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gamblinglawreport
FEATURED ARTICLE
04/09
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USA
Legislative efforts to authorise
and licence internet gambling
Despite previous efforts to prohibit
internet gambling, the US has
reviewed its position as the
Congress - and several States - are
in the process of enacting Bills to
regulate internet wagering. Linda J.
Shorey, Anthony R. Holtzman and
Robert A. Lawton, of K&L Gates,
examine the latest legislative
developments in the USA.
From the 104th (1995-1996)
through to the 109th Congress
(2005-2006), Bills were introduced
in the House of Representatives
(‘the House’) or the Senate for the
purpose of specifically prohibiting
betting or wagering using the
internet. The culmination of those
efforts in 2006 was the enactment
of the Unlawful Internet Gambling
Enforcement Act (UIGEA)1. The
110th Congress (2007-2008) saw
the introduction of the first Bill
that would regulate and license
internet gambling. In the 111th
Congress (2009-2010), three Bills
were introduced that would, if
enacted, provide for the regulation
and licensure of some form of
internet wagering - one in the
House and two in the Senate. A
companion to the House Bill
would address taxation of licensed
operators. The Senate Bills would
also address taxation.
Under the UIGEA, stateauthorized ‘intrastate’ and tribalauthorized ‘intratribal’ wagering
activities were excluded if the
activities met certain requirements
from the definition of unlawful
internet gambling2. These
exclusions initiated much
commentary about whether one or
more states would authorize some
form of intrastate internet
wagering. This article looks at the
Congressional bills and legislative
efforts that have been taking place
in two States - California and
Florida - with respect to the
world online gambling may 2010
regulation and licensure of
intrastate internet poker.
The Congressional Bills
Three Bills are currently pending
in the US Congress that, if enacted,
would provide a licensure and
regulatory scheme for certain types
of internet wagering.
Representative Barney Frank (DMA) introduced on 6 May 2009
H.R. 2267, the Internet Gambling
Regulation, Consumer Protection,
and Enforcement Act (‘the Frank
Bill’). Senator Robert Menendez
(D-NJ) introduced on 6 August
2009 S. 1597, the Internet Poker
and Games of Skill Regulation,
Consumer Protection, and
Enforcement Act of 2009 (‘the
Menendez Bill’). Senators Ron
Wyden (D-OR) and Judd Gregg
(R-NH) introduced on 23
February 2010 S. 3018, the
Bipartisan Tax Fairness and
Simplification Act of 2010 (‘the
Wyden Bill’). All three Bills would
add a new Subchapter V to Title
31, Chapter 53, of the US Code.
Subchapter IV of Title 31 contains
the UIGEA.
Two Bills introduced by
Representative Jim McDermott (DWA) would amend the Internal
Revenue Code to provide for the
taxation of entities that might be
licensed pursuant to the system the
Frank Bill would institute. The
first, introduced on 6 May 2009, is
H.R. 2268, the Internet Gambling
Regulation and Tax Enforcement
Act of 2009. The second,
introduced on 25 March 2010, is
H.R. 4979, the Internet Gambling
Regulation and Tax Enforcement
Act of 2010’ (‘McDermott’s Bill’).
While H.R. 4979 likely moots H.R.
2268, its provisions appear to have
been the model for the taxing
scheme in S. 3018.
All the Bills were referred to and
remain in committee. The House
Committee on Financial Services
held a Hearing on the Frank Bill
on 3 December 20093. The House
Committee on Ways and Means is
is scheduled to hold a hearing on
‘tax proposals related to legislation
to legalize internet gambling' on 19
May 2010’.
This section addresses two things.
First, we consider similarities and
differences in how the Frank and
Menendez Bills would deal with
the licensure and regulation of
internet wagering. Senator Wyden's
Bill - S. 3018 - is not discussed
because its regulatory and licensure
scheme is similar to that in Rep.
Frank's Bill. Second, we consider
the tax schemes of Senator
Wyden's Bill (S. 3018), Senator
Menendez' Bill (S. 1597), and Rep.
McDermott's second Bill (H.R.
4976).
The Frank and Menendez Bills
As noted above, those Bills would
amend Chapter 53 of Title 31 of
the US Code by adding a new
Subchapter V to follow Subchapter
IV, which contains the UIGEA.
The Bills would provide a
regulatory and licensing
framework in which the Secretary
of the Treasury would issue licenses
to internet operators. However, the
type of internet wagering activities
covered by each Bill is different.
The Frank Bill would authorize all
forms of wagering (including
casino games, poker, bingo and
lotteries) except for sports
wagering, while the Menendez Bill
would authorize poker and other
games it describes as
predominantly of skill (i.e chess,
bridge, mahjong and
backgammon).
The Bills would attempt to clarify
how other laws impact internet
wagering, including the
Professional and Amateur Sports
Protection Act (PASPA)5, the
Interstate Horseracing Act (IHA)6,
the Wire Act7 and the UIGEA.
