Colorado Sports Betting First to Phase Out Tax Deductions on Promos

Colorado has become the first legal sports betting state to phase out tax deductions on promos for sports betting operators. The state legislature has recently passed State House Bill 22-1402, which will bring more tax revenue from sports betting.

The measure has already been sent to the governor’s desk for his consideration.

If Gov. Jared Polis signs this into law, Colorado sportsbook operators will no longer be able to deduct promotional and other expenses from their revenues.

The legislative move comes amid a crucial time when Colorado sports betting enters the summer slump – a period between April and August with a slower US sports calendar.

The bill was sponsored by outgoing House Speaker Alec Garnett and co-sponsored by Sen. Chris Hansen.

Why Do We Have the New Colorado Sports Betting Law?

Since its 2020 launch, Colorado gambling laws have allowed the operators to deduct the cost of promotions and bonuses. Considering an already moderate state tax of 10%, the allowance has resulted in lower tax revenues.

Those revenues will further dip in the coming months, thanks to the summer slump.

According to the Colorado Gaming Division, the operators have paid $17.7 million in taxes to the state, which makes up less than 5% of the overall sports betting handle.

Those lawmakers who voted for the new bill saw this as a problem, believing the state should extract more revenue from an underwhelmingly performing industry.

The Centennial State generated only $6.6 million in its first full year of legal wagering, totaling nearly 4% net tax rate.

For comparison, the newly launched New York mobile sports betting industry collected more than $216 million in tax revenue from the industry in its first four months and was the fastest state to reach 5 billion dollars in handle.

What’s in New CO Sports Betting Bill?

However, HB 22-1402 seeks to address the issue of CO sports betting in a phased manner. The state legislature passed the bill on May 10, and Gov. Jared Polis has 30 days to sign it into law.

The new legislation seeks to limit the total amount of free bets that may be deducted on and after Jan. 1, 2023, with a view to calculating the net sports wagering proceeds from the operator (retail or mobile).

The bill will phase out deductions gradually each year over a three-year period. By the third year (July 1, 2026, onward), the Centennial State will only be able to deduct 1.75% of the total sports betting handle for marketing and promos. The law will apply to both retail and mobile operators.

From the sports betting launch in May 2020 through March 2022, promotions and bonuses accounted for nearly 3.2% of Colorado sports betting handle.

However, as the market matures, promos spending traditionally declines in the market.

Colorado Tax Revenues Increase YOY

Colorado sports betting has also shrunk to more than 22% as April kicked off the summer slump for the US sports betting industry.

According to the report released Friday by the Colorado Department of Revenue, the Centennial State’s sportsbooks combined a total handle of $392.3 million, down 22.4% from March’s $505.6 million total.

Colorado’s sports betting had witnessed the second-highest handle in March.

Colorado sports betting, which is ranked sixth so far among the states that released their April numbers, collected $22.6 million in gross revenue from the total bets in the month. It represented a 28.5% increase from $17.6 million reported in April 2021.

However, it was a sharp decline (20%) from March’s $28.2 million.

Promos and federal taxes further reduced CO sportsbooks’ net sports wagering proceeds to $11.5 million.

It translated into just $1.2 million in state tax, which was a slight increase from $1.08 million in the sports betting tax during the same period last year.

Colorado is the first state to legalize this kind of bill. However, some industry analysts believe many other legal states will try to bring similar legislation to increase sports betting revenue from the industry.