Transition from Revenue-Based to Wager-Based Tax System

By Matt Speakman,
Betting Expert at online-gambling.com

Matt Speakman Betting Expert at online-gambling.com

A die-hard fan of the Patriots, Matt Speakman is an expert on everything related to sports betting and DFS sites. Over the years, he has proven a valuable asset for our team at online-gambling.com. You can find Speakman's professional tips and tricks in any of his many articles on the website.

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Last updated: June 12, 2023

As a result of Governor Bill Lee’s signing of Senate Bill 475 into law, a new tax system for sports betting will go into effect in Tennessee. By adopting a tax on handle, or the amount wagered each month, the ground-breaking law would replace the prior tax structure, which collected taxes based on revenues. The law will come into effect on July 1 and significantly alter the state’s sports betting market.

The old 20% tax on gross income has been replaced with a 1.85% tax on handle for sportsbook operators under the new law. Operators will, however, have the option to subtract a 0.25 percent federal excise tax from each wager before computing the new state tax. The goal of this modification is to give the sports betting sector a more fair and equitable tax structure.

The bill also provides a tiered structure for operator renewal costs in addition to the tax modifications. Operators will now pay renewal costs according on their revenues, which can range from $375,000 to $750,000, as opposed to the previous fixed $750,000 charge. With this modification, it is anticipated that the renewal payments will be more closely matched to the operators’ financial success.

Tiered Renewal Fees and Removal of 10% Hold Requirement

The measure also removes the 10% hold requirement for sportsbooks, which is a big change. The hold is the portion of bets that sportsbooks keep for themselves. Operators were once obliged to keep a minimum hold of 10%, however this rule has since been eliminated. With this modification, sportsbooks will have more freedom to modify their hold percentages in response to changing market circumstances.

In addition, the Act makes a number of additional modifications, such as changing the name of the regulating body from Sports Wagering Advisory Council to Sports Wagering Council. The council’s position in regulating sports betting in Tennessee and the industry’s ongoing evolution are reflected in this rebranding.

The decision to make these modifications was based on a state regulators’ assessment, which revealed that the majority of sportsbook operators would not be able to achieve the 10% hold threshold in 2022. In order to address the difficulties experienced by the operators and foster a more advantageous operating environment, modifications to the law were therefore deemed required.

During its passage through the legislature, the new law faced minimal opposition. In April, the state House overwhelmingly approved it, approving it with a vote of 75-7; the state Senate then unanimously approved it. The legislation’s support from both parties demonstrates how important it is to update Tennessee’s tax code and regulatory framework for the sports betting business.

Impact and Potential Model for Other States’ Sports Betting Regulations

It is unclear if Tennessee’s approach will serve as a model for other states exploring changes to their sports betting legislation, despite the industry’s somewhat subdued response to the new law thus far. Tennessee is unique in that it doesn’t have any physical locations and solely permits internet betting. This online-only model offers insightful information on the possible advantages and difficulties of such a strategy.

Twelve operators are now authorized to operate in the state since Tennessee legalized betting in 2019, including well-known brands including Bally Bet, Barstool Sportsbook, BetMGM, Caesars Sportsbook, DraftKings, Fanatics, FanDuel, Hard Rock, SuperBook, Tennessee Action 24/7, and WynnBET. Now, these operators must adjust to the new tax system and adhere to the updated regulatory standards.

During the legislative process in Tennessee, the Sports Betting Alliance, a trade group that represents significant sportsbooks, was present. While Tennessee Action 24/7 spent between $25,000 and $50,000 on lobbying, they spent between $50,000 and $110,000. Less than $10,000 in lobbying costs were revealed by Barstool Sportsbook’s owner, Penn National Gaming. These groups, however, have not yet made any public remarks about the new law.