Taxable Talk

In the analysis below, I’ve put my comments in italics.

Taxes

1. The measure has a 16% tax on rake (called an “Online Poker Activity Fee”); the tax is on gross rake taken in by any online poker sites. Bonuses, promotions, etc. are not taken into consideration in this tax. Additionally, any sales of ancillary items (e.g. a t-shirt for a site) are not part of this tax. [Sect. 302; note that section numbers reference the section of the legislation and not the section(s) of law being added and/or changed]

2. The tax will go 14% to states and 2% to the federal government. [Sect. 302]

3. Of the portion to the states, 70% of it will go to the state where the player resides while 30% will go the regulatory state based on where the player resides (see below). [Sect 302]

3A. I expect this portion of the legislation to cause a major bone of contention. I doubt that this split will pass muster (too much headed to the regulatory state); I expect the final legislation to have a higher split based on residency, say 80% – 20%.

4. All sites must file and pay US income tax returns. [Sect. 306]

5. Full reporting of players’ wins, losses, net win, name, address, and social security number to the IRS every year with a copy to the player (1099 issued) [Sect. 302].

5A. A big issue for the reporting of wins and losses will be how this is determined for cash games. Will every bet be considered a loss and every pot taken a win? Or will the reporting be by session? How will players who play on multiple tables at once be looked at? While this generally is not an issue for professionals, it is a huge issue for amateur gamblers from one of the “bad” tax states. The actual language of the legislation is silent on this; I assume this will have to be covered in the regulations.

5B. It is very likely that without changes to state tax law that online poker will not be a beatable game in the bad tax states for gambling.

6. Backup withholding required for individuals who refuse to give their social security number to a site. [Sect. 303]

7. The legislation specifically makes online poker wagering exempt from the Wagering Excise Tax. [Sect. 307]

Poker/Gambling Aspects of the Legislation

1. States must opt-in to the legislation, not opt-out. [Sect. 108]

2. There is no criminalization for players on playing on unlicensed sites. However, the money on those sites is subject to forfeiture without recourse. [Sect. 204]

3. All other forms of online gambling except poker, horse racing, and certain state lottery sales are made expressly illegal. [Sect. 103]

4. The regulations for this bill will come through the Commerce Department, with an “Office of Online Poker Oversight” to be formed within 180 days of enactment. [Sect. 104]

5. At least three state and/or tribal regulatory bodies to be chosen within 270 days of enactment. [Sect. 105]

5A. That this measure would allow just Nevada to regulate online poker and have any chance of passage was zero.

6. No players under age 21 allowed. [Sect. 106]

7. GPS, biometric, and other similar techniques required to be used by sites to prevent unauthorized online gambling. [Sect. 106]

8. Severe penalties for any site found to be operating in the US illegally, with potentially all bets being confiscated or a $1 million per day fine. [Sect. 106]

8A. This won’t have much impact on current sports betting sites; they’ve been illegal under US law for years, so nothing has really changed.

9. Hardware and facilities for the poker sites must be in the United States. [Sect. 106]

10. Criminal penalties for cheaters. [Sect. 112]

11. A 450 day (15 month) blackout period after enactment. [Sect. 114]

12. Any business that served US customers in violation of the UIGEA after December 31, 2006 is ineligible for a license for five years after enactment. [Sect. 114]

12A. PokerStars and any other US-facing poker sites will not be able to obtain licenses. While the PokerStars/DOJ settlement announced earlier this year stated that the DOJ would not fight PokerStars from attempting to obtain a license should online poker become legal in the US, this legislation clearly states otherwise.

Additionally, based on my personal knowledge of government licensing and regulation there was almost no chance of PokerStars being able to obtain a license. Licensing agencies are extremely risk averse. As long as there were any charges pending against Isai Scheinberg (and those charges are still pending) I felt that there was no chance of PokerStars obtaining a license. This section cements that for at least five years (and likely far longer).

13. The US Trade Representative must complete the withdrawal for Internet Gambling under GATS. [Sect. 403]

13A. Anyone who expected the Antigua complaint at the World Trade Organization to open up US internet gambling worldwide was dreaming.

Public Policy/Politics

Note: This portion is completely my analysis of the measure.

1. This was probably the best bill you could possibly see out of Congress. Realize that online poker isn’t an issue to much (most) of Congress. For individuals who play online poker, this may be your life, but consider the pressing issues of the day: an economy that’s not performing well, high unemployment, a huge national debt, etc. Is online poker a big issue to the majority of Americans? Definitely not.

2. This measure will need a lot of luck to pass Congress this term. The measure will be introduced sometime in the “lame duck” session (following the November election). There will be must-pass legislation (Estate Tax, tax extenders, etc.), so I expect this measure to be attached to one of those.

