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Supreme Court Frees States to Legalize and Tax Sports Betting

POSTED ON May 15, 2018
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The U.S. Supreme Court ruled that states may legalize and tax sports betting, finding that a federal law banning such activity violated the 10th Amendment.

The Court's 7-2 decision May 14 in Murphy v. National Collegiate Athletic Association found that the provision of the Professional and Amateur Sports Protection Act (PASPA) prohibiting states from authorizing gambling schemes violates the amendment because it “unequivocally dictates what a state legislature may or may not do.” The court declared the rest of the PASPA void, finding that the constitutional provisions could not be severed from the unconstitutional provisions.

“Congress can regulate sports gambling directly, but if it elects not to do so, each State is free to act on its own,” Justice Samuel A. Alito Jr. wrote in the majority opinion, reversing the decision of the U.S. Court of Appeals for the Third Circuit.

Marc Dunbar of Jones Walker LLP, who is a partner in the firm’s government relations practice group, told Tax Analysts May 14 that an interstate system is needed in light of the ruling and that without one, markets would be inefficient and sophisticated operators could exploit inexperienced state regulators.

“Congress could easily create a system like the Interstate Horseracing Act that allows states to opt in, recognizes the role of the states in policing the market participants, allows the states to create a taxation scenario if they want to, but more importantly, allows for the money to commingle at a national level and the revenues to be split via contract at the national level,” Dunbar continued.

JB Kelly of Cozen O’Connor PC, who is a member in the firm’s state attorneys general practice, said that states would likely move at different speeds to look at permitting various forms of sports betting. Kelly added that this would likely take more time than most people think, but that some states would be looking seriously at the issue almost immediately.

Kelly said that in his view, the states were fully capable of trying out different regulatory schemes. He continued that many states have adopted regulatory schemes for daily fantasy sports in the last couple of years.

“While that isn’t necessarily gaming, it has a measure of protections that could be copied as it relates from a daily fantasy sports contest versus a strict sports betting concept, particularly if there’s an online presence,” Kelly said. “I think that the states are probably going to be in a much better position than the federal government to relay quickly what their consumers want.”

Noting that the legalization of sports gambling is controversial, Alito said that supporters “argue that legalization will produce revenue for the States and critically weaken illegal sports betting operations,” but opponents argue that legalizing sports betting will hook the young on gambling and would corrupt professional and college sports.

Rejecting the NCAA's argument that PASPA was constitutional because it did not compel states to enact legislation, but only prohibited states from enacting new laws, Alito found that the “distinction is empty.”

“The basic principle — that Congress cannot issue direct orders to state legislatures — applies in either event,” Alito continued.

After finding that the provisions of PASPA prohibiting the authorization and licensing of sports gambling by states violated the 10th Amendment, the court determined that Congress would not have enacted the other provisions without the invalid provisions.

The court held that PASPA implemented a coherent federal policy, and severing the unconstitutional provisions would implement “a perverse policy that undermines whatever policy is favored by the people of a State.”

Justice Stephen G. Breyer, who concurred in most of the majority decision, joined Justice Ruth Bader Ginsburg and Justice Sonia Sotomayor in dissenting from the majority’s holding that the provision making state-authorized sports gambling schemes a violation of federal law was also void.

Breyer acknowledged that allowing the provision to stand “would make New Jersey’s victory here mostly Pyrrhic.”

In her dissenting opinion, Ginsburg argued that there was no doubt that “Congress has power to regulate gambling on a nationwide basis, authority Congress exercised in PASPA.” There was “no cause to deploy a wrecking ball destroying the [PASPA] in its entirety,” she said, arguing that the court “wields an ax” to cut down PASPA “instead of using a scalpel to trim the statute.”

Background

Congress passed PASPA in 1992, which made it unlawful for a state to sponsor, operate, advertise, promote, license, or authorize by law sports gambling. The act, 28 U.S.C. section 3702, also prohibited a person from sponsoring, operating, advertising, or promoting sports betting under state law.

After New Jersey voters approved a state constitutional amendment allowing sports gambling, former Gov. Chris Christie signed legislation in 2012 authorizing sports betting at casinos and horse tracks and setting forth a comprehensive regulatory scheme. The NCAA and professional sports leagues challenged the legislation that same year.

Both the Third Circuit and the U.S. District Court for the District of New Jersey held that the New Jersey law was invalid and PASPA was constitutional. However, the Third Circuit noted in the opinion that PASPA prohibited the state only from authorizing gambling or issuing gambling licenses and did not prohibit the state from decriminalizing sports betting. The state appealed the decision to the U.S. Supreme Court, which declined to take the case.

In 2014, New Jersey enacted legislation that repealed all state laws and regulations that had prohibited and regulated sports betting at casinos and horse tracks. The NCAA and the professional leagues filed suit to stop the legislation from going into effect.

After the Third Circuit ruled in 2016 that the 2014 law violated PASPA, New Jersey petitioned for certiorari, arguing that PASPA was unconstitutional. The Court heard oral arguments in December 2017.

State Legislation

At least 14 other states introduced legislation that would legalize some form of sports betting during the 2017 and 2018 legislative sessions, with laws enacted in Mississippi, West Virginia, Pennsylvania, and New York.

Dunbar said some states are in a position to take advantage of the decision immediately, like New Jersey and Mississippi. He continued that other states, including West Virginia and Pennsylvania, still have to figure out issues on the regulatory and taxation side.  

Dunbar said state legislatures may take a shot at legalizing sports betting over the next few months, but because this is an election year, it would be tough to get many more bills across the finish line before the elections. It's possible that three or four more states may try to pass legislation during football season, he added.

Speaking to possible state taxation of sports betting, Dunbar said that policymakers should understand that “at its core, this is a tourist amenity.”

“It’s not necessarily about having a robust gambling market, it’s about having a place people want to go and engage in tourist gambling,” he said. While there could be small direct tax opportunities, such as a handle tax on sports betting, Dunbar said, the indirect economic benefit from the tourism industry of legalizing sports betting would be significant.

In 2017 Mississippi enacted H.B. 967, removing statutory language prohibiting wagers on athletic events by gaming licensees.

Allen Godfrey, executive director of the Mississippi Gaming Commission, said that the commission was “moving forward with regulations and hope to be up and running in a timely manner.” In January Godfrey told Tax Analysts that the commission could potentially have regulations out for public comment and adopted within a few months if the federal law was repealed or declared void.

Connecticut Gov. Dan Malloy (D) issued a statement that he was prepared to call the General Assembly into special session to consider legalizing sports betting in the state. “It is incumbent on us to consider the question of legalized sports betting in a thoughtful way that ensures our approach is responsible, smart, and fully realizes the economic potential that this opportunity provides,” he said.

Connecticut enacted H.B. 6948 in 2017, which required the state’s commissioner of consumer protection to adopt regulations “to regulate wagering on sporting events to the extent permitted by state and federal law” but did not legalize sports betting.