On May 24, Tennessee Gov. Bill Lee signed a new sports betting bill into law. The law makes Tennessee the first and only state in the nation to tax sports betting handle — the amount bettors wager — rather than gaming revenue. Revenue is the amount sportsbooks make after subtracting winnings and promos from the handle.
Starting in July 2023, the new tax structure will go into effect, taxing legal online sportsbooks 1.85% of their total handle. Prior to this change, Tennessee taxed sports betting at 20% of gross gaming revenue.
While the tax structure is the biggest change, the bill (SB 475) puts several changes into motion in the sports betting landscape. Here’s what you need to know.
Why Tennessee is Changing its Sports Betting Tax Laws
The change comes after a lengthy controversy over Tennessee’s law requiring sportsbooks to maintain a 10% hold on their handle. Lawmakers said the hold was good for tax revenue and for competition, but sportsbooks claimed it hamstrung their operations in the state.
When Tennessee legalized sports betting in 2019, the state’s legislature created two unique restrictions not seen in any other state. First, it legalized only online sports betting, with no legal retail sites. Second, it set a 20% tax on gross gaming revenue, which is fairly standard across states. But, they added the unusual stipulation that Tennessee sportsbooks would be required to hold a minimum of 10% of their handle each month.
A typical hold is lower, usually around 5% to 8%. The hold allowed the state to ensure a higher amount of revenue. They also aimed to collect thousands of dollars in fines if the sportsbooks were unable to maintain the hold.
The other rationale for a 10% hold is that it would allow smaller sportsbooks to be competitive and keep any major sportsbooks from gaining a monopoly in the state. With a 10% hold requirement, larger sportsbooks can’t just operate at a loss to gain a bigger market share.
However, sportsbook operators said the 10% hold requirement made it difficult to stay competitive against offshore books. They claimed they couldn’t offer odds as competitive or bonuses and promos as enticing to new users and that it hurt the user experience.
Minimum Hold No Longer Required
The new legislation does away with the minimum hold mandate. Sportsbooks are no longer bound to keep 10% or be fined.
A fiscal note attached to the new bill documents that nine of the state’s 11 sportsbooks paid $25,000 for failing to stick to the minimum hold.
According to Legal Sports Report, if the state had included the handle tax in their initial sports betting launch, they could have collected roughly $15 million more for state coffers than they did with the 20% GGR tax. However, that’s because sportsbooks failed to meet the minimum hold. Had the minimum hold mandate worked, Tennessee would have collected about $11 million more than that.
Will Other States Follow Tennessee’s Handle Tax?
So far, whenever a handle tax was proposed in other states, it hasn’t passed. West Virginia, Kentucky, and Minnesota have all considered and rejected a handle tax.
A federal handle tax of 0.25% already existed before sports betting was legalized outside Nevada.
“It’s a very simple and direct tax, relatively easy to administer, and doesn’t rely on a lot of factors that could change how much the state actually receives,” Director of Excise Tax Policy at the Tax Foundation, a right-leaning think tank in Washington D.C., Adam Hoffer told Legal Sports Report. “If we see this work well in Tennessee, it’s the kind of model that other states could adopt.”
As Hoffer says, whether other states adopt a handle tax remains to be seen, but the success or failure of Tennessee’s new law will certainly affect its popularity.
Other Changes in Tennessee’s New Sports Betting Bill
The bill also drops Tennessee’s official league data mandate. This mandate required sportsbooks to license official league data for live betting. Sportsbooks objected due to the often high cost of licensing this data.
Two Tennessee sportsbooks, Betly and SuperBook told the Sports Wagering Advisory Council (SWAC) that Genius Sports’ official league data for NFL betting was not available for a commercially reasonable price.
The new bill has new operators paying an initial licensing fee of $750,000, but their annual renewal fee will be $250,000 if they have less than $100 million in handle and $500,000 if they have less than $500 million in handle.
Article contributed by Hannah Vanbiber.
