Why did the state get so little? Kansas’ law legalizing sports betting allows sportsbook companies to deduct the cost of promotional free bets before reporting revenues.
By Marco Schaden | The Wichita Beacon
Update: Following publication of this story, Gov. Laura Kelly’s office issued a statement via Brianna Johnson, her communications director: “Governor Kelly agrees there are aspects of the sports betting legislation that could be improved. She will continue to discuss any potential changes with legislators.”
It may not surprise you that in the same month the Kansas City Chiefs won the Super Bowl, more than $194 million was wagered on sports in Kansas. But would it surprise you to learn that the state received only $1,134 of that in tax revenues in the same month?
It surprised Stephenie Roberts, a Wichita social worker and gambling addiction counselor.
“Is criminal too strong a word?” asked Roberts, when she learned from a reporter that Kansas allows sportsbooks to deduct “free plays or other promotional credits” before assessing state tax, basically allowing sportsbooks to advertise their product for free. The deductions reduce what is considered revenue and taxable by the state.
“I call that get-into-debt money instead of free-play money,” said Roberts, who is also the chair of the South Central Kansas Problem Gambling Task Force. “I mean, that’s fraud or something. That’s advertising money. That’s money to hook the player in, money to entice them to play and to get them started. That’s not right.”
Sportsbooks use terms of Kansas law to minimize state taxes
Whether or not it is right, it is legal under the Kansas sports betting law enacted last year by the Kansas Legislature and signed by Gov. Laura Kelly.
“It was probably the biggest ask from lobbyists was that they would be allowed to deduct promos,” said John Holden, an associate professor in the Spears School of Business at Oklahoma State University who has monitored the expansion of legalized sports betting in the United States. Colorado is the only state bordering Kansas that currently has legalized sports betting, along with 31 other states and Washington, D.C.
The sportsbooks in Kansas have claimed nearly $80 million in promotional deductions from September 2022 through April 2023, according to numbers reported by the Kansas Lottery.
One sportsbook, BetMGM, has not paid a cent in state taxes through April 2023 by claiming $18.6 million in promotional deductions despite bringing in $17.5 million more from wagers than it paid out in prizes. But it did pay federal taxes — more than $400,000 worth. That’s because unlike the state of Kansas, the federal government does not allow sportsbook companies to deduct their promotions before assessing its taxes.
Thanks to a law regulating federal taxation of legal gambling originally passed in 1951, the federal government collected $468,699 in tax revenue on Kansas sports wagering in February 2023, the same month Kansas got just $1,134.
The federal tax is an excise tax based on the value of wagers placed, unlike the Kansas tax based on the value of net revenue. The federal tax is assessed based on a formula of $50 per employee plus .25% of the overall bets wagered, more colloquially known as “the handle.”
Federal vs. state tax revenues on Kansas sports betting wagers
This is a screenshot of the data reported by the state of Kansas showing how most casinos and sports betting companies reported no taxable revenue in February 2023.
Kansas revenues from sports betting still exceed projections
Despite scant collections in February, Kansas expects to take in more than the $1.8 million in tax revenue projected when it legalized sports betting last year.
Sports betting in Kansas began on Sept. 1, 2022, a week before the NFL season was set to begin. The state’s tax revenue share was a little more than $4.5 million by the end of April, the most recent month reported by the Kansas Lottery. A lottery spokesperson anticipates the total will rise to no more than $6 million when the fiscal year ends this month.
Had Kansas structured its taxation of sports betting differently — following the example of states like Colorado or Tennessee — the state’s revenue share could have been many millions more.
Last year, Colorado became the first state to rid itself of promotional deductions, which would have brought in more than an additional $7.7 million this year if done in Kansas. The state legislature in Tennessee just recently switched to a 1.85% tax on the handle instead of the net revenue. If Kansas taxed the February 2023 handle at that rate, it could have collected close to $3.6 million instead of just $1,134.
State hesitates to rewrite Kansas law to increase revenues
No such formal discussions of sports wagering reform took place in Topeka during this past legislative session, despite at least one lawmaker advocating change.
“I sent a bill to the revisor [of statutes], about changing the percentage back from 10% to 20%, which is what it had originally been,” said Rep. Paul Waggoner, a Republican from Hutchinson. The Office of Revisor of Statutes provides legislative legal consultation and bill drafting services to the Kansas Legislature.
