Colorado Passes Law That Limits Deductions By Sports Betting Operators

In an attempt to gain more tax revenue from sports betting, the Colorado State House and Senate have passed legislation that is expected to be signed soon by Gov. Jared Polis.

Under the law, Colorado sportsbook operators will no longer be able to deduct many of the promotional and marketing expenses from their revenue. The move is expected to increase the amount of tax the state receives.

House Bill 22-1402 “limits the total amount of free bets that may be deducted on and after January 1, 2023, for the purpose of calculating the net sports betting proceeds of a sports betting operator or internet sports betting operator.”

The bill goes on to add other restrictions on sports betting operators each year over a three-year period, phasing out deductions in 2023, 2024, 2025, and again on New Year’s Day in 2026. At that point, a sports betting operator in the state will only be able to deduct 1.75% of the total sports betting handle for marketing and promotions.

This law will apply to both online and retail sportsbooks.

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Why Colorado Is Reducing Deductions By Sports Betting Operators

Since launching a legal sports betting market in May 2020, Colorado has seen more than $400 million in total wagers placed. With a state tax of 10% on sports betting revenue, you’d think the state treasury would have received $40 million in taxes. But, the law allows sportsbooks to deduct almost all of the expenses they incur in the form of betting promotions and marketing.

In essence, sportsbooks like FanDuel, BetMGM, DraftKings, and others, are allowed to deduct the cost of acquiring customers via marketing or free bets or deposit matches, and so on.

According to the Colorado Gaming Division, the state treasury has been paid $17.7 million in taxes from sports betting operators, which comes to less than 5% of the overall sports betting handle. Some lawmakers see that as a problem and hope to increase tax revenue.

Unlike some other states that earmark tax revenue from sports wagering for K-12 education programs, Colorado establishes that 50% goes to the general fund to be spent as the legislators wish. For the other half, the state constitution requires that 12% goes to counties that host retail sportsbooks, 10% to host cities, and 28% to Colorado’s State Historical Fund for the preservation of historical sites.

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New Law Defines Phases

Under the changes in the new law, in Phase 1 limits on promotional deductions by sports betting operators will be 2.5% of the total handle beginning Jan. 1, 2023.

During Phase 2, which begins on Jan. 1, 2024, the amount of the total handle eligible for deductions will reduce to 2.25%. During Phase 3, which is from July 2025 to June 2026, the amount lowers to 2%.

Beginning in July 2026, the amount lowers to 1.75%, and that will complete Phase 4.

Colorado is the first state to successfully alter the tax policy for sports betting operators after launching its sports wagering market. Previously, both Louisiana and Virginia attempted to place limits on deductions by sportsbooks, with no success.

AP Photo/David Zalubowski

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