Virginia lawmakers consider restoring part of tax deduction for sports betting apps

When Virginia stopped letting sports betting companies deduct free-bet promotions from their taxable revenue last year, the state saw a significant bump in tax dollars.

The industry wasn’t happy with the change, arguing policymakers were inhibiting the long-term potential of legal betting platforms by making it harder to attract new bettors and keep existing ones. That pushback led to legislation being taken up this year that would restore the tax deduction for free-bet promos while capping it at 1.75% of total wagers.

“We are not here asking for all of our promotional deductions back,” lobbyist Bea Gonzalez, who represents a group of sports betting companies called the Virginia Sports Betting Alliance, told lawmakers at a committee hearing in January. “We’re asking for a portion of it back.”

The proposal would retain an existing rule allowing the promotions to be deducted from tax liability during a company’s first 12 months of operation in Virginia, a rule meant to give new licensees the same opportunity to establish themselves that the initial wave of sports betting platforms had.

The legislation that would partially restore the tax deduction passed the state Senate 31-7-1, but it was blocked twice by the House of Delegates Appropriations Committee. The fight’s not over yet, however, because the same language was included in the budget plan approved by the Senate. Lawmakers are still negotiating a final budget, meaning there’s still a chance the policy change could be included in the final version.

A billboard in Richmond for DraftKings, one of Virginia’s major sports betting platforms. (Graham Moomaw/Virginia Mercury)

Betting apps use a variety of free-bet bonuses to entice people to gamble on sports, often offering hundreds of dollars worth of bonus bets to new users who make a small initial bet. Many apps use promos and bonuses to encourage gamblers to make riskier parlay bets, promising a refund of sorts if a long-odds wager loses. Parlays are a combination of multiple bets, offering the possibility of higher payouts and a higher likelihood of failure.

Virginia legalized sports betting in 2020, setting a 15% tax rate on adjusted gross revenue. The law initially allowed sports betting companies to deduct any money spent on free-bet promotions from that amount.

“When we first passed the sports betting bill, which I helped write and was very proud of, we had the promotion deduction in order to get players from the illegal market to the current market,” Gonzalez said at the legislative hearing earlier this year.

The Virginia Sports Betting Alliance, which Gonzalez represents, includes FanDuel and DraftKings, the top two sports betting platforms operating in Virginia.

The exemption frustrated some lawmakers, who were surprised to learn some companies were paying almost no state gambling taxes. The state budget approved last year included a provision to close what some legislators considered to be a loophole that essentially meant the state was subsidizing industry efforts to promote sports betting.

At a committee hearing this year, Del. Mark Sickles, D-Fairfax, noted that other states had enacted much higher tax rates on sports betting with no deductibility for free-bet promos.

The big sports betting companies, Sickles said, “really don’t want to pay their 15%.”

After leading last year’s push to end the tax deduction, Sickles has touted the resulting boost to state revenues.

In January 2022, Virginians wagered a total of $485.5 million through licensed sportsbooks, according to monthly reports from the Virginia Lottery. The $18.2 million in adjusted gross revenues that month produced $2.8 million in tax revenue for the state.

In the same month this year, total wagers clocked in at $513.1 million, a 6% increase from 2022 without the free-bet deduction, which translated to $42.1 million in adjusted gross revenues and about $6.3 million in taxes.

State officials estimated that the partial restoration of the tax deduction would cost the state about $12.6 million in annual tax revenue while noting that sports betting revenue is running well ahead of projections.

Through January, the state had collected nearly $44.8 million in sports betting taxes for the fiscal year that ends July 1.