Gambling on Sports is Legal (Kind of): What Does That Mean for Tax Information Reporting?

Gerry Nelligan
May 21, 2018

So, the Supreme Court just legalized sports gambling all over the United States, right? Not exactly. In fact, not at all. But the Court’s recent decision does open the door for states to legalize sports betting and, as is the case with many news developments, it could have a massive impact on tax information reporting.

Although casinos have sprung up in different states over the last few decades, the only state with legal sports betting, until the court’s recent decision, was Nevada. The home of gaming meccas Las Vegas and Reno was grandfathered into legal sports betting because sports books existed there before the federal government banned them.

The prohibition even extended to the Internet, meaning would-be gamblers had to place sports bets in person in Nevada if they wanted to wager legally. Soon, however, Nevada will no longer be the only state with legal gambling on sports. Any state will be able to offer legal sports gambling, as will any casino in a state that has legalized sports betting. But each state has to legalize sports betting first.

Sports gambling state-by-state

New Jersey, which brought the suit against the federal government that led to the Supreme Court’s decision, is poised to offer sports betting almost immediately. West Virginia, Pennsylvania and Delaware also look ready to move forward with sports wagering. However, the process won’t be so simple in other states.

Political bickering, for instance, has stalled momentum toward legalized sports betting in heavy hitters such as New York and California. Other traditionally more conservative states, particularly big population centers such Texas and Georgia, simply seem unlikely to embrace legal sports gambling anytime soon. So, legitimate sports betting isn’t exactly poised to sweep the nation … yet. A hunger for revenue, however, could change the political climate in many states.

A new acceptance of gambling online?

For now, there is an issue with how gamblers can bet on sports. Although nearly half of states allow commercial casino gambling and even more allow Native American tribes to run casinos, only four states currently offer legal online gambling of any kind. Without an online option, bettors will have to physically visit a casino or other gambling institution in order to place a sports bet.

In countries like England, where gambling has been legal and part of the culture for decades, sports-betting operations have neighborhood locations almost like convenience stores. For now, no such infrastructure exists in the US, where physical casinos tend to be separated by long distances.

With consumers already showing a lack of willingness to shop at a mall, favoring online shopping, casinos will likely look to avoid creating local betting shops and instead seek to establish gambling applications and websites that will allow customers to bet on sports online. But again, for casinos to be able to offer sports-betting apps, individual states would have to legalize online gambling on top of legalizing sports betting.

So far, the online option has not proven popular. However, potential revenue from sports gambling could spur both legislative efforts to legalize online gambling at the state level and massive marketing campaigns for apps from casinos and other gaming companies.

Will existing sports gamblers go legit?

Another potential roadblock to legal sports gambling has nothing to do with state governments and everything to do with the bettors themselves. Illegal gambling is already popular, easy and tax-free, although failing to pay taxes on gambling winnings is also illegal.

Will gamblers give up old habits and choose a legitimate option? That’s anybody’s guess at this point, but it’s possible that some gamblers will warm to the idea of betting legitimately and not worrying about potential prosecution for pursuing what, for many, is really just an entertainment option.

Some observers believe that legal sports betting will take off quickly and succeed in a big way, particularly with the marketing strength of the casino industry behind it. New bettors who haven’t gambled illegally in the past might be more comfortable with a legitimate system and decide to place money on sports for the first time. And casinos are likely to provide far better customer service than local bookies.

Given a mix of in-person and online options, legal sports betting could be massive. Some estimates put the market potential at $150 billion a year, but the potential market for legal sports betting is essentially unknown given how restrictive the laws around the practice have been until now.

Whether it grows slowly or rapidly, and despite some hurdles in the way, legitimate sports gambling is on its way to becoming a fixture of American culture and commerce.

States need sports gambling money

States have a reason to want sports betting to succeed, and that reason is money. Legal sports betting is a potential boon for cash-strapped states. Casinos pay fees to set up sports operations aside from paying a variety of other taxes, and betters themselves pay taxes on winnings.

Of course, state politics can be as nasty as national politics, if not nastier. In some states, such as California, different factions, from Native American tribes to commercial casino interests and anti-gambling campaigners, have fought for so long that they’ve stalled the process of legalizing commercial gambling. California allows Native American casinos but not commercial casinos.

