The Importance Tax Rates Play in Regulated Online Poker

John Mehaffey May 8, 2014 1755 Reads

Online poker tax rates are a part of the regulatory process. In addition to licensing fees and background checks, states look to tax a percentage of the gaming win.

The current regulated states take a percentage of the rake or casino win. In Nevada, that rate is 6.75 percent. New Jersey taxes at a 15 percent rate. That was originally 10 percent until Governor Christie conditionally vetoed the bill. The new tax rate was one of his demands. Delaware taxes online slots at a rate of 43.6 percent and 29.4 percent for other games, including poker. The first $3.75 million per year has a 100 percent tax rate.

Last month, Mark Lipparelli, Former Chairman of the Nevada Gaming Control Board, told a California House Committee that he felt the proper tax rate would be the high single digits and that any amount higher than the low teens would hurt the growth of regulated online gaming.

Lipparelli was the Chairman of the Nevada Gaming Control Board when online poker regulations were adopted. The same tax rate that is applied to live gaming was used for online poker in the state. The only difference is that online tournament rake is taxed. Live casinos do not pay this tax as tournaments are seen as a promotion, even though live tournaments often have a rake of over 20 percent.

Pennsylvania released an iGaming study on May 7.  The study suggests taxing online poker at a rate of 20 percent and 60 percent for online casino games.  This rate could become a burden for operators, especially during the first few years.  The study recognizes this potential issue and suggests “lower rates may be optimal in the short-run” and “legislation could set a lower rate initially that increases to 20% and 60% respectively”.

Pennsylvania already has steep tax rates on its live casinos.  Slot revenue is taxed at a rate of 55 percent, while table games have a 16 percent rate.  The lower tax rate on table games recognizes the added expenses and lower house edge compared to slots.

One side effect a high tax rate has is the amount of rake a site must charge to players. The best example of this is France where the effective tax rate for cash games is 37 percent. This is because poker sites must pay a 2 percent tax on all pots, even where there was no rake. This can cause an imbalance when a pot maxes out the rake or a game does not see a flop, creating a no-rake hand. It discourages operators from offering high limit games. This fact and the high rake can cause players to seek out unlicensed poker sites. This type of tax structure has not been proposed in the U.S.

Using PokerStars.fr as an example of rake, no limit and pot limit games with blinds €0.05/€0.10 or higher rake 6.5 percent up to €3 with five or more players. There is a €.50 lower cap at tables with 3-4 players. The conversion rate for €3 is $4.16 today. The rake on a €10 sit and go is 11 percent.

PokerStars.fr does not rake if there is no flop. That was not always the case. It changed its policy after a backlash from players.  PokerStars.com and virtually all other online poker sites have always had a “no flop, no drop” policy. The French tax burden created a situation where PokerStars had to go against the industry standard and players immediately demanded a change.

According to Pokerfuse, in addition to taxes, operating costs were 29 percent of revenue in the French market, while marketing was 46 percent. This created a situation where the average expenses were 112 percent of revenue.

Italy is another example of a high tax burden. The tax rate in Italy is 27.3 percent for tournaments and 25 percent for cash games. PokerStars.it rakes 5.5 percent up to €3 for games above €0.10/€0.25. The cap is lower in micro limit games, although that makes little difference as most pots in those limits will not hit the max rake. Sit and gos with a buyin of €10 have a rake of about nine percent.

To compare to regulated markets, WSOP.com in Nevada charges 5 percent rake and does not go up to a $3 max until $.50/$1. Ultimate Poker charges 4.5 percent rake at most no limit games and 4 percent at all limit games. Some New Jersey operators charge 5.5 percent rake.

The tax burden has two effects on a player’s experience. The higher rake needed to overcome taxes grinds a player’s bankroll down faster. It also shrinks an operator’s marketing budget. There is less money to give back to players in the form of bonuses, VIP programs and other promotions. There is less money to pay affiliates to help promote the product. An excessive tax burden may also hurt the ability for sites to fund the development of new products or improve existing platforms. All of these can create a scenario where offshore sites that still operate in the market have an advantage.

Online poker may seem like a great opportunity to pile the taxes on to operators that are anxious to enter a market. Sites may even agree to high taxes just to open the door. In the end, it puts operators at a competitive disadvantage, especially when unlicensed offshore sites still have access to the market.

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