The National Football League, National Basketball Association, and other professional sports leagues may be able to cash in on the potential legalization of sports betting.

In anticipation of a U.S. Supreme Court ruling that could undo a federal bar against state-sanctioned sports gambling, states are proposing legislation that would pave the way for betting on professional sports in casinos and elsewhere. The NBA and Major League Baseball participated in discussions regarding a bill making it’s way through the Indiana Legislature, Rep. Alan Morrison (R), a sponsor of the House version of the bill, told Bloomberg Tax.

Morrison’s bill, H.B. 1325, would place a 1 percent “integrity fee” on bets that sports gambling operators would be obligated to pay to sports organizations like the NFL.

While 1 percent may seem trivial, the excise fee yields numerous potentially detrimental consequences for the low-profit-margin industry of sports betting. For cash-laden professional leagues, the integrity fee could garner millions in additional revenue.

No state other than Indiana is currently proposing any sort of sports betting fee to be paid to sports leagues. However, Indiana’s inclusion of such a fee could be precedent-setting and may influence ongoing lobbying efforts encouraging similar measures in other states.

Indiana Integrity Fee

Indiana H.B. 1325 would authorize sports wagering throughout the state should the U.S. Supreme Court decide to lift the federal ban in Christie v. National Collegiate Athletic Association. Justices in that case, argued in December 2017, will rule on the legalization of sports betting outside the states of Delaware, Montana, Nevada, and Oregon, where it’s already legal. A decision isn’t expected until the spring.

Under H.B. 1325, sports wagering operators would be obligated to pay the integrity fee to sports governing bodies “at least once per calendar quarter.” Indiana’s Senate proposed similar sports betting legislation (S.B. 405), but it didn’t include a similar fee. The House bill isn’t near finalization and will need to be amended to conform with the Senate measure, but Morrison believes the House text is a great starting point to ensure competitive sports wagering in the state.

Other States

Currently, 11 states—including Indiana, New York, and New Jersey—have introduced legislation that would legalize sports wagering pending a potential change in federal law.

Connecticut, Pennsylvania, and Mississippi have already passed sports gambling legislation, which can only be enforced after federal legalization. Rhode Island Gov. Gina Raimondo (D) proposed Jan. 19 in the state budget that Rhode Island should allow sports betting at two casinos. Hawaii has introduced a bill to study the impact of gaming in the state. The NBA has started similar sports betting conversations with the state of New York.

Written testimony submitted Jan 24. by Dan Spillane, senior vice president and assistant general counsel, League Governance & Policy for the NBA, showed that the NBA is seeking a similar 1 percent integrity fee from New York sports betting operators.

“To compensate leagues for the risk and expense created by betting and the commercial value our product creates for betting operators, we believe it is reasonable for operators to pay each league 1% of the total amount bet on its games,” Spillane said in a written statement.

Domino Effect

The introduction of an integrity fee early on in Indiana’s legislative process could be precedent-setting, Sara Slane, senior vice president of public affairs at the American Gaming Association in Washington, told Bloomberg Tax Jan. 16. “You want to ensure that as other states start adopting legislation, that you have the best possible model,” she said.

If there’s one state that is including an integrity fee, leagues are going to want other states to include the fee as well, Gilbert Brooks, partner at Duane Morris LLP in Cherry Hill, N.J. told Bloomberg Tax. “And they may use whatever enforcement mechanism that is available to try to get everybody to play ball,” he said.

“I think there is no doubt that the leagues will now pursue this concept, especially those willing to engage on this topic such as the NFL, they will have that as part of their lobbying effort in the states where the discussion of legalization is happening,” Dennis Ehling, partner with Blank Rome LLP in Los Angeles, told Bloomberg Tax.

However, Indiana’s House bill is far from being the best, according to American Gaming Association President and CEO Geoff Freeman. “We encourage Indiana to reject this short-sighted, misinformed idea, which simply replaces a failed federal prohibition with bad state policy,” Freeman said in a statement.

Unrealistic and Flawed

Critics of Indiana’s integrity fee warn that the 1 percent fee is flawed and would cripple sports betting operators, especially if such a fee is included in other states’ legislation.

“The biggest problem I see with the Indiana bill is that it is one percent of the handle, not the hold, and that is an astronomical amount of money that makes it unrealistic,” Brooks said.

In a bet, the handle is the total amount of money gambled, while the hold is the percentage of money a casino keeps from a bet. Placing the 1 percent fee on the handle instead of the hold would dramatically increase the amount of money sports operators are paying out to the leagues.

“The best-run sports book in town brings in a little money,” Kate Lowenhar-Fisher, gaming attorney at Dickson Wright LLP in Nevada, told Bloomberg Tax. “The reported win percentage is typically less than 5 percent for the well-run books, and that’s before the casino pays expenses,” she said regarding the Nevada sports betting market, where sports gambling is legal. “To impose a 1 percent tax on handle, which is worse than on the hold, would murder the regulated sports betting market,” Lowenhar-Fisher said.

Per calculations from the American Sports Betting Coalition, under the Indiana House bill, the average $100 sports book bet would break down as follows:

• $95 would be paid to the winner; • $1 would be paid to the gaming organization under the integrity fee; • $0.46 would go to state taxes; and • $0.25 would go towards a federal excise tax. Ultimately, the actual operator would receive $3.29 in revenue.

“If you were to equate the integrity fee to the state of Nevada, that would equate to $48 million a year,” Slane told Bloomberg Tax. “That’s more than the entire budget of the Nevada gaming control board,” she said, which maintains an operating budget near $47 million.

Gambling Influx

Critics of the integrity fee are too narrowly focused on current sports betting profit margins and aren’t optimistic about the potential influx of new gamblers pending sports betting legalization, Sergio Acosta, partner at Hinshaw and Culbertson LLP in Chicago, told Bloomberg Tax. “I think the approach underlying their comments is based on the notion that legalizing sports gambling is a zero sum game. In other words, only people who now bet illegally are those who are going to be betting legally,” said Acosta, who was the former administrator at the Illinois Gaming Board. Currently, sports betting generates $270 million in revenue, but it would jump to over $7.1 billion if sports betting was enacted in brick-and-mortar casinos across all 50 states, according to Eilers & Krejcik Gaming LLC, a California-based market research firm specializing in the global gaming industry.

For that reason, when critics “start talking about the margins and how much profit these operations are going to make, I think they are going to make a lot more profits than the critics are claiming right now,” Acosta said.