New York allows both kids of casinos but has not thus far allowed online betting. Sports betting, already a contentious issue in the Empire State, could meet the same fate, as legislators appear split on the issue. Texas, another massively populous state, has taken a largely anti-gambling tack in general, allowing tribal but not commercial casinos.

In fact, states with smaller populations, and therefore fewer jobs and less employment infrastructure, might be among the first to embrace legal sports gambling. Among the likely early adopters of legal sports betting, along with West Virginia and Delaware, are Montana, Delaware, Mississippi and Oregon, all of which rank in the bottom half of all states in population.

As smaller states lead the way in establishing laws to allow legal sports betting, larger states, particularly those located near smaller states where sports gambling is legal, could seek to shore up their own revenues by breaking legislative deadlocks and allowing the business themselves.

Tax information reporting challenges inherent in legal sports betting

No matter which states embrace sports gambling first, there is one certainty: Once states legalize sports betting, tax reporting for commercial casinos and other legitimate sports-gambling outlets will get a lot more complicated. (Native American casinos are generally exempt from taxation, although individuals who win money at those casinos do owe taxes on their winnings.)

The form used to report gambling winnings is the W-2G. When legal sports gambling does take off, the number of W-2G forms filed will inevitably grow, and casinos will be the organizations tasked with sending those forms both to payees and to the IRS. Handling a large influx of forms could prove challenging, but numbers aren’t the only potential problem that lurks.

Currently, casinos report W-2G forms in states where commercial casinos are legal. That is already a challenge, with states changing, and usually tightening, reporting deadlines in recent tax years. However, should states that haven’t allowed gambling in the past pass legislation to allow sports gambling, casinos could face having to report huge numbers of forms in brand new jurisdictions, as each state represents a different jurisdiction with different deadlines and compliance policies.

Meeting the challenges of tax information reporting for sports bettors

In order to stay in compliance with both state and federal reporting regulations, accounts payable professionals at casinos will need to be confident that they have the correct information on all of their customers. In order to avoid withholding of payouts to winners, as well as potentially expensive penalties for missing reporting deadlines or providing incorrect information, casinos need to ensure that information customers give matches information in IRS and state databases.

Of particular importance is the Tax Identification Number, or TIN. Each taxpayer has a unique TIN, and failure to match names with TINs when reporting information to the IRS and to state tax authorities can lead to both withholding and penalties. Matching names and TINs in bulk just before reporting season in January is possible but cumbersome and risky.

The ability to match names and TINs upon first contact with a customer, then is critical for casinos that want to ensure that their information is correct come reporting time. A solution that provides TIN matching at the point of contact with a customer can save a casino considerable time and money in the reporting process. Similarly, a solution that manages withholding can help casinos navigate the choppy waters of compliance in an area that is of great concern to their customers.

Confidence in a time of uncertainty

Perhaps the overarching message commercial casinos and other gambling organizations should take away from the potential legalization of sports betting state-by-state is that compliance regulations in the space are very likely to change. As states take on sports gambling and evaluate its effects, they are likely to tinker with laws and regulations.

That includes laws and regulations around W-2G reporting and other tax reporting tasks. Keeping up with the pace of regulatory change is difficult and fraught with risk: One miss could lead to financial penalties and frustrated customers. Casinos that use solutions with regulatory changes factored in are much more likely to manage tax information reporting smoothly than those that try to go at it alone.

No matter how quickly legal sports gambling takes off, it will eventually become a normal part of American life, and it will usher in complexity regarding how casinos deal with state and federal tax authorities. Those casinos that are prepared for complexity are much more likely to come out as big winners than those that aren’t.

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Gerry Nelligan

Gerry Nelligan is a Regulatory Analysis Supervisor at Sovos, leading a team of counsels covering information reporting, including 10-Series IRS reporting, Affordable Care Act (ACA) reporting and Automatic Exchange of Information (AEOI). Gerry received his J.D. from Suffolk University Law School and his B.A. from Providence College. He is a licensed attorney in the state of Massachusetts.
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