A combination of a low tax rate, high licensing fees and the allowance for promotional deductions would tilt the scales in the North Carolina sports betting market toward the sportsbook operators.
House Bill 347, which currently sits in the Senate Committee on Rules and Operations, levies a 14% privilege tax on online sportsbooks and allows them to deduct promotional credits given to new bettors in decreasing amounts from the proposed launch (Jan. 8, 2024) through Jan. 1, 2027. It also calls for a $1 million licensing fee for all sportsbook applicants.
These decisions about tax-and-fee structure and whether or not to allow promotional deductions make for a delicate balancing act of financial