If it sounds like a no brainer to take a “free bet” from a digital sports betting platform on whether the Denver Broncos will score in a game, or to take advantage of $1,000 in “risk-free” bets, that’s because it is. But those giveaways, which are common in new, highly competitive sports betting markets, are costing the state of Colorado a bundle.
While handle in the state has been rising steadily since sportsbook operators launched online on May 1 with no U.S. professional leagues playing, tax revenue has not been quite as eye-popping, according to the Colorado Sun. And the culprit is promotions.
Colorado taxes sportsbook operators at 10% of gross gaming revenue (GGR). But when promotions or “free play” are in the mix, gross gaming revenue isn’t what it appears to be. For September, the latest available revenue report, Colorado sportsbooks took in $207.7 million in handle, and operators had gross gaming revenue of approximately $4.2 million. Based on the state’s 10% tax rate, that should have translated into about $420,000 in tax revenue. But the state took in only about $70,000.
“With the return of professional sports, many operators are looking to bring in new players through heavy promotional efforts in order to gain market share in the new industry in Colorado,” said Suzi Karrer, a Colorado Dept. of Revenue spokesperson. “In September, operators offered free bets to new players who were coming into the sports betting market specifically for football, and they used free bets as a customer acquisition tool during a football push. We anticipate seeing the same push by operators during other large events; for example, the Final Four or the playoffs could see the same marketing push to gain market share by operators.”
Colorado doesn’t tax promotional play, but some states do
The statutory exemption in Colorado enables operators to reward customers for loyalty. In effect, the exemption also allows sportsbooks to lower their tax liability based on promotional activity each month.
— ELITE Sportsbook Colorado (@elitesportsbkco) November 9, 2020
Not all states exempt promotions and free play from gross gaming revenue. In fact, up until last month, Louisiana casino operators paid tax on promotional gaming credits, but a new law that passed in the face of the COVID-19 crisis now exempts casinos from paying tax on those credits. According to Casino.org, promotions account for about 10% of gross gaming revenue in Louisiana, and the measure could save casinos in the neighborhood of $83 million. The new law became effective on Oct. 28.
The amount of gross gaming revenue in Colorado that can be attributed to promotional play is much higher. Given the September results, if the state took in $70,000 in tax revenue, the figure would be based of about $700,000 in GGR. But operators took in $4.2 million, meaning that $3.5 million — or 83% of total GGR for September could be attributed to promotions. The excitement surrounding the nascent sports betting market, combined with the intense competition, may explain why sportsbooks are so willing to offer promos.
The generous offers won’t last forever — operators use them to draw in new players — when new markets open up or during a special event. Typically, the more competitive the market, the more aggressive the offers.
“The sports betting tax structure was established in the enabling legislation, HB 19-1327, and established the calculation for the net sports betting proceeds as the total amount of all, ‘wagers excluding free bets, less all payments to players and less all federal excise taxes,'” Karrer said. “Colorado is not unique in its tax structure of allowing free bets to taken out of the net sports betting proceeds; other states also offer free play money given to customers as promotional deductions. Operators utilize free bets as a new customer acquisition strategy. We anticipate, that once the market is established and saturated in Colorado, the strategy may change to customer retention and satisfaction in promotions offered.”
Operators offer chance to turn $1 into $100
For example, in Tennessee on Nov. 1, Draftkings offered fans the chance to bet $1 to win $100 if the Tennessee Vols beat Arkansas on Nov. 7, or to double their money if the Titans scored against the Bengals on Nov. 1, and FanDuel offered a $1,000 risk-free credit and a “super boost” for the Titans to score 3+ points on Nov. 1 with a max bet of $10 and odds of up to +2500. Meanwhile, BetMGM continues to offer fans the chance to win $100 on a $1 bet if the Tennessee Volunteers score a touchdown in a game as well as if either team scores a touchdown in a Monday Night Football game, no matter who is playing.
And in Colorado, the promotions keep coming from regional and national operators. Just this week, Elite Sportsbook advertised its latest promotion — place four $50 bets and get a fifth $50 free bet, while Betfred in September offered a $500 risk-free bet to new Colorado customers.
Lawmakers have taken note of the disparity between handle and tax revenue. Sports betting tax revenue was earmarked for the state’s water plan, and if it doesn’t start to rise, there could be changes coming.
“You’d assume it’s part of an advertising investment on the front end — but if that doesn’t slow down, then there are some statutory fixes the legislature can contemplate,” Rep. Alec Garnett told the Colorado Sun.