worldonline
gamblinglawreport
FEATURED ARTICLE
04/09
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TAX
Revenue maximisation & egambling: a taxing debate
The worldwide economic situation
has seen many states looking for
new revenue sources, most notably
by amending or tightening tax
regimes for gambling activities.
While most of the debate focuses
on what exactly should be subject
to taxation - gross profits or
turnover - there are also questions
arising as to the level of tax
gambling services should be subject
to and its impact on the operators
themselves. Clearly, in this particular
area, choosing a tax regime can
make an important difference in
terms of location, level and scope of
activities for operators. Linda J.
Shorey and Robert A. Lawton, of
US law firm K&L Gates LLP,
examine the taxation of online
gambling operators by looking at
the two primary methods in use gross revenue tax and turnover tax and offer a simple comparison of
the impact of the methods at
differing rates.
world online gambling june 2011
The dismal state of the global
economy has governments
looking for new sources of
revenue. One source being
considered, and in some instances
tapped, is online gambling1. In
the US, Congress and the states of
California, Florida, Iowa, Nevada,
New Jersey and Hawaii are or
have flirted with the idea of
authorizing, regulating, and
taxing online gambling in one or
more of its forms2. In Europe, the
UK, Italy, France, Spain, and
Poland have systems in place to
regulate and tax online gambling,
while other European countries for example, Bulgaria, Denmark,
Germany, Greece, and Hungry are in the process of putting
systems in place.
How a government taxes
licensed operators can impact the
interests of both the government
and the operators. Governments
and operators, of course, both
want to maximize revenue. The
current marketplace presents a
significant obstacle to this goal unlicensed operators3 with a large
number of players from a
government's jurisdiction.
In a nutshell, if the amount of
tax imposed by a government
curtails the ability of a licensed
operator to be more attractive to
players than unlicensed
operators, the licensed operator
will not be able to attract, let
alone keep, players from
unlicensed operators.
The result is that the operator
will not be able to continue
operating in the jurisdiction and
the government will not be able
to achieve hoped-for revenue (or
other goals, such as consumer
protection). While players, in
exchange for the benefits of a
regulated gambling site, may be
willing to pay more to play or to
receive less in winnings, there
undoubtedly is a point beyond
which the tax impact is
counterproductive for both
governments and operators.
When considering how to tax
licensed operators, governments
are faced with at least two
questions - what type of tax to
impose and at what rate. Two of
the frequently-imposed types of
tax are a turnover tax (‘TT’)4 and a
gross revenue tax (‘GRT’).
A turnover tax is a tax imposed
on the amount of wagers placed
with an operator (the turnover). A
gross revenue tax (also referred to
as a gross profit tax) is a tax
imposed on the sum remaining
from the amount of wagers placed
with an operator minus the
amount of winnings paid to the
players (the payout) before any of
the operator's costs or expenses
have been deducted, when wagers
are made against the house, or on
the commission charged to
customers, when the wagering is
player-to-player. Some operators
and analysts have expressed a
preference for the gross revenue tax
over the turnover tax.
They argue that choosing a
turnover tax for online wagering
results in less tax revenue for
governments and makes it
commercially difficult or
impossible for operators to offer
low margin products.
It is not easy to determine the
appropriate rate at which to tax
online gambling without giving
unlicensed operators a competitive
advantage.
After a year of operation, many
commentators are opining about
what they see as the negative
impact of the French regime's high
turnover tax rate on the ability of
licensed operators to profitably
compete with unlicensed operators
and what needs to be done to fix
the situation. One consultant is
reported to believe that
‘[g]overnments can capture more
activity and tax revenues under a
dot.county regulatory regime if
03
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they opt for a gross profit tax...of
less than 15%’.
What follows is a simple
comparison of the impact
experienced by an operator under
the two tax methods at various
rates, which are rates in effect or
being considered in various
jurisdictions. The comparison was
done by assuming placement of
$1,000 in wagers in two situations 80% and 90% payout (refer to
tables 1 and 3 opposite and on
next page) - and looking at the
impact on gaming profitability
under five different turnout tax
rates and five different gross
revenue tax rates (refer to tables 2
and 4, opposite and on next page).
To assist in the comparison, the
bottom row of each chart shows
the equivalent tax rate of the other
tax method. For example, at an
80% payout, a 4.5% TT equates to
a 22.5% GRT and a 15% GRT
equates to a 3.0% TT.
The comparison charts illustrate
that the two tax methods have a
very different impact on operators.
For example, using an 80% payout,
a 4.5% turnover tax has the same
impact as a 22.5% gross revenue
tax, while using a 90% payout, a
4.5% turnover tax has the same
impact as a 45% gross revenue tax.
The comparison also illustrates the
difficulty in offering low margin
products using a turnover tax.
Indeed, with a 90% payout, this
approach requires almost half 45% - of an operator's gross
revenue to pay a 4.5% turnover tax
rate.