03
USA
Among the clarifications
proposed are:
The Bills would provide that
Subchapter V is not to be
construed to authorize a licensee to
accept a bet or wager from a USbased person on a sporting event
in violation of the PASPA.
The Menendez Bill would
exclude from its licensure
requirement operators who accept
interstate off-track wagers under
the IHA and operators who accept
wagers on games of skill that ‘are
not regarded as gambling under an
applicable provision of State or
Federal law in effect’, when the Bill
is enacted. However, the exception
for skill game operators would be
qualified by providing that those
choosing not to obtain a license
would not be able to rely on
Subchapter V as validating the
legality of their games.
The Bills would provide a
defense to prosecution or an
enforcement action if the activity
at issue is authorized and has been
lawfully done under Subchapter V.
The Bills would provide that the
Wire Act and the UIGEA do not
apply to wagers occurring
pursuant to a license issued under
Subchapter V. The Menendez Bill
would also provide that the Wire
Act and the UIGEA do not apply
to wagers permitted under the
IHA.
The Bills would require - to be
eligible for licensure - the
determination after ‘a background
check and investigation, that the
applicant, and any person deemed
to be in control of the applicant, is
suitable for licensing’.
The Bills would require
applicants to establish ‘by clear and
convincing evidence’ that they
meet certain standards, including:
(1) to be of ‘good character,
honesty, and integrity’;
(2) not have ‘prior activities,
reputation, habits, and
associations’ that (a) ‘pose a threat
04
The Bills
would
provide a
regulatory
and licensing
framework in
which the
Secretary of
the Treasury
would issue
licenses to
internet
operators.
However, the
type of
internet
wagering
activities to
be covered
by each Bill is
different
to the public interest or to effective
regulation and control of the
licensed activities’ or (b) ‘create or
enhance the dangers of unsuitable,
unfair, or illegal practices’ of its
licensed activities...; and
(3) be ‘capable of and likely to
conduct’ its business in accordance
with the provisions of the
legislation and any regulations
prescribed under it.
The Bills would deem unsuitable
for a license an applicant
delinquent in filing any applicable
federal or state tax return or in the
payment of any applicable tax.
The Menendez Bill would
disqualify from licensure those that
knowingly accept or have accepted
bets or wagers on sporting events
from persons located in the US in
violation of applicable federal or
state law.
The Menendez Bill would
provide a 90-day period, starting
on the date that applications are
first accepted, during which
applications may not be denied
solely on the basis that an applicant
‘operated an internet game of skill
facility, in interstate or foreign
commerce, in which bets or wagers
were knowingly initiated, received,
or otherwise made by individuals
located in the United States’.
The Menendez Bill would
provide that Section 5382(b) of
Subchapter V (making it unlawful
to operate an internet game of skill
facility without a license) would
not apply for a period of up to two
years if, no later than 90 days after
the Bill is enacted, an operator
provides written notification to the
Secretary of an intent to apply for a
license and, no later than 90 days
from when applications begin to
be accepted, files an application.
The Bills would require licensees
to have ‘appropriate safeguards...to
ensure the individual placing a bet
or wager is physically located in a
jurisdiction’ that under the Frank
Bill ‘permits internet gambling at
the time the bet or wager is placed’
and, under the Menendez Bill, ‘has
not prohibited such bets or wagers’,
as permitted by the Bill.
The Bills would require
operators to take measures to
prevent underage individuals from
wagering. The Frank Bill requires
wagerers to be ‘of legal age as
defined by the law of a state or
tribal area in which the individual
is located when placing a bet or
wager’, while the Menendez Bill
requires a wagerer to be at least 21.
The Bills would make an effort to
respect state and tribal decisions
concerning internet wagering by
allowing them to opt-out, i.e. to
not allow or to limit licensees from
accepting bets or wagers from
people within their jurisdictions.
Tax schemes
All the Bills addressing taxation
would employ a similar taxing
scheme - a fee imposed on
‘deposited funds’, i.e. the amount
players deposit with an internet
gambling operator to fund
gambling activities. Deposited
funds do not reflect ‘churning’
(winnings or losses that move in
and out of accounts).
State activity
Like Congress, some states see
internet gambling as a potential
source of new revenue to help ease
growing budget deficits. State
interest in internet gambling was
energized by the provision in the
UIGEA that excludes intrastate
wagering activities from the
statutory definition of ‘unlawful
internet gambling’ if certain
requirements are met in
connection with the activities.
Florida and California are two
prominent examples.
