Sports Betting Integrity Fee

“Integrity” and “gambling” — two terms that just don’t get associated frequently. At least not in the unregulated sports betting market we’ve been operating under for decades. Then again, we live in a Truman Show-like world of alternative facts, so why not straight-laced bookies too?  The reality is that over the last couple of months, “integrity” and sports betting have become inexorably linked in statehouses across the country, although not in the context you might expect. How positive a development that is remains up for heavy debate.

Integrity fees and sports betting legislation

The unlikely proposed marriage has come in the form of a demand — for lack of a better word — by both MLB and the NBA that an “integrity fee” made payable to the leagues be included in all proposed sports betting legislation. In the leagues’ preferred iteration, the integrity fee would be an amount equal to 1 percent of sports betting handle over a given period, which equals about 20 percent of an operator’s revenue. So what’s the purpose of this extortion pay—uh, fee, anyhow? The leagues have argued from the onset — the provision first made an appearance in a proposed Indiana sports betting bill in January — that the funds would go toward a comprehensive monitoring system that would ensure the outcomes of games played under their banner were free of any undue influence from sports betting. Moreover, some pesky questioning by Connecticut lawmakers recently got NBA VP and general counsel Dan Spillane to concede that the fee also represented an “intellectual property right” – aka royalty – paid to the leagues for the right to have their games wagered on.

Integrity fee pros and cons

How do the pros and cons for an integrity fee line up? To begin with, let’s look at the significance of the fact that the discussion is even taking place. While a sore subject for gaming operators and state lawmakers, the introduction of the integrity fee represented a watershed moment in the legalized sports betting conversation. Reading the tea leaves, the sports leagues proposing such a fee sent two distinct messages, both very positive for those looking to see PASPA struck down:
  • The leagues and their legal advisers clearly see a solid likelihood of New Jersey scoring a full victory in Murphy vs. NCAA.
  • The leagues are recognizing – more overtly than ever – that there will subsequently be a potentially lucrative, national sports betting market. Naturally, they want to get their hands on some of it.

Burdensome doesn’t begin to explain it

However, that’s where a lot of the feel-good aspect of things ends. Integrity fees at the proposed 1 percent rate are widely considered a non-starter by many in the gaming industry, considering that prospective sportsbook operators will also have to fork over:
  • Whatever the applicable tax rate on revenue is in the state they operate.
  • A federal excise tax of .25 percent on handle that currently remains unmovable, despite the fact it actually appears to be quite obsolete.
  • The overhead associated with the additional employees required to operate their new sportsbook division.
Unsurprisingly, plenty have already been crying foul. And some lawmakers are simply shutting out the leagues’ request swiftly by powering through and passing legislation with no integrity fee inclusion. Veteran sportsbook operators and bookmakers rightly point out the water is already about chest-high when it comes to them squeaking out an appreciable annual profit. That’s without gift-wrapping millions to the leagues each year under the aforementioned 1 percent rate. And naturally, if the sportsbooks start to get squeezed, the customer is next in line. An even tighter profit margin is sure to result in:
  • Prices on straight bets going up
  • Consumers consequently still seeking out offshore sports betting websites and local bookmakers, i.e. the black market legalized sports betting is supposed to eradicate.

Compromise on the horizon?

Looking ahead, the states and gaming operators may well win some and lose some. In other words, the leagues may get their way in some states’ new sports betting laws and will be left wanting in others. The potential issues that could surface – including competitive disadvantages for sportsbooks operating under different regulations as those within driving distance in a neighboring state – is likely a whole other topic of discussion. However, one of the newest sports betting bills to surface – in Kansas – attempts to begin bridging the divide between a 1 percent proposal and a total goose egg for the leagues. The bill reduces the integrity fee rate to .25 percent of handle, with that amount never to be greater than five percent of actual sports betting revenue for the period being measured. That undeniably represents a significant annual reduction of what operators would owe the leagues. Of course, that’s of little solace to those who don’t feel any fee should apply in the first place —  a death-by-a-thousand-cuts approach, as compared to a single deathblow.