The Taxation of Online Sports Betting in North Carolina
On March 28, 2023, North Carolina legislators voted in favor of House Bill 347, which would allow online sports gambling in North Carolina. Governor Roy Cooper has already pledged to sign it into law if passed by the Senate. Many celebrate this successful vote, given that several neighboring states already allow these gambling activities, and online sports gambling is legalized in most parts of the country.
Currently, sports fans can only legally gamble at tribal casinos located in the western part of the state. In recent years, online sports gambling has become increasingly popular. North Carolinians could download apps such as DraftKings and FanDuel Sportsbook, but location-tracking software within the apps disallow users to place bets while they are physically located in North Carolina. With this bill’s passing, sports fanatics in North Carolina will now be able to gamble through these online platforms and apps.
How will sports books be taxed in North Carolina for online gambling service providers?
As part of this legislation, online gambling service providers will be taxed by North Carolina. Specifically, North Carolina will collect a $1 million licensing fee for each online gambling provider (i.e., FanDuel, DraftKings, etc.). Furthermore, the state will collect a 14% privilege tax that will be levied on the online gambling service providers on net gambling revenues after the winnings. For example, if an online gambling site collects $100 million in wagers in North Carolina, but they pay out $90 million in gambling winnings, then the net gambling revenues to the online gambling site is $10 million. The online gambling service provider would then be subject to the 14% privilege tax on the $10 million net earnings, yielding $1.4 million in additional tax revenues.
However, as part of House Bill 347, the state allows unlimited deductions for the cash value of the bonus or promotional credits through 2024, which are then phased out through 2026. We often hear about these promotional bets in advertisements. For example, at the time of this article, DraftKings advertises that for first-time users, placing a $5 bet will pay out $150 in bonus bets. Consider a new user who deposits $200 in their account. In 2024, if they lose their $200 and the $150 bonus bets, then only $50 of DraftKings’s income will be subject to the 14% privilege tax. Meanwhile, in 2027, all $200 will be subject to the 14% privilege tax.
So what are the overall tax benefits for North Carolina?
The benefits for the state could be substantial over the long term. For example, the privilege tax is projected to provide $42.6 million in North Carolina tax revenues starting in 2027-28. However, in the early years, this number is expected to be much lower due to the deductions for bonus and promotional credits: $13.2 million in 2023-24, $22.2 million in 2024-25, and $31.4 million in 2025-26.
How will the tax proceeds be used?
Even the lowest projected year estimate of $13.2 million in 2023-24, would bring in nontrivial additional revenue sources. Therefore many may be curious about how the funds will be apportioned. We summarize the projected allocation below as follows:
|NC Department of Health and Human Services||$2,000,000||Gambling addiction education and treatment programs|
|NC Division of Parks and Recreation||$1,000,000||$10,000 grants per county for youth sports equipment and facilities upgrades|
|Select NC Universities (ECSU, FSSU, NC A&T, NNCU, UNCA, UNCP, & WSSU)||$2,100,000||$300,000 to each university to support collegiate athletics departments|
|NC Outdoor Heritage Advisory Council||$1,000,000||$5,000 grants per sports team per county needing assistance for travel; $25,000 to attract state, regional, and national sporting events, tournaments, and programs for non-professional athletes|
After this $6.1 million is allocated, the remaining tax revenues will be divided – with 10% going to the selected UNC System institutions, 30% to the North Carolina Major Events, Games, and Attractions Fund, and 60% to the General Fund.
How is sports betting taxed for individuals engaging in wagering?
This bill does not change how sports wagering is taxed for individuals. However, the law provides easier access to sports gambling, and therefore, more North Carolinians might be more likely to engage in sports wagering. Sports enthusiasts and those interested in wagering will benefit from understanding how gambling will affect their tax bill.
In North Carolina, gambling winnings are, and have always been, taxable both at the state and federal level. Therefore, individuals engaging in sports betting will need to keep track of their winnings. Fortunately, most online wagering service providers will send individuals a tax document summarizing gambling winnings if they exceed $600 per year. It is important to note that all gambling winnings, like winning your Fantasy Football league, are subject to tax – even if the amount is less than $600. Gamblers will also want to keep track of their losses because gambling losses can sometimes reduce taxes. Importantly, all gambling winnings are reported as taxable income. For example, if a gambler has winnings totaling $10,000 and losing wagers totaling $4,000, they do not pay tax on the net winnings of $6,000 – rather they will report “Other Income” of $10,000 that is taxable, and the gambling losses will only provide a tax benefit if the individual itemizes their deductions. Even if the individual itemizes, gambling losses totaling more than gambling winnings are not deductible. Therefore, if the numbers from the above example were reversed and the gambler loses $10,000 and wins $4,000, they would report Other Income of $4,000 – and would be able to deduct only $4,000 as an itemized deduction.
Losses in excess of winnings also cannot carry forward to future years. Another thing to keep in mind is that gamblers cannot subtract the cost of gambling from the winnings. For example, if you bet $100 and then win $600, the entire $600 is the taxable income (not the excess of the $500 over the original bet).
A best practice for gamblers is to keep detailed records or logs of gambling activities, such as the date and time of gambling activities and the amounts of wagers and wins/losses. Online sports gambling apps may make this easier, as they can provide records of a gambler’s history of wagers. There is no benefit in keeping records of travel or other gambling-related expenses, such as fees for bets, as gamblers generally cannot deduct these expenses unless they are professional gamblers. Also, for each win, the gambler may want to set aside some money for taxes, as online sports gambling providers may not withhold income taxes from winnings.
Sports gambling is already legal in North Carolina at in-person sports books, and it is pervasively available online around the country. Notably, online sports betting is not a matter of traditional political lines, as we have seen both red and blue states alike legalize it in recent years. Even a traditionally conservative state like Texas is considering legislation allowing it. House Bill 347 would allow the state of North Carolina to capitalize on these tax revenues.
For example, illegal gambling revenues are generally not reported and therefore do not generate tax revenues. However, House Bill 347 will formally tax these revenues for operators and gamblers. In terms of the operators, they will pay a tax rate of 14%, which is well above North Carolina’s current 2.5% corporate income tax rate. The gamblers’ net income from winnings will also be subject to the current individual state income tax rate of 4.75%. These are all tax revenues generally lost when online sports gambling is not legalized.
Opponents of this bill are quick to point out the implicit costs associated with gambling addiction. While the bill sets aside $2 million per year to help address gambling addiction, this may be a small number compared to the underlying costs of gambling addictions. Furthermore, the $42.6 million in tax revenues is less than 2% of the $29.7 billion state budget, leading one to question whether the bill provides enough benefits to offset the costs. While most of the states that have legalized online sports betting impose a privilege tax near the 14% suggested by North Carolina, others, like New Hampshire (51%), New York (51%), and Delaware (50%), are much higher. Thus, some may question whether a higher tax rate would be more beneficial.
Despite some of the drawbacks, online sports gambling is a very popular activity. Given the legalization of other gambling activities like the lottery, the widespread legalization of online sports gambling in many states across the country, and the inherent benefits that greater tax revenues will afford, this move by North Carolina legislators appears warranted.