However, that’s not a guarantee of passage. First, this isn’t a big issue to most Congresscritters. They care about the Estate Tax, but they don’t care at all about online poker. That said, Harry Reid (D-NV) will be majority leader of the Senate after the election so he will be able to insert this bill into something.

Second, a lot will depend on the result of the presidential election and the possible intransigence of President Obama. As of this morning, the election is very close (all polling I’ve seen shows a dead heat). Let’s look at the possible outcomes (I’m assuming the House will stay in Republican hands):

(a) Obama wins, Senate becomes Republican in January. Under this scenario, I’d expect some must-pass legislation to get through (especially related to tax measures), as President Obama will still have veto power at the end of January and most Congresscritters will try to avoid the Taxmageddon that’s approaching.

However, it’s possible that Republicans will revolt against Harry Reid in the Senate, and wait until January to pass legislation. This could occur if Senator Reid restricts Republican amendments.

(b) Obama wins, Senate stays Democratic. This scenario practically guarantees that must-pass legislation will get through Congress during the lame duck session. The only issue will be President Obama. He’s shown no desire to compromise on legislation; he will have to as some of what he wants is not acceptable to the House.

(c) Romney wins, Senate becomes Republican in January. There are two forces at work in this scenario. First, Harry Reid will lose much of his power in January (the majority leader in the Senate can dictate legislation while the minority leader cannot). Second, President Obama would be replaced on January 20th. He could sign some legislation that he otherwise wouldn’t (accepting certain compromises) or he could be extremely stubborn.

(d) Romney wins, Senate remains Democratic. Here, the lone issue will be how President Obama will react to legislation. (The House and Senate will still have to compromise in order to pass legislation.)

Overall, I give this legislation only a one-in-four chance of passing Congress and being signed by the President during the lame duck session. It probably has a higher chance of passage (say, a 30% to 40% shot) but there’s a significant chance that President Obama will veto the legislation if it’s attached to something he doesn’t like.

3. It remains very possible that this legislation goes nowhere in Congress. There are many Democrats and Republicans who will not support anything related to online poker, and nothing you say or do will change their mind. Both California Senators (Feinstein and Boxer, both Democrats) are adamant opponents; many Republicans, especially from the South, are also opponents.

4. The draft legislation and the final version of the measure may look completely different. This measure has less chance of significant amendment than most legislation because it will likely be offered as an amendment to some must-pass piece of legislation (the Estate Tax extension is the most likely imho). However, that doesn’t mean there can’t be changes. It’s quite possible that the final version of this measure will look radically different from today’s draft.

5. If this measure doesn’t pass in this lame duck session, it will take many years for online poker to be reestablished in the United States. I think this is the last chance for federal legislation in the next few years. There are far too many more significant issues impacting the United States. If it doesn’t pass, this isn’t the end for legislation. Instead, online poker will gradually be implemented on a state-by-state basis. This will be far worse for players due to liquidity issues and what will likely be far higher rakes; most states will look toward monopoly models rather than competitive models. Additionally, even if a state passes a measure (such as Nevada) the ability to form state compacts will probably take an act of Congress…and that could take many, many years.

6. Even if this act passes, expect the regulations to take years to be implemented rather than months. Anyone who sees how regulators “work” knows that deadlines are routinely missed with no consequences. Thus, while online poker is supposed to return 15 months after passage, it could be longer.

7. There will still be battles on a state-by-state basis if this measure passes. The legislation requires each state to opt-in. If you live in, say, Alabama or Utah, there’s no chance of your state legislature passing opt-in legislation. If you live in Nevada, it’s almost certain it will pass quickly. If you live in California, I think there will be a protracted battle over opting in (and I expect California not to opt-in, at least initially).

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Overall, this measure looks to me about as good as one could expect from Congress. Anyone who expected online poker to return to its golden era (2005-2006) through legislation and regulation was dreaming. Additionally, anyone who thought that foreign enterprises that ignored the UIGEA would receive a free pass was also dreaming.

I would have liked to see certain tax issues resolved with this measure such as gambling being taxed on a net basis rather than by wins and losses. Unfortunately, I don’t expect to see that for many years (or even decades). This measure would raise money for states and the federal government (which is how I expect Senators Reid and Kyl to sell it) while strengthening laws against most online gambling. Assuming that the final version of the bill looks like this draft, I will support it.

That said, it’s still far more likely than not that this measure will not pass. It faces many obstacles, and there’s no guarantee even if it passes (attached to some must-pass piece of legislation) that it will be signed into law by President Obama.