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

Most questions surrounding Massachusetts online sports betting were answered ahead of the March 10 launch.

One highly consequential question, however, was only answered on March 23.

Massachusetts will not allow sportsbook apps to write off their promotional credits when filing their taxes.

Sportsbook promotional write-offs have been cutting potential tax revenue in many of the states that legalized sports betting from 2018 to early 2022. The 2022 markets began to clamp down on promotional write-offs to prevent losses in tax revenue. Around the same time, established markets began to revisit these policies.

Promotional write-offs allow sportsbooks to deduct bonus credits they award to customers from the pool of taxable revenue. For example: If a sportsbook made $100,000 in taxable revenue and awarded $40,000 in promotional credits, its taxable revenue would be $60,000.

The Massachusetts Gaming Commission took a vote in January 2023 that determined the MGC has the authority to tell Massachusetts online sportsbooks what to do regarding them. At that time, they also decided to follow the status quo of what the statute suggested — that sportsbooks cannot write off promo credits. The MGC confirmed that decision March 23.

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

Promotional credits really can cut taxable revenue by that amount.

In Colorado’s previous March Madness month, promotional write-offs reduced taxable revenue from $28.2 million to $13 million. That’s about a 43% decrease in taxable revenue.

In the Play MA revenue projections, promotional write-offs could mean the difference between $56 million and $87 million in taxes paid to the state.

However, promotional credits are also foundational to sportsbooks’ launch strategies. They increase the amount of money that customers can wager with the same small amount of money.

Bloomberg offers the example of a bettor who places a bet with their promotional credits and loses. According to Bloomberg, that results in an increase in gross revenue for the sportsbook “even though no money is changing hands.”

So, sportsbooks that can’t write promotional credits off get taxed on money that they gave to customers that customers returned to them in the form of lost wagers. It further reduces the profit margin of a business that already depends on high volume to offset its low margins.

Other states have their own ways of addressing this challenge. Their examples model possible solutions for Massachusetts can adopt.

Colorado

When Colorado sportsbooks went live in May 2020, Colorado allowed its sportsbooks to write promotional credits off without limit. This resulted in the near halving of months of potential tax revenue for many months.

In May 2022, Colorado passed a bill to reduce the amount of money that sportsbooks can write off. Beginning on Jan. 1, 2023, Colorado sportsbooks were only able to write 2.5% of their handle off in promotional credits. This amount continues to decrease each year until July 2026. At that point, sportsbooks will only be able to write 1.75% of their handle off in promotional credits.

This is an example of an existing sports betting market adjusting its promotional write-offs policy after seeing the sustained impact of unlimited promotional write-offs to tax revenue.

Ohio

Ohio sportsbooks launched in January 2023. The state will not allow sportsbooks to write promotional credits off until 2027. After that, Ohio will phase promotional write-offs in. Starting in 2027, Ohio will allow sportsbooks to write off 10% of sportsbooks’ net revenue as promotional credits. Starting in 2031, sportsbooks can write off 20%.

Usually, when sportsbook markets address promotional write-offs, they’re phasing write-offs out instead of in. Ohio is unique in its approach of maximizing its sports betting tax revenue up front and reducing its take over time.

This approach makes sense for the state. As customer growth plateaus at expected maturity, Ohio can reap a steady stream of tax revenue from sportsbooks’ reliably large customer bases. It’s a raw deal for sportsbooks, which rely heavily on promotions in the first year of a state’s sports betting launch.

Virginia

When Virginia sports betting went live in January 2021, it allowed sportsbooks to write promotional credits off. After seeing taxable revenue reduced by about half, lawmakers changed the state’s promotional write-off policy. In an amendment to the 2022 budget, Virginia prohibited sportsbooks from writing off tax revenue at all after the first 12 months of a sportsbook’s operation.

In 2023, Virginia could make another reversal. SB 1142 would allow sportsbooks to write promotional credits off again, but cap the amount at 1.75% of monthly handle. This acknowledges the benefits of allowing sportsbooks to write at least some of their promotional credits off without allowing those credits to drain the pool of sportsbooks’ taxable revenue.

Virginia’s scramble to address promotional write-offs then redress its over-correction is a wasteful use of limited legislative resources. Oscillating between the best-case scenario for sportsbooks then the state is a poor way to govern when a reasonable compromise is available.

Virginia is a case study in how not to handle the promotional write-offs issue.

Best sportsbook promotional write-offs model

Structurally, Ohio is the best promotional write-off model for Massachusetts to emulate. Ohio had to allow promotional write-offs over time, as Massachusetts will have to.

No matter how Massachusetts treats the specifics, any decision it makes will resemble Ohio’s promotional write-offs policy. Massachusetts has already launched online and retail sports betting and, thus, Massachusetts sportsbook promos as well. So, any date it chooses will grant some tax relief to Ohio sportsbooks.

Based on previous states’ experiences, Massachusetts will likely choose to allow promotional write-offs at some date in the future. Time will tell whether those limits are based on a percentage of handle or gross revenue.

For Massachusetts sportsbooks, the time between now and the eventual write-off limits will be more trying than launches in previous years.