Sports betting operators made over $285 million in revenue in Virginia during the state’s first year of legal sports betting. However, 54% or $155 million of that went untaxed due to current tax laws, according to a report released by the state February 1. Virginia sportsbook operators are allowed to deduct from their taxable revenue promotional free bets they use to incentivize bettors to register.
Virginia is one of four states that allow operators to deduct these promotions from their adjusted gaming revenue prior to taxation. On top of the 0.25% excise tax on handle and other legal adjustments, operators in Virginia can deduct the total of all bonuses and promotions used by players. This means that offers like boosted odds or a $500 dollar match with a player’s first deposit goes untaxed, regardless of whether the company loses money on the promotion.
According to the Tax Foundation, this has reduced Virginia’s tax rate from 15% to an effective 5.14%. This cuts into the state’s tax revenue from sports betting and limits the contributions into the state’s general tax fund and Problem Gambling Treatment and Support Fund.
Changes Ahead To Virginia Sports Betting Tax Structure?
Virginia has a bill, HB 1103, in the House that would limit this deduction to only 2021. The bill would also prevent sportsbook operators from carrying over losses month-to-month. The bill would accomplish this by amending sections 58.1-4030 and 58.1-3037 of Virginia’s state code.
It is the first of the four states to introduce legislation to stop the losses in tax revenue from these types of deductions. The bill is currently in review with the Virginia House Privileges and Elections committee after passing the Subcommittee with a 4-3 vote.
Online sports betting operators use the deductions to support player-facing promotions. This is critical because sports betting is not yet a consistently profitable business in the U.S., as companies are using promotions to acquire customers. However, sports betting customers in many other states see free-play offers despite there not being a tax perk for operators. For example, New York, which launched online betting in January 2022, has a 51% tax rate for operators and doesn’t provide any deductions for promotions, yet operators offered bettors plenty of promos and bonuses.