Tennessee sports betting has been akin to Nashville’s hot preparation for fried chicken since its inception; extremely unique. A bill on its way to the governor’s desk would maintain that unique flavor even as it could affect some major changes to how sportsbooks operate in the state.
In an effort to improve Tennessee online gambling tax revenue performance, the legislators are banking on the ability to maintain even current levels of income. It’s not all doom and gloom for companies that offer opportunities to gamble online, though.
Tennessee sports betting tax bill advances
While legislators put SB472 on the back burner in Nashville in late March, they never extinguished the flame entirely. On April 21, the two chambers of the Tennessee legislature concurred on the bill’s language.
Should Tennessee Gov. Bill Lee sign SB472, that move would affect several changes to legal sports betting in the state. There are a few that most bettors in the state will probably not notice at all. Among those are dropping “Advisory” from the Sports Wagering Advisory Council and changing licensing requirements.
Tennessee was unique in legalizing online sports betting from the start. It was the first jurisdiction to do so in an online-only format, with no physical licensed sportsbooks anywhere in the state.
It was also the first, and to date only, jurisdiction to install a minimum win threshold for sportsbooks. That could soon no longer be the case. The legislature is trying to adjust practice to comply with the intent of theory.
The problem that SB472 tries to address
If Lee enacts SB472 with his signature, Tennessee’s privilege tax for sports betting licensees will see a drastic change. Under the current law, those licensees pay a 20% rate on their monthly revenue. State law also features a “hold requirement” unique to Tennessee.
A hold requirement essentially means sportsbooks have to keep at least a certain percentage of the money bettors give them each month. Currently, that threshold is 10%. In theory, it guarantees the state a certain amount of tax revenue with a simple equation.
Put simply, suppose DraftKings in Tennessee takes in $10 million in bets in a month. By law, DraftKings could only pay out up to $9 million of that money back to bettors. It then pays a 20% rate on the $1 million or more left over to the state, which would come out to at least $200,000.
The problem with that plan, as criticisms of the structure pointed out from the beginning, is that sporting events are unpredictable. As an extension, so are wagering markets on those events. Thus, it’s difficult for sportsbooks to adjust or plan to ensure they win at least 10% from bettors each month.
In fact, Sam McQuillan of Legal Sports Report says multiple licensees in Tennessee have paid fines for non-compliance with the hold requirement. The $25,000 penalty for them likely represented a savings. At the same time, it also meant the state wasn’t hitting its revenue targets from sports betting taxes.
With Lee’s signature, the hold requirement and the accompanying 20% tax would be no more. The replacement isn’t necessarily better for Tennessee, however.
How SB472 would affect change
Under the tenets of SB472, Tennessee would no longer tax the amount of money that sportsbooks actually win from bettors, more simply known as hold. Instead, the state would assess the sportsbooks based on the amount of money that bettors give them each month, called handle in the gambling industry.
Under the potential new law, the state would assess those sums at a rate of 1.85%.
Once again, the theory has some promise. Looking at the numbers from the first three months of legal sports betting in Tennessee in 2023 reveals how if this works as intended, it could increase revenue for the state.
|Handle||Unadjusted hold||Actual tax paid||Tax under SB472 proposed terms|
|January 2023||$410.7 million||$41.4 million (10%)||$7.2 million||$7.5 million|
|February 2023||$327.3 million||$34 million (10.3%)||$6.3 million||$6 million|
|March 2023||$392.6 million||$45.5 million (11.5%)||$8.7 million||$7.2 million|
As the simple math shows, though, that’s no sure thing. Whether the current or proposed format would result in more money for the state once again depends on how sportsbooks fare during the month. The state is still seeking a way to guarantee itself a certain amount of revenue it can bank on from its legal sports betting licensees.
When it comes to gambling on sports, though, there are no guarantees. Tennessee is still taking a risk with sportsbooks’ commitment to the state.
How things could go horribly awry
The particulars of gambling taxes for licensees are a tad more complicated than the simple handle minus payouts = taxable revenue equation. For one thing, SB472 would also allow the licensees to deduct the federal 0.25% tax they pay to the United States on their revenue.
The reason why no US jurisdictions currently tax sports betting handle is implicit in the term. Sportsbooks merely handle that money. It would be like the IRS taxing you on money that you simply delivered for a friend to another friend.
If bettors have a good month, paying their privilege tax under this format could result in sportsbooks going into the red. Should that persist, sportsbooks in Tennessee would need to cut back on expenses to pay their bills.
For bettors, that could mean fewer and less attractive promotions. Other possibilities include fewer betting markets or odds more favorable to sportsbooks. An extreme but worst-case scenario for Tennessee would be sportsbooks pulling out of the market.
Those circumstances seem unlikely right now, though. SB472 does include changes that appear favorable for operators, too.
No more official data mandate
Another part of the current legal structure for Tennessee sports betting is an “official data mandate.” SB472 would make that disappear as well.
That tenet requires sports betting licensees to use the services of data providers that have official designations from the appropriate sports governing bodies to settle bets with. For example, to settle bets on Memphis Grizzlies games, sportsbooks must use the data provider that the NBA assigns its official provider status to.
At least two of the licensees in the state have challenged that mandate. SB472 would repeal that provision, leaving the sportsbooks to use any service they deem appropriate.
Conversation around Tennessee’s gambling law has been as spicy as Nashville hot chicken since 2019. If Lee does affix his signature to SB472, Tennessee’s gaming statutes will continue to bring the heat.