NY sportsbooks limit promos, ask for tax breaks as losses rise

Mobile sports betting exploded when it was first offered in New York in January, with the state quickly becoming the top market for such wagers in the US

But five months in, the business is starting to look a lot like the rest of the country, with operators cutting back on their marketing and promotional offers amid ongoing losses. Giants like DraftKings Inc. and FanDuel, a division of Irish bookmaker Flutter Entertainment Plc, are asking legislators to change the rules to lower their taxes after agreeing to them just last year.

“We simply can’t apply our capital against an irrational investment thesis,” Gary Deutsch, chief financial officer of BetMGM, a joint venture between MGM Resorts International and Entain Plc, said at an investor event in May. “Players would never continue to play if the house always won, and the house cannot continue to play if it’s always going to lose.”

DraftKings logo on an Apple iPhone

Andrew Harrer/Bloomberg

So far, mobile sportsbooks in New York have taken in more than $7.6 billion in bets. The bulk, though, is paid out to winners. It’s mostly the state, not the operators, reaping the benefits.

New York taxes gross gaming revenue from mobile sports wagering at a rate of 51%, among the highest in the country. The average sports-betting tax rate in the US is 19%, according to Morgan Stanley. New Jersey taxes online sports betting at 14.25%, while Pennsylvania charges 36%. New York also includes promotional credits given to players in the calculation of taxes. Many states do that, but it makes the tax bite even higher for operators.

When mobile sports betting went live in New York, companies offered eye-popping promotions to lure users to sign up. The goal was twofold: entice seasoned sports bettors who had been using illegal markets and draw new players to try their hand for the first time.

Free money

Caesars Entertainment Inc. Offered $300 in credit to users who signed up and a deposit match on as much as $3,000. DraftKings gave even odds of winning or losing on bets like either team scoring a point in an NBA game or on top NCAA tournament seed Gonzaga University winning its first round matchup versus the lowest-ranked team.

The incentives were essentially free money, and they worked. More than 1.1 million accounts were created in the first two weeks of legalization, according to GeoComply Solutions Inc.

Since the online sports betting went live, the state has collected more than $275 million in taxes. That mostly goes to fund schools, with some assigned for youth sports and treatments for problem gamblers. New York collected more money in sports wagering revenue in five months than any other state has collected over several years, Governor Kathy Hochul said in a recent press release.

Operators, meanwhile, say they are struggling in the state because of the high tax rate. Adding to the pain, New York taxes “phantom revenue” from promotional credits, according to BetMGM’s Deutsch.

For instance, if a bettor receives and loses a free, $50 promotional bet, it is logged as $50 in gross revenue for the sportsbook, even though no money is changing hands. Taxing that promotion revenue along with gross gaming revenue can make it “untenable to run a business,” the Tax Foundation said in a February report. The research estimated that the effective tax rate as a percentage of actual revenue in New York, including federal tax, could be more than 77%.

The state’s tax structure “significantly hampers our ability to compete with pervasive, offshore online sportsbooks and undercuts one of the core benefits of legalization, bringing bettors into the legal, regulated market,” DraftKings said in a statement.

Fewer promos

Once the glamor of the New York launch faded, operators started to adjust. Caesars, which briefly vaulted to the number one spot in terms of bets in New York in January, announced it would “dramatically curtail” marketing nationwide the following month. The company lost $576 million in its online division in the first quarter.

Customers are seeing the operators’ shift. Whitney Tilson, the founder of Empire Financial Research, which provides analysis and commentary on markets, said he made more than $9,000 by taking advantage of various early promotional offers in New York. But if the state was going live now, the companies wouldn’t be offering such lucrative promotions because the market has changed, the former hedge fund manager said.

Tilson said he keeps a bit of cash in the various sportsbooks in case a new promo catches his eye, but he hasn’t “seen an interesting offer in a month.”

Zack Knab was finishing his senior year at Syracuse University when sports betting launched. He put roughly $100 each into six different sportbooks to capitalize on the various offers, and estimates he was up as much as 400% thanks to first-time promotions. Since then he’s “slowly bit into those profits.”

During the first couple of weeks Knab said he was making three to five bets a day, but he’s now placing just two a week. Sportsbooks are “smarter once you’re in, about not having nearly as high of a payoff or definitely increasing the risks,” Knab said.

Market leaders

The New York market is starting to look like the rest of the US in terms of market share, with industry leaders FanDuel and DraftKings capturing the most bets.

The state has maintained the No. 1 position nationally every month since its launch, with total monthly wagers continuing to top $1 billion, according to the latest data from state gaming authorities and Legal Sports Report, a website that tracks legal betting in the US

Even so, BetMGM made a concerted decision to pull back its pursuit of players in New York because of the tax environment.

Flutter, the Irish bookmaker, touted a successful launch in the Empire State, but said it’s seeing signs that competitors are scaling back their initial customer offers. The company said in March that given the current tax environment, the period of early aggressive spending is almost over.

“We hope policy makers in New York recognize that while the state benefited from an initial period of heavy investment amongst operators, such investment is not sustainable beyond a few weeks,” Flutter Chief Executive Officer Peter Jackson said during a March investor call.

Joe Addabbo, the New York state senator who chairs the Senate’s Racing, Gaming and Wagering Committee, said the operators were well aware of the taxes when they competed for licenses last year. “That was something that they always knew about,” he said in an interview.

That said, he thinks legislators will discuss changing the rate, along with other tweaks such as whether promotional credits are counted as revenue and whether there should be more operators. That discussion won’t happen until legislators convene for next year’s budget, he said.

“They were all full of fire right out the gate,” Addabbo said of the mobile-betting operators. “You knew they were investing a lot of money, some maybe over-the-top money.”

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