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VOL. 43 | NO. 21 | Friday, May 24, 2019

Against all odds: Tennessee goes all-in for legal, online sports betting. Here’s how it will work

By Kathy Carlson

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Against all odds, legal online sports betting will soon be available in Tennessee, possibly in time for the SEC Championship football game, the college football national championship game, the Super Bowl and most of the Predators’ and college basketball seasons.

Tennessee is, so far, the only state to adopt legislation that only allows online, mobile, interactive gaming, says Rep. Rick Staples, D-Knoxville, who sponsored the bill in the House.

It will allow betting on professional major or minor league baseball, football, basketball, soccer or hockey, professional motor sports or esports (video game competitions), as well as any collegiate or Olympic sporting event sanctioned by a national or international organization.

All this in a state that:

• Resisted approving a state lottery until 2002, decades later than most of the 44 states with state-sanctioned lotteries.

• Has a governor, Bill Lee, who has expressed moral opposition to gambling yet refused to veto the bill.

• Ranks No. 3 in the nation in religious conviction, with 73% identifying as “highly religious” in a 2016 Pew Research poll.

Staples

“People said I was crazy, it would never fly,” says Staples, who sponsored the bill in the House, where the principal selling point was collecting a share of the estimated $3 billion leaving the state each year on illegal offshore betting.

“I was really grateful for the opportunity to be heard.”

Staples, who filed the first version of the bill in November 2018, well before the 111th General Assembly convened, says he saw online sports betting as a way to help fill the gap created by the elimination of the state’s Hall Income Tax of 6% on dividend and interest income. That tax is being phased out toward a full repeal in 2022.

The Hall Tax generated about $100 million for local governments each year, money the locals now needed to seek from other sources.

About a year ago, while exercising on an elliptical machine, Staples heard the U.S. Supreme Court had overturned a law that stood in the way of most states being able to legalize sports betting.

“I got on the phone with the legal department” at the legislature, he recalls, so he and others could begin working on a bill.

People from the professional sports leagues – the NBA, MLB, NFL, PGA – plus colleges and universities talked with lawmakers, he says. The bill went through several iterations before the bill was filed, with more to come as it traveled through legislative committees. Eventually, 10 House members signed on as co-prime sponsors; three senators joined sponsor Sen. Steve Dickerson, R-Nashville, on companion legislation.

Lee was made aware of progress on the bill as the bipartisan effort moved along, Staples notes.

“We made history,” Staples adds.

Not only will local governments receive additional funding to fill the Hall Tax gap, money also will become available to encourage responsible gaming and to treat gambling addiction.

So, what does it mean for folks wanting to try their luck at legal online sports betting? To companies that want to offer their apps to bettors? How much tax revenue will sports bets bring in? What about problem gamblers?

Here are some of the basics:

What the law allows

People age 21 and older who are physically present in Tennessee may legally bet on a host of sporting events, but only with online apps via cellphones or computers. The bill doesn’t allow brick-and-mortar betting venues.

Bettors cannot bet on horse racing. They can bet on major or minor league baseball, football, basketball, soccer or hockey, plus professional motor sports and esports. They also can bet on any collegiate or Olympic sport sanctioned by a national or international organization.

Betting on high school games is not allowed. Some people are disqualified from betting because of their connection to a sport, to a sports betting company or for other reasons.

To offer sports betting apps in Tennessee, a company must apply for a one-year license and pay a non-refundable $50,000 application fee. If approved, the company pays a $750,000 annual licensing fee, with the $50,000 application fee going toward the license fee.

Each year thereafter, the company pays the $750,000 annual licensing fee.

Who will be betting online?

People who have placed a bet on traditional sports at a casino, online or with a bookie in the past 12 months:

• 14% of the U.S. population 21 years of age and older, some 32.8 million people in all

• 45% are between the ages of 23 and 34

• 69% are male

• They earn at least $50,000 per year

• 53% have a bachelor’s or more-advanced degrees

• 41% “multicultural”

Other sports betting groups:

• Casual bettors – No traditional sports bets in past 12 months, but have placed a bet via family/friends, in a pool or in a fantasy game. This includes 8% of the 21-and-older population, or 18.8 million people.