When it comes to choosing a tax
method and rate, however, what
these comparison charts do not
show is probably more important
than what they do.
Governments need to evaluate
the impact of tax methods and
rates on player migration from
unlicensed to licensed operators
and on their ability to obtain the
maximum possible tax revenue in
04
What these
comparison
charts do not
show is
probably
more
important
than what
they do.
Governments
need to
evaluate the
impact of tax
methods and
rates on
player
migration
from
unlicensed to
licensed
operators
Tax Rate
1.8%
4.5%
5.7%
12%
16.66%
Total wagers
(turnover)
$1,000
$1,000
$1,000
$1,000
$1,000
Wagers paid
to players
$800
$800
$800
$800
$800
$200
$200
$200
$200
$18
$45
$57
$120
$166.6
$182
$155
$143
$80
$33.40
14.3%
8%
3.34%
60%
83%
Gross Revenue $200
Tax Paid
Net Revenue
Net Revenue
as % of
turnover
18.2%
15.5%
Equivalent
GRT rate
9%
22.5%
28.5%
Turnover tax at 80% payout (table 1)
a marketplace containing
unlicensed (and untaxed)
operators. Making this
determination will likely be easier
as more jurisdictions regulate and
license online operators, resulting
in more data to be evaluated.
Linda J. Shorey Partner
Robert A. Lawton Associate
K&L Gates
linda.shorey@klgates.com
robert.lawton@klgates.com
1. Eric Pfanner, ‘Europe Unleashes
Online Gambling to Fill Coffers’, The New
York Times, (noting efforts in US as well
Gross gaming revenue tax at 80% payout (table 2)
GRT Rate
8%
10%
15%
20%
Total wagers
(turnover)
$1,000
$1,000
$1,000
$1,000
$1,000
Wagers paid
to players
$800
$800
$800
$800
$800
Gross Revenue
$200
$200
$200
$200
$200
Tax Paid
$16
$20
$30
$40
$50
$184
$180
$170
$160
$150
18.4%
18%
17%
16%
15%
1.6%
2%
3%
4%
5%
Net Revenue
Net Revenue
as % of
turnover
Equivalent
TT rate
25%
world online gambling june 2011
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Tax Rate
1.8%
4.5%
5.7%
12%
16.66%
Total wagers
(turnover)
$1,000
$1,000
$1,000
$1,000
$1,000
Wagers paid
to players
$900
$900
$900
$900
$900
Gross Revenue
$100
$100
$100
$100
$100
Tax Paid
$18
$45
$57
$120
$166.6
$82
$55
$43
($20)
($66.6)
Net Revenue
as % of
turnover
8.2%
5.5%
4.3%
(2%)
(6.66%)
Equivalent
GRT rate
18%
45%
57%
120%
166%
Net Revenue
in other Member States without having
obtained an authorization to do so under
the corresponding national legislation’
and describes ‘illegal’ market operators
as those having no license in an EU
Market State. See id.
4. In Europe, a turnover tax is currently
imposed or being considered by France,
Germany, and Poland and a gross
revenue tax is imposed or being
considered by the UK, Spain, and
Denmark. Italy imposes both, depending
on the type of online wagering. In the
US, a gross revenue tax seems the tax
of choice in proposed state legislation.
For example, in California, one of two
bills that have been introduced would
impose a gross revenues tax of between
10-20%, while New Jersey legislation
that was vetoed called for an 8% tax on
gross revenue.
Turnover tax at 90% payout (table 3)
as in Europe).
2. Generally, the primary forms of online
gambling fall into four categories sports, horseracing, poker, and casino
games. Each category, however, can be
further broken down and various
jurisdictions do so in different manners.
3. In this article, ‘unlicensed’ operators
are those having no license and those
licensed in one or more jurisdictions but
not in all the jurisdictions from which they
take players. These ‘unlicensed’
operators would fall into the categories of
‘grey’ and ‘illegal’ market operators
described in the recently published EU
Green Paper about online gambling. See
European Commission, Green Paper On
Online Gambling In The Internal Market
(issued 24 March 2011) at 3 n.3. The
Green Paper describes ‘grey’ market
operators are those ‘licensed in one or
more Member States providing services
Gross gaming revenue tax at 90% payout (table 4)
Tax Rate
8%
10%
15%
20%
25%
Total wagers
(turnover)
$1,000
$1,000
$1,000
$1,000
$1,000
Wagers paid
to players
$900
$900
$900
$900
$900
Gross Revenue
$100
$100
$100
$100
$100
Tax Paid
$8
$10
$15
$20
$25
$92
$90
$85
$80
$75
Net Revenue
as % of
turnover
9.2%
9%
8.5%
8%
7.5%
Equivalent
TT rate
0.8%
1%
1.5%
2%
2.5%
Net Revenue
world online gambling june 2011
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