States stand to lose dollars if Wire Act opinion sticks

Wire Act Opinion Could Strip Education, Social Services In Sports Betting States

Wire Act

Nearly two weeks ago, a new Wire Act opinion surfaced from the Department of Justice’s Office of Legal Counsel, potentially shaking the foundation of modern gaming.

The crux of the opinion is that the DOJ apparently now believes 18 U.S.C. § 1804 — a provision of the Wire Act — prohibits all forms of gambling that use a wire transmission (e.g., the internet) to allow a “recipient to receive money or credit as a result of bets or wagers,” and/or that provide “information assisting in the placing of bets or wagers.”

This essentially could mean the DOJ finds all forms of internet gambling illegal — even wagers that do not cross state lines and are legal under the laws of the state in which the gambling took place.

It’s just one (Wire Act) opinion

An important caveat is that the DOJ is not the final arbiter in interpreting federal statutes. That privilege lies with the federal courts.

As Mark Hichar explained to Legal Sports Report in December, multiple federal circuit courts already interpreted § 1804 as only pertaining to sports betting. That’s much like the DOJ’s own guidance issued in 2011, which remained valid until the DOJ’s recent opinion superseded it.

Thus, litigation over the topic is a near certainty.

See you in court

However, the DOJ’s opinion is immediately impactful from both a legal and a pragmatic point of view. Any indication of potential illegality could cause consumers, businesses and/or state legislatures to think twice about their roles in online gaming.

Given the plethora of states legalizing and expanding online gaming, if the DOJ successfully enforces its interpretation of the Wire Act, what impact would this have on state revenues?

Online sports betting

Online sports betting was illegal at the time of the DOJ’s 2011 guidance. The Supreme Court’s overturning of PASPA in 2018 ushered in a new wave of states legalizing sports betting.

Currently, New Jersey, Nevada, West Virginia, and Mississippi have some form of operational online sports wagering system, with many more states hoping to cash in.

Most notably, in 2018 — in less than half a year of operation — the state of New Jersey received over $6.8 million in taxes from online sports and online racing wagers. That money was also used to fund social services.

Daily fantasy sports and intrastate online poker

Two areas with much more uncertainty under the DOJ’s guidance are daily fantasy sports and intrastate online poker.

Daily fantasy sports may be considered games of skill or gambling, depending on the state (and depending on the opinion of the state’s attorney general). If the DOJ attempts to include DFS in its Wire Act guidance, it would impede upon a $3.2 billion industry and directly affect the multitude of states that tax DFS, including Alaska, Delaware, Maine, Mississippi, New Jersey, New York and Pennsylvania.

Additionally, while multistate online poker could well be illegal under the DOJ’s current interpretation of the Wire Act, it’s also possible intrastate online poker could be considered illegal. This would affect states like Nevada, Delaware, New Jersey and Pennsylvania — all of which tax online poker for the general welfare of their states.

Online casinos

Three states currently operate online casino-style gambling within their jurisdictions: Nevada, New Jersey and Delaware. Pennsylvania is also on its way, as it legalized online gambling in 2017 and is expected to begin operations this year.

The data in Delaware and New Jersey is particularly striking.

In Delaware, online gaming (or iGaming) net revenues from the three currently licensed operators:

  • December 2018: $251,280 (up $41,464 year-over-year)
  • November 2018: $209,234 (up $49,477)
  • October 2018: $226,498 (up $16,753)
  • September 2018: $337,012 (up $166,248)

Delaware imposes a revenue-sharing system for these funds, with the state typically receiving 50 percent of net revenues. If the DOJ opinion had been implemented and enforced last year, Delaware’s general fund would have lost $512,000 over the last four months of 2018.

That means directly reducing money for Delaware schools, hospitals and family services, in addition to shuttering a booming industry within the state.

New Jersey’s numbers are even more jarring.

The state collected more than $44 million in taxes from online gaming in 2018, directly funding myriad beneficial programs, including delivering meals to the food-insecure and providing hearing assistance to the elderly.

Online lotteries

Online casinos are not the only entities affected by the DOJ’s opinion: Online lotteries would also be considered illegal. This immediately impacts states operating online lotteries, including New Hampshire, Pennsylvania, Georgia, Kentucky, Illinois and Michigan.

Much like online casino wagering, the fiscal impact of criminalizing online lotteries is staggering.

Michigan’s iLottery, which launched in 2014, has been expanding exponentially since its release. In its first two years of operation, Michigan took in roughly $18.5 million and $48 million in tax revenue, respectively. In its third year, Michigan received more than both of those years combined, taking in roughly $77.9 million in taxes.

Similarly, a spokesman for the Pennsylvania Lottery told Trib Live that he believed the state could receive up to $250 million in new profits from online lotteries, with funds primarily being used to help seniors in the state.

Final thoughts

While the outcome of the DOJ opinion will likely be settled in the courts, the immediate impact is anything but certain.

On Jan. 15, Deputy Attorney General Rod Rosenstein issued a follow-up memo urging the DOJ not to enforce the opinion for at least 90 days, and additional guidance is likely forthcoming. However, if the DOJ continues to attempt to stifle businesses operating pursuant to state law, state budgets and a plethora of social services will undoubtedly suffer.

Joey Connor
- Joey Connor is an attorney at Bloomberg Tax in Washington, D.C., specializing in the taxation of gaming and sports gambling. Joey has presented to attorneys on the Supreme Court's opinion in Murphy v. NCAA and frequently writes articles discussing the tax and fiscal impacts of gaming. Prior to joining Bloomberg, Joey practiced law in Fairfax, Virginia. Joey received his J.D. from Washington & Lee University School of Law and his B.A. from the University of Virginia.