Taking a gamble on sports betting

OPINION:

The U.S. Supreme Court has thrown out a federal law that had banned sports betting in every state but Nevada. In anticipation of the decision, the gambling and sports worlds were clamoring for states to pass laws legalizing sports betting. But state legislatures hoping to cash in on new tax revenue from legalized sports betting should proceed with caution. Here is why:

• There is no pot of gold at the end of this rainbow.

Sportsbooks are low-margin ventures. They will not produce meaningful tax revenue for states. Last year, Nevada sportsbooks returned just .02 percent of the total casino wins from slot machines and table games. Of the nearly $800 million in gambling taxes collected by Nevada, sports betting tax revenues generated a mere $18.5 million in taxes.

• The big winners will be illegal offshore sportsbooks and local bookies.

Before the Supreme Court even rules, more than 90 percent of U.S. sports betting takes place outside of Nevada. Most is wagered through offshore sportsbooks located in the Caribbean and Central America. Offshore sites do not require gambler verification, pay taxes or report large winnings to the Internal Revenue Service.

Likewise, local bookies do not report winnings to the IRS, pay taxes, have the compliance costs of licensed casinos, nor will they have to remit the “integrity fee” being proposed by the professional sports leagues. Plus, they offer credit, are conveniently located, and keep no banking records. Both of these illegal gambling options will flourish with the expansion of sports betting. Because neither pays taxes or have the compliance costs saddled on legal casinos, they will be able to offer more competitive odds and bigger bonuses.

• Online sports betting is still illegal.

Even though the Supreme Court tossed the sports betting ban, online sports betting is still illegal. In 1961, all gambling involving interstate telecommunications was prohibited by the Wire Act. When the internet emerged, the Department of Justice made clear that all online gambling was banned by the Wire Act and other federal criminal laws. Congress then passed a law to give law enforcement new tools to shut down all online casinos and sportsbooks.

But in December 2011, the Department of Justice issued an opinion reversing 50 years of precedent, concluding the Wire Act only prohibits online sports betting. That opinion hamstrung law enforcement which, in turn, has allowed illegal sites to flourish. At the same time, by affirming the Wire Act applies to sports betting, the Department of Justice opinion hamstrings sportsbooks that will want to hedge their risk by establishing a national pool, creating interstate compacts, or laying off bets across state lines — all of which would violate the act.

It’s hard to imagine how states legalizing sports betting will prevent their residents from migrating to illegal offshore sportsbooks where the odds are better, bonuses larger, and there’s no worry the sports-book will report winnings to the IRS. Only through vigorous enforcement of the Wire Act will states be able to protect and earn revenue from legal sportsbooks. But that can only occur if the Wire Act is fully restored and the law is aggressively enforced by Department of Justice. Until then, states looking for riches from sports betting may want to hedge their bets.

• Jon Bruning is a former Nebraska attorney general and president of the National Association of Attorneys General. He is managing partner of Bruning Law Group and is counsel to the Coalition to Stop internet Gambling.