• Potential bettors – No sports bets of any kind in past year but say they would bet in the future; 12% or 28.2 million

• Uninterested – never have and never will bet on sports; 61% or 143.1 million

• Interested – 5% or 11.7 million said they would consider sports betting after they were told of the U.S. Supreme Court decision removing sports-betting restrictions on states

Support for legal betting: 78% of people surveyed support legal, regulated sports betting in their state. That includes 66% of the uninterested. Among potential, casual and core, 96% support legalized sports betting.

Source: American Gaming Association online survey of 6,777 Americans age 21 and up, conducted from Nov. 8-Dec. 7, 2018

Licensees pay the state 20% of their adjusted gross income (AGI) each month. AGI represents the difference between the dollar value of bets placed, minus what the licensee pays out on winning bets.

Legislators used an estimate of AGI placing of about 10% of total bets placed; the actual percentage may vary.

For example, if $1,000 worth of bets are made and $900 is paid out to winners, the licensee is left with $100 in AGI and must pay $20 to the state. Of the taxes the state collects:

• 80% goes to the Tennessee Education Lottery’s lottery-for-education account

• 15% goes to local governments for infrastructure projects

• 5% goes to the state Department of Mental Health and Substance Abuse Services to help treat gambling addiction.

The money that comes into the Tennessee Lottery in application and licensing fees will pay for the administrative costs of running the newly legalized online sports betting program. Any funds that remain after covering these costs will fund additional Tennessee Promise scholarships.

When can I bet?

Probably not until January 2020, although a late 2019 start date is possible, Staples says. The fiscal note refers to a Jan. 2020 start date.

He anticipates that the governor, speaker of house and lieutenant governor will begin looking at people to serve on the sports gaming council in August or September. They could be appointed in the fall, perhaps in November, with online sports betting becoming a reality in January 2020.

Much needs to be accomplished before betting begins. The important details, Staples says, involve operation of the sports betting system, record keeping and reporting.

The Tennessee Education Lottery Corporation, which will oversee online sports betting, can start July 1 by writing rules and setting up the framework for the new operation.

What’s on the to-do list?

Licensing rules: The TEL must set up the mechanics of how to apply for a license to offer sports betting, including preparation of an application form for required information. The Lottery Board has 90 days after submission to approve or reject an application. The fiscal note attached to the bill estimated that in the first year, 15 companies would apply to become licensees and 12 would be approved.

Sports wagering advisory council: The governor, speaker of the Senate and speaker of the House must each nominate three people – one from each grand division of the state – to serve on the lottery corporation sports wagering advisory council. The council meets at least quarterly and advises the lottery board on best practices in sports wagering, provides administrative and technical assistance and performs other assigned duties. Board candidates are subject to criminal records check by TBI and other vetting measures.

Accounting system: A central accounting and reporting system must be set up for use by all licensees to track bets and payoffs. The lottery board may “competitively procure” a vendor for the system.

Other rules: The lottery board will need to set up other rules for sports betting. By statute, the lottery board is not subject to state administrative procedure law so it’s unclear where members of the public can see the regulations. Public notice requirements on rulemaking aren’t known.

Rules can cover procedures for auditing licensees, financial reporting by licensees, programs by licensees to promote responsible wagering and the types of confidential information that licensees need not report.

What licensees need to do: Depending on whether applicants already offer legal online sports gaming in other states, they will need to develop a registration system for bettors to ensure that they can legally bet. Applicants must pass a criminal background check, provide additional information and meet other vetting requirements set up by the TEL. They’ll also need geofencing capabilities to ensure that bettors are physically within the state.

What is geofencing?

Geofencing is “a technology that defines a virtual boundary around a real-world geographical area. In doing so, a radius of interest is established that can trigger an action in a geo-enabled phone or other portable electronic device,” Techopedia.com states.

