MA Has Strict Promo Tax Write-Off Policy. What Do Other States Do?

The majority of concerns regarding Massachusetts online sports betting were addressed prior to the launch on March 10th.

However, it was not until March 23 that one highly significant question was finally resolved.

Sportsbook apps in Massachusetts are not permitted to deduct promotional credits from their taxes.

From 2018 to early 2022, the legalization of sports betting in several states led to a decrease in potential tax revenue due to sportsbook promotional write-offs. To address this issue and prevent further losses in tax revenue, the 2022 markets initiated measures to restrict promotional write-offs. Concurrently, established markets also started reevaluating their policies in response to this concern.

Sportsbooks can deduct bonus credits given to customers from their taxable revenue through promotional write-offs. To illustrate, if a sportsbook generated $100,000 in taxable revenue and granted $40,000 in promotional credits, its taxable revenue would decrease to $60,000.

In January 2023, the Massachusetts Gaming Commission conducted a vote and established its authority to regulate Massachusetts online sportsbooks. During this vote, they also agreed to adhere to the existing statute, which prohibits sportsbooks from deducting promotional credits. The MGC officially reaffirmed this decision on March 23.

What are promo write-offs and why do they matter?

By that amount, promotional credits can effectively reduce taxable revenue.

During the previous March Madness month in Colorado, the implementation of promotional write-offs resulted in a decrease in taxable revenue from $28.2 million to $13 million, representing a decrease of approximately 43%.

The difference between $56 million and $87 million in taxes paid to the state could hinge on the promotional write-offs in the revenue projections of the Play MA.

Nevertheless, promotional credits play a crucial role in the launch strategies of sportsbooks as they enable customers to amplify their wagering potential with minimal investments.

Bloomberg illustrates the scenario of a bettor utilizing their promotional credits to place a bet, subsequently losing it. As Bloomberg explains, this outcome leads to a rise in the sportsbook’s gross revenue, despite no actual monetary transaction taking place.

Sportsbooks that are unable to deduct promotional credits are subject to taxes on the funds they have given to customers, which are later returned to them as lost bets. This further diminishes the profit margin of a business that relies on substantial volume to compensate for its narrow profit margins.

Other states have devised their own strategies to tackle this challenge, offering potential solutions that Massachusetts can adopt.

Colorado

In May 2020, when Colorado sportsbooks became operational, the state permitted them to offer unlimited promotional credits. Consequently, this led to a significant decrease in potential tax revenue for several months.

Colorado passed a bill in May 2022 that aimed to decrease the permissible write-offs for sportsbooks. Starting from January 1, 2023, sportsbooks in Colorado were limited to writing off only 2.5% of their handle as promotional credits. This percentage will progressively decrease annually until July 2026, when sportsbooks will be restricted to writing off just 1.75% of their handle as promotional credits.

After observing the ongoing consequences of unlimited promotional write-offs on tax revenue, an established sports betting market has decided to modify its promotional write-offs policy.

Ohio

In January 2023, Ohio witnessed the launch of its sportsbooks. However, it will not permit these sportsbooks to deduct promotional credits until the year 2027. Following this, Ohio plans to gradually introduce promotional write-offs. From 2027 onwards, sportsbooks will be allowed to deduct 10% of their net revenue as promotional credits, while from 2031 onwards, they can deduct 20%.

Typically, sportsbook markets tend to gradually reduce promotional write-offs instead of implementing new ones. However, Ohio stands out by adopting a strategy that prioritizes maximizing its sports betting tax revenue initially and gradually decreasing it over time.

This strategy is advantageous for the state, as it allows Ohio to generate a consistent flow of tax revenue from sportsbooks’ stable and substantial customer bases, even when customer growth levels off. However, this may not be ideal for sportsbooks, as they heavily depend on promotional activities during the initial year of a state’s sports betting launch.

Virginia

In January 2021, Virginia introduced sports betting, granting sportsbooks the ability to deduct promotional credits. However, as taxable revenue experienced a significant decline, lawmakers decided to modify the state’s policy regarding promotional write-offs. Through an amendment to the 2022 budget, Virginia implemented a prohibition on sportsbooks deducting tax revenue beyond the initial 12 months of their operation.

In 2023, Virginia might experience another change. SB 1142 proposes that sportsbooks can once again deduct promotional credits, but with a limit of 1.75% of monthly handle. This recognizes the advantages of permitting sportsbooks to deduct a portion of their promotional credits, while ensuring that it does not deplete the taxable revenue pool.

Virginia’s inefficient allocation of legislative resources is evident in its hasty attempt to handle promotional write-offs and subsequent need to correct its overreaction. Alternating between the most favorable outcome for sportsbooks and the state is an ineffective approach to governance, especially when a reasonable compromise is within reach.

Virginia serves as a prime example of mishandling the issue of promotional write-offs.

Best sportsbook promotional write-offs model

Massachusetts should look to Ohio as the ultimate model for implementing promotional write-offs. Just like Ohio, Massachusetts will eventually need to adopt promotional write-offs in its structure.

Regardless of the approach Massachusetts takes, its decision will mirror Ohio’s policy on promotional write-offs. Massachusetts has already introduced online and retail sports betting, which also includes sportsbook promotions. Therefore, regardless of the chosen date, Ohio sportsbooks will receive tax relief.

Massachusetts is expected to follow the example of previous states and permit promotional write-offs in the future. It remains to be seen whether the limitations will be determined by a percentage of handle or gross revenue.

Massachusetts sportsbooks will face a more challenging period leading up to the eventual write-off limits compared to previous years’ launches.