Free Bet Promos Bring Considerable Tax Benefits For Colorado Sportsbook Operators

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After months of exasperation with major U.S. pro sports sidelined due to the COVID-19 pandemic, sports bettors across Colorado will rejoice Thursday with the start of the 2020 Major League Baseball regular season.

The opening of the MLB season precedes the resumption of the NBA and NHL seasons in the coming days, providing a boon to the nascent Colorado legalized sports betting industry. With intense competition for the bettor’s wallet, sportsbooks continue to offer free bets and other promotions as a carrot for customers to open accounts. There are other sweeteners for operators to offer the promos: a Colorado statute allows sportsbooks to exempt free bets from their monthly taxable proceeds, giving books another reason to reward customers for their loyalty.

“I think you will see them roll out promotional credits with the start of different seasons,” Colorado Division of Gaming Director Dan Hartman told COBets.

The benefit to sports bettors

Earlier this week, FanDuel Sportsbook toasted the return of sports with a massive promotion to customers. Under the promotion, FanDuel placed a $10 promotional credit in the account of every customer for use in legal sports bets and daily fantasy contests. In total, FanDuel awarded more than $80 million in credits to customers nationwide.

Prior to the coronavirus outbreak, FanDuel President and COO Kip Levin addressed the topic of promotions at the 2019 Global Gaming Expo (G2E) last October. Colorado has drawn comparisons to New Jersey for its crowded marketplace. As a result, the top sportsbooks are expected to spend heavily on promotions to acquire customers, then double down on free bet offerings for customer retention purposes.

“You have to know what your sustainable customer acquisition costs are,” Levin told COBets at the time. “We build it into our projected margin, we build it into our retention and our acquisition spend.”

FanDuel is not the only major operator that will offer a snazzy promotion to customers for Thursday’s MLB return. At BetMGM, customers will receive $100 in free bets on a $1 wager if either the Washington Nationals or the New York Yankees hit a home run on Opening Night. For bettors who place a wager of at least $25 on selected MLB games at DraftKings, the sportsbook will reward customers with $5 per homer by their favorite team.

The benefit to sportsbook operators

During the first month of legal sports betting in Colorado, operators reported a $25.6 million handle with a win of $946,741.34. Operators, per state law, can exclude free bets and other promotions from the winning amount they are taxed on each month. Net sports betting proceeds in Colorado are taxed at 10% after operators deduct payouts to winners, free bets and federal excise taxes.

“Those are big numbers that bring the 10% tax in Colorado down to probably one of the lowest ones in the country,” Hartman said.

“Net sports betting proceeds” means the total amount of all bets placed by players in a Sports Betting Operation or internet Sports Betting Operation, excluding free bets, less all payments to players and less all excise taxes paid pursuant to federal law. Payments to players include all payments of cash premiums, merchandise, or any other thing of value.

Colorado Sports Betting Regulations, Gaming Rule 1

Early trends regarding promotional credits in Pennsylvania indicate that operators will use free bets as a tool for customer acquisition. FanDuel doled out $3.5 million in promotional credits to Pennsylvania customers last November alone, the third consecutive month the company spent at least $2 million in customer promotions. Free bets in Pennsylvania are not subject to the state’s cumbersome 36% tax on sports betting revenues. The rule saved FanDuel about $3.4 million in tax liabilities over the final six months of 2019.

While sportsbooks have handed out free bets fairly liberally in recent months, the companies may be more hesitant to offer multi-million dollar promotions under less favorable tax regulations, research shows. When asked to describe the impact of tax duties on various promotions, a U.K. gambling firm responded that the tax treatment of free bets significantly influences how it offers the promotions. In the same 2014 study, another company said that if free bets somehow fell outside the “value deductions,”  allowed through the U.K. tax regime, the operator would be forced to reconsider its promotional model.

Not all sportsbooks are eager to use free bets and promotional credits as an integral part of their customer acquisition and retention strategy. When Circa Sports launched in Colorado earlier this month, CEO Derek Stevens indicated that the sportsbook would place a greater focus on offering competitive lines, rather than on boosted-bet promotions.

Eventually, many Colorado sportsbooks will be forced to adjust their strategy as the sports betting market matures. The promotions can be costly and may backfire if sportsbooks are unable to meet their acquisition targets. Down the road, operators will likely concentrate less on adding new bettors versus finding creative ways to entice existing ones. Despite the tax advantages of offering free bets, it is difficult to predict whether books can afford to offer promotions on such a large scale by say, 2025.

“I think it’s a huge sign-up incentive, certainly in the beginning,” Hartman said. “I think as it goes on, it won’t be as much of a player acquisition tool, as it will be a player retention one.”

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Matt is a veteran writer with a specific focus on the emerging sports gambling market. During Matt's two decade career in journalism, he has written for the New York Times, Forbes, The Guardian, Reuters and CBSSports.com among others. In his spare time, Matt is an avid reader, a weekend tennis player and a frequent embarrassment to the sport of running.

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