Head of Casino Operations
Virginia online sportsbooks have enjoyed the ability to deduct promotional expenses from their taxable revenue since sports betting was legalized in the state in January of 2021. The new state budget has put an end to the tax break, limiting the deductions for sportsbooks to one year following their launch.
Virginia Lottery Deputy Director of Gaming compliance Gina Smith announced that a state budget amendment will accomplish what the state’s legislative body could not – eliminating the ability for online sportsbooks in the state to exclude their promotional expenses from the gaming revenue they pay a 15% tax on. When sports betting was legalized in the state in January of 2021, operators were allowed unlimited deductions for free bets and other incentives offered to players. Under the new state budget, online sports betting sites will be limited to a one-year period after their launch where their promotional expenditures are tax deductible.
The new tax rules went into effect on July 1, and the timing means that online sportsbooks that launched in day one in Virginia are immediately liable for taxes on their promotional spending immediately. Seven of the state’s 14 operators, including most of the top online sportsbooks including DraftKings, FanDuel, Caesars, and BetMGM, fall into that category. An eighth, Barstool Sportsbook, will pass the one-year threshold in early August and be added to the list of companies paying up on their promo spending. Language in the budget still allows for operators to carry over monthly losses when assessing their taxable revenue for subsequent profitable months.
The move comes 18 months after legal sports betting in the state, and taking a look at the numbers shows why there was urgency to eliminate the tax break. Through May of 2022, the state’s online sportsbooks had taken in more than $2.1 billion in total handle, but have paid only $33.7 million in taxes on the revenue generated. Had they been taxed under the new rules, they would have been on the hook for more than $69 million in taxes during the same period. Heavy promotional spending in the large and competitive market has made a huge dent in the revenue the state would have received, with the top US bookmakers in the state battling each other for each and every new customer.
Nearly $68 million in total has been deducted from taxable revenue by the state’s sportsbook. Many of the smaller sportsbooks in the state have yet to pay any taxes at all, with the promotional expense exemption a major reason why. The flurry of offers to attract new customers and acquire market share has been common in most states as legal sports betting has become legal, but while it is tapering off slowly elsewhere, the new tax code will likely bring things to a crashing halt in Virginia. The one-year window however will afford a brief period where a handful of smaller sportsbooks in the state hold a financial advantage, and Virginia bettors could be treated to a “finale” of promotional offers from those sportsbooks as they attempt to maximize the window where their promotional expenses can be deducted.
As states push to legalize sports betting, legislators and/or voters are drawn in with anticipation of huge amounts of tax revenue flowing into the state’s coiffers. While in many states these projections have proved either accurate or even too conservative, in others, tax revenue has fallen short of expectations in spite of robust handle and hold numbers. That was the case in Virginia, as well as in Colorado where the state altered their initial legal sports betting legislation to put a cap on the percentage of sportsbook revenue that would be able to be deducted as promotional expenses.
The downside for bettors in the state is that the lucrative Virginia betting bonus benefits they have received from sportsbooks in the past will likely be drastically reduced. Savvy bettors have been able to take advantage of these offers to drastically reduce their initial risk, but with the offers hitting the books’ bottom lines much harder under the new tax code, the natural step from operators is to reign in promotions and rely on other methods to bring new bettors into the fold.