Florida's proposal
In February 2010, H.B. 1441 - the
Internet Poker Consumer
Protection and Revenue
world online gambling may 2010
USA
Generation Act of 2010 - was
introduced in the Florida
legislature. The Bill would
authorize and tax internet poker
transactions conducted within
Florida. Its opening provisions
express the intent to ‘[e]nsure that
intrastate internet poker is only
offered for play in a manner that is
lawful under the federal [UIGEA]’
and ‘[p]rovide a new source of
revenue that will generate
additional positive economic
benefits to the state’. Florida's
legislative session ended on 30
April 2010 without H.B. 1441
having been enacted. News reports
indicate that Governor Crist is
considering whether to call a
special legislative session - it is
possible the Bill could be
considered during such a session8.
Among the key provisions of
H.B. 1441 are ones that would:
provide a competitive
procurement process to identify
‘internet poker hub operators’ that
would be licensed to offer
intrastate online poker wagering
opportunities;
allow licensed cardroom
operators to provide online poker
wagering opportunities through
licensed internet poker hub
operators;
require that online poker wagers
were placed only by those
physically present in Florida and at
least 21 of age;
require that registered internet
poker players would be protected
from fraud, identity theft, and
similar threats; and
impose various taxes and fees on
licensees. For example, licensed
internet poker hub operators
would ‘pay a tax to the state of 20%
of the monthly gross receipts
derived from the play of intrastate
internet poker’.
Continued consideration of H.B.
1441, however, is complicated by
the gaming compact between the
Seminole Tribe (‘the Tribe’) and
world online gambling may 2010
the State, authorized by Florida's
legislature in April 2010. The
compact provides that if the State
authorizes internet gambling and
there is a 5% drop in the Tribe's
gambling revenue compared to the
previous 12-month period, the
Tribe is excused from making its
guaranteed revenue share payment
to the State9.
Rumblings in California
Although no Bill that would
authorize, license, and tax internet
gambling activities has yet been
introduced during California's
current legislative session, at least
one is expected.
On 9 February 2010, the
California Senate's Committee on
Governmental Organization held a
hearing on internet gambling.
Testimony was heard from 35
witnesses who addressed issues
related to internet gambling in
general, and the possibility of
authorizing internet gambling in
California in particular10.
In April 2010, it was reported that
Senator Wright, relying on the
UIGEA's exception, was poised to
introduce a Bill that would
authorize, license, and tax internet
poker transactions conducted
wholly within California11. While
the Bill has not yet been
introduced, Senator Wright told
participants of the 12 May 2010
Global iGaming Summit & Expo
that he expects to introduce a Bill
shortly12.
California's interest in the new
revenue that would be generated
by licensure of internet poker is
complicated by the interests of the
State's Tribes. If Senator Wright's
Bill or a similar Bill is introduced,
the Tribes will likely meet it with
resistance. If a Bill were enacted
and a court concluded that it
allowed competition with Tribes
for gambling revenues in violation
of state-tribal gaming compacts,
California could lose millions of
dollars in annual revenue share
payments made by the tribes13.
Conclusion
The internet gambling industry is
closely tracking the recent
explosion of legislation that would,
in some form, regulate internet
gambling in the US, whether at
federal or state level. While there is
no certainty that the various
barriers to enactment will be able
to be hurdled in the near term,
there is hope that new
opportunities will eventually be
available in the United States for
the internet gambling industry.
Linda J. Shorey Partner
Anthony R. Holtzman Associate
Robert A. Lawton Associate
K&L Gates
linda.shorey@klgates.com
anthony.holtzman@klgates.com
robert.lawton@klgates.com
1. 31 U.S.C. §§5361-5367.
2. 31 U.S.C. §5362(10)(B) & (C).
3. See www.house.gov/apps/list/hearing/
financialsvcs_dem/hr_112409.shtml
4. See http://waysandmeans.house.gov/
press/PRArticle.aspx?NewsID=11178
5. 28 U.S.C. §3702.
6. 15 U.S.C. §§3001-3007.
7. 18 U.S.C. §1084.
8. See Rule 10.11(b)(2)-(4) of the Florida
House Rules, available at
www.jaxdailyrecord.com/showstory.php?
Story_id=530944 and
www.theledger.com/article/20100514/E
DIT01/5145009?Title=SpecialLegislative-Session-Override-Politics-ofMoment
9. See Gaming Compact Between the
Seminole Tribe of Florida and the State
of Florida at XI.B.3 (28 April 2010).
10. See Hearing Transcript, available at
www.sen.ca.gov/htbin/testbin/
seninfo_dated?sen.committee.standing.g
o.intrastate_internet_poker_2-9-10
Senator Roderick Wright, the Chairman
of the Committee, presided.
11. See Tony Batt, ‘California State
Senator Preparing Internet Poker Bill’,
Gambling Compliance (26 April 2010).
12. See Andrew Gellaty, ‘New California
Internet Poker Bill To Challenge Tribes’,
Gambling Compliance (13 May 2010).
13. See Hearing Transcript at 79-83
(Lohse Testimony).
05
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