“The revisor sent it to the [Kansas] lottery people who said that this would create lawsuits. They have some five-year contract, and so if we try to call back the percentage, or call out the percentage of something more respectable for the taxpayers at least, [the sportsbooks] would sue, and it would be just kind of a bloody mess,” said Waggoner. “I think they said ‘all hell would break loose’ if we actually tried to do that.”
The state of Kansas owns and operates the gaming industry through the Kansas Lottery office, which contracts with casino managers who in turn signed five-year subcontracts with the sportsbook companies. All those companies could sue.
“The folks that are building the sports wagering platforms, the retail sportsbooks, they’re investing the money, they’re doing that based upon an assumption of what the rate is at that time,” said Keith Kocher, Kansas Lottery’s director of gaming facilities. “If it was going to be changed, then they might have an argument that, ‘Hey, we wouldn’t have built the Taj Mahal, we would have built, you know, the tree house.’”
But legally, the state could change the terms of state taxation.
“The Legislature can change the law, there’s no question about that, they have that inherent right,” said Kocher. “Now, the consequences of doing that are unknown.”
Sportsbooks operating in Kansas were asked if they would sue the state if the law changed, but none of them commented. DraftKings was the only sportsbook out of the six to acknowledge the request for comment, but did not respond before publication.
Gov. Kelly’s office also did not respond to a request for comment, and Attorney General Kris Kobach, who would represent the state if sued, did not respond to a request either.
This promotion for sports betting appeared on a large screen in the lobby of Kansas Star Casino south of Wichita, one of the four locations in the state where on-site sports betting is legal. The casino and its partner FanDuel were the only ones to pay any taxes to the state in February 2023. They received $71.5 million in wagers, claimed $11,432 in net revenue and paid the state $1,134 in tax. (Polly Basore Wenzl/The Beacon)
Problem Gambling Fund can’t match ad spending by sportsbooks
The money that came in during the past year has yet to be distributed to any of those intended to benefit. That will finally happen in July, when the Kansas Lottery will make its first distributions of the sports wagering revenue.
The first $750,000 will go toward the White Collar Crime Fund, created to investigate criminal offenses related to illegal wagers. After that, 80% of what’s left will go to the Attracting Professional Sports to Kansas Fund, a state fund to finance a potential stadium to lure the Kansas City Chiefs or the Kansas City Royals to relocate in Wyandotte County. The remaining money earmarks 2% for the Problem Gambling and Other Addictions Grant Fund. The remaining 18% will go into the Lottery Operating Fund.
Using the maximum $6 million projection for the fiscal year 2023, here is how it breaks down:
- White Collar Crime Fund: $750,000
- Attracting Professional Sports to Kansas Fund: $4.2 million
- Problem Gambling and Other Addictions Grant Fund: $105,000
- Lottery Operating Fund: $945,000
The Problem Gambling and Other Addictions Grant Fund is administered by the Kansas Department for Aging and Disability Services (KDADS). That fund was the subject of a 2018 audit by the Legislative Division of Post Audit that found one-third of money allocated to the fund by law was instead transferred to other funds “not used to provide services to individuals with gambling or other addictions.”
Programs and services for problem gambling within the fund fell 54 percent because staff positions were left vacant, which made it “more difficult to coordinate education and awareness programs which may have led to fewer people seeking treatment.”
The South Central Kansas Problem Gambling Task Force has an annual budget of $68,000. Roberts is hoping to get an extra $10,000 to $15,000 from sportsbook state tax revenues.
Roberts would rather see reform to the current sports betting law that leaves her with more money to combat the fallout of gambling addiction in south central Kansas.
“When you talk about all the advertising out there for sports betting, $15,000 doesn’t do much,” Roberts said. “When we do TV advertising, that can cost maybe $5,000 or more for the type of advertising we do for a limited amount of time, but there are multiple [sportsbooks] doing the advertising for gambling.”
Nearly $80 million of it.
If you or somebody you know needs help, contact the Problem Gambling Hotline at 1-800-522-4700. Help is available at no cost to the problem gambler and their concerned others.
This article was republished here with the permission of: The Wichita Beacon