At a House hearing, a representative of Fan Duel talked about how its geofencing technology keeps online bettors in New Jersey, where it’s legal, from completing a bet as they travel by train into New York City. Fan Duel and Draft Kings, both owned by the same European sports betting company, Paddy Power Betfair, offer legal daily fantasy sports contests in Tennessee.

Where do I sign up?

Bettors go to a gambling app and register. At a minimum, the licensee must verify the bettor’s name and age, verify that the person isn’t prohibited from betting and listed on a confidential TLC registry made available only to licensees, and obtain the person’s physical address, phone number, unique username and active email account.

An industry representative testifying at a House hearing said the verification, in most cases, could be done quickly online with more time needed to verify someone with a common name.

Once the bettor’s account is set up, he can fund the account in several ways, but not with a credit card. Once funded, the bettor can start betting.

Handling of violations

Ineligible bettors can be found guilty of a misdemeanor. Licensees that allow minors or other ineligible bettors to bet, extend credit to bettors, accept bets that aren’t allowed by statute or commit other violations may be found guilty of a misdemeanor, incur civil penalties or have their licenses suspended or revoked.

Estimated tax revenue

According to a fiscal note dated April 25, sports betting itself will bring in about $25.4 million in taxes in FY 2019-20, assuming that people will be able to legally bet starting Jan. 1, 2020. About $20.3 million of that will go to the lottery for education account, another $3.8 million will go to local governments, and $1.3 million will support gambling addiction treatment in the Department of Mental Health and Substance Abuse Services.

In the 2020-21 fiscal year, with online sports gambling available for the full year, these amounts would roughly double. The fiscal note said that the revenues should rise in succeeding years, although it didn’t say how much.

Those numbers don’t include about $9 million a year in additional revenues from application and licensing fees. That money would cover the Lottery Corporation’s additional expenses in running sports gaming, estimated to be at least $250,000 per year. The remainder would go to the Tennessee Promise Scholarship Endowment Fund.

It remains to be seen whether the revenues from taxes and license fees are in keeping with the estimates.

About those estimates …

Legislative staffers preparing the fiscal note took tourism estimates from the state Department of Tourist Development and U.S. Census data on the number of people 21 and older who live in Tennessee. They also used a 2017 Oxford Economics study, “Economic Impact of Legalized Sports Betting,” commissioned by the American Gaming Association.

Estimates show 5% of Tennessee leisure visitors 21 and older – about 3.5 million people – would bet on sports while here. The fiscal note also estimated betting by those over 21 and living in Tennessee, some 4.9 million people.

Each one of these bettors would generate about $30 in AGI for the state to tax at 20%, yielding about $50 million a year in tax revenues.

The fiscal note seems to assume that every Tennessee resident who is age-eligible to bet on sports will do so. But a report by Oxford Economics cited in legislative meetings mentioned a 2016 third-party study finding that 28% of those eligible to bet will actually bet. A 2018 consumer survey by the American Gaming Association found that 61% of respondents said they never have bet on sports and never will.

Those data indicate that not everyone will bet, which would mean a number lower than 4.9 million should have been used to estimate the number of Tennessee residents who would bet on sports.

Depending on how much it costs the Tennessee Lottery to administer sports betting, fewer dollars from licensing fees may go into the Tennessee Promise Scholarship Endowment Fund.

What about the lottery?

Staples says lottery officials don’t expect online sports betting to affect the lottery because sports bettors and lottery bettors are different groups of people. The Oxford Economics report states people would switch from illegal to legal sports betting, and that additional people would make sports bets if betting were legal.

When do numbers get real?

Licensees must turn in taxes to the state every month and make financial reports to the Lottery Board.

By Sept. 30, 2020, the Lottery Board must submit an annual report to the governor and the speakers of the Senate and House with the number of active licensees, the aggregate gross and net revenues of licensees and the financial impact of sports betting on state and local government.

Licensees must report each year to the Lottery Board the total amount of wagers from bettors in the immediately preceding calendar year; their AGI for the same period and any other information that the board requires. The report is due by Jan. 15.

In addition, the state Department of Mental Health and Substance Abuse Services must report annually on how it is using the funding it receives from taxes on gambling.

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