Tennessee breaks ground as first state to tax on total sports betting handle, not revenue

Tennessee Governor Bill Lee has signed a new sports betting bill into law making the Volunteer State the first and only in the US to tax sports betting handle rather than gaming revenue. The law, which will take effect in July 2023, introduces a tax rate of 1.85% on the total handle of legal online sportsbooks, a significant departure from the previous tax structure of 20% of gross gaming revenue.

The new law follows a prolonged controversy surrounding the state's requirement for sportsbooks to maintain a minimum hold of 10% on their handle. While lawmakers argued that the hold was beneficial for tax revenue and fostering competition, sportsbooks contended that it hindered their operations within the state.

In 2019, when Tennessee legalized sports betting, the state's legislature imposed two unique restrictions not observed in other states. Firstly, it exclusively legalized online sports betting, with no provision for legal retail sites. Secondly, it established a 20% tax on gross gaming revenue, a practice commonly followed by other states. However, Tennessee introduced the aforementioned unusual stipulation mandating that sportsbooks maintain a minimum hold of 10% on their handle each month.

Typically, the hold requirement is lower, ranging from 5% to 8%. By implementing the 10% hold, the state aimed to ensure a higher amount of revenue and collect fines if sportsbooks failed to meet the requirement. Additionally, the 10% hold provision sought to level the playing field, preventing larger sportsbooks from operating at a loss to gain a larger market share and potentially monopolize the industry.

Tennessee Governor Bill Lee signed the bill into law last week

However, sportsbook operators argued that the 10% hold requirement made it challenging to remain competitive against offshore books. They claimed that they couldn't offer odds as competitive or provide enticing bonuses and promotions to attract new users, ultimately impacting the overall user experience.

The newly enacted legislation eliminates the minimum hold mandate, relieving sportsbooks from the obligation to maintain a 10% hold or face fines. A fiscal note attached to the new bill reveals that nine out of the state's 11 sportsbooks paid $25,000 for failing to adhere to the minimum hold requirement.

If Tennessee had included the handle tax in its initial sports betting launch, the state could have collected approximately $15 million more for its coffers compared to the 20% gross gaming revenue tax. However, this estimation factors in the failure of sportsbooks to meet the minimum hold. If the minimum hold mandate had been successful, Tennessee would have collected approximately $11 million more than that.

While Tennessee has become the first state to implement a handle tax, it remains to be seen whether other states will follow suit. Previous attempts to introduce a handle tax in states such as West Virginia, Kentucky, and Minnesota have been unsuccessful. However, experts believe that if Tennessee's handle tax model proves successful, it could serve as a blueprint for other states to adopt.

In addition to the changes in tax structure, the new sports betting bill in Tennessee also eliminates the mandate requiring sportsbooks to license official league data for live betting. This provision drew objections from sportsbooks due to the high cost associated with licensing such data.

The bill also brings modifications to the licensing fees for new operators. They will now pay an initial licensing fee of $750,000, with annual renewal fees set at $250,000 for those with less than $100 million in handle and $500,000 for those with less than $500 million in handle.

With the enactment of the new legislation, Tennessee's sports betting landscape undergoes significant changes. The move to tax sports betting handle rather than revenue sets a precedent in the industry and may pave the way for similar approaches in other states.