he said. “For example, if Rutgers is playing a football game, a New Jersey resident could not place a wager on Rutgers with a New Jersey sportsbook.”
Kentucky, however, has no such rule. Betting on in-state college athletics has the green light.