New York Takes A Gamble With 51% Tax On Online Sports Betting
This week, gambling took a huge leap when the New York State Gaming Commission recommended approving 10-year licenses for two groups of gambling companies. For a state that has a history of restricting gambling to the point that the maximum number of casinos is part of its constitution, this may seem a surprising move.
But the decision wasn’t made overnight, despite mobile sports betting being legalized this last April by former Governor Andrew Cuomo. The recommendation comes after years of delays as New York’s neighbors have raked in buckets on their legalized gambling operations. And New York has missed out on that revenue in more ways than one: it’s estimated that 20% of New Jersey’s sports gamblers are New Yorkers hopping the Hudson River.
As you might have guessed, though, there’s a catch. Unlike New Jersey’s 14.25% gambling tax, or Pennsylvania’s relatively high 36%, New York will claim a full 51% of all gross gambling revenues. This marks one of the highest “sin taxes” in the nation, rivaling only New Hampshire’s 51% gambling tax.
Still, that hasn’t stopped gambling operators from applying – or being disappointed when they lose out.
Nine Lucky Winners
At Monday’s meeting, the New York State Gaming Commission approved 10-year licenses for nine operators in total. These operators applied in two consortiums:
- The “Kambi Group,” which includes Rush Street Interactive, Caesars Sportsbook, the online arm of Wynn Interactive, Resorts World, and PointsBet
- The FanDuel Group, which includes FanDuel, the online arm of Bally’s, BetMGM, and DraftKings
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These two groups are expected to operate up to 9 online betting sites to serve the state of New York. One fervent proponent of the arrangement, State Senator Joseph P. Addabbo Jr., said that he hopes the new ruling will make the state “competitive” and encourage New Yorkers “to come to us and stay with us.”
As part of their agreement, each group has partnered with tribal nations in the state to circumvent worries that the agreement would intrude on the state’s longstanding deal granting exclusive gambling rights to indigenous nations. The FanDuel group is partner with the Seneca Nation in western New York, while the Kambi Group will work with the Oneidas and Saint Regis Mohawk Tribe on the Canadian border.
Overall, sentiment is high in the gambling community. PointsBet CEO Johnny Aitken told media outlets that the news “marks an exciting moment” for the company. He also noted that expanding into New York is a proud milestone for the company as it will finally be able to access “one of the largest and most important markets in the United States.”
BetMGM’s CEO Adam Greenblatt shares the sentiment. His officer released a statement reveling in their new mobile sports betting license. And, like Aitken, Greenblatt believes that a footprint in the state is “vital to ensuring nationwide leadership in sports betting and iGaming over time.”
But the honor of doing business in New York comes at a steep price.
The Price of an Expanding Betting Market
As of 2021, 32 states have legalized sports betting in the United States. According to the AGA’s annual national bettor’s survey, nearly 7 million citizens are expected to bet with a bookie in 2021. Another 11 million are projected to place bets in person.
But as of 2021, just 32 states have legalized sports betting, and only 18 permit mobile betting, including Pennsylvania, Connecticut, and New Jersey. This spotty legality has given rise to a lucrative (and illicit) market estimated to rake in billions annually. New York plans to claw back $1 billion from these illegal sportsbooks.
However, the privilege of operating a legal sportsbook in New York comes at a price. The state will claim 51% of the operator’s gross gambling revenue (compared to a median tax rate of 11% nationwide). Sports betting platform providers will also have to pay a $25 million one-time licensing fee and $5 million per year to the casino housing their servers.
These unusually high costs have gambling operators split on the opportunity. For instance, Jay Snowden, CEO of Penn National, commented during the company’s Q3 conference call that his feelings are “mixed” about New York as a market. He believes that nobody’s “going to make money operator-wise” even as the state will rake in buckets. And, as DraftKings has made it clear, “it’s very difficult to make money in New Hampshire,” the one state with a comparable tax structure.
But Bally’s CEO Lee Fenton shared a different perspective during their Q3 conference call. Though he notes that “no one’s happy with a 51% tax rate,” New York is a “huge state and therefore the scale of it means you can have opportunities…. Clearly, New York is not a market that you want to miss out on.”
The Profits to Be Had
Despite these high prices, New York, at least, is predicting a profit off its newest venture. According to the state, online sports betting will generate $493 million annually by the beginning of 2025. And there’s precedent for these profits: New Jersey, which taxes online gambling at just 14.25%, raked in $46 million on $1 billion of sports bets in September alone.
It’s also worth reiterating that around 20% of New Jersey’s mobile sports bettors are New Yorkers trying to get in on the game. Because operators, not gamblers, will pay the state’s high taxes, New York may nab a substantial portion of New Jersey’s betting market as gamblers bet from the comfort of their own homes. And as it becomes easier to access online gaming, more gamblers may join the fun, even just a few times a year.
This previously untapped market of 20 million citizens – many of whom are already avid backroom or cross-border gamblers – is why so many operators are eager to move into the state despite high taxes. In fact, some companies – aware of New York’s desire to profit from the venture – offered more than 60% of their betting profits to garner a long-term license.
Perhaps Robert DeSalvio, President of Genting Americas East – which operates Resorts World – said it best. “This is an extremely exciting time for New Yorkers as we get ready to launch the leading mobile sports betting program in the country. Our team…will be able to deliver a program on day one that provides more choices for consumers, more tax revenue for New York, and more reinvestment in the local communities where we operate.”
In other words: the price is high – but the profits are worth it.
So, what does this mean for investors looking to capitalize on the upcoming profits?
To start, many of these 9 operators are publicly traded companies with a lot to gain. While going in on each company’s individual stock may seem like a surefire way to profit off the new gaming law, the downside of buying single shares is the risk of disproportionately weighting your portfolio toward a losing company.
And with no online betting counters yet open, it’s a bit early to go all-in anyway as their stocks ride on the news (and in some cases, like DraftKings, continue to fall after two years of heavy losses in the gambling sector).
Instead of snapping up shares of individual companies, it may be wise to opt for gambling-focused ETFs.
For instance, there’s the Roundhill BITKRAFT Esports & Digital Entertainment ETF. This niche fund focuses on esports and online gambling and gaming opportunities. Though it includes several videogame and hardware stocks in the mix, this allows it to balance the gambling risk against the rest of the lucrative tech industry. And as New York’s gambling law changes the game, it’s likely the portfolio will veer toward online sportsbooks and gambling alternatives.
Roundhill also offers the Sports Betting and iGaming ETF, a global fund that invests in digital gaming stocks like PointsBet and DraftKings. As one of the largest gambling-based ETFs out there, it commands just under $450 million in assets and holds around 40 gambling service leaders. And, due to its international exposure, your profits aren’t limited to how New York’s new market performs.
Lastly, investors may be interested in the VanEck Vectors Gaming ETF, which offers a more traditional mix of gambling names and Casinos like Wynn Resorts WYNN . This fund gives investors a chance to go in on the brick-and-mortar companies with online gambling arms extending into New York’s market – without sacrificing profits in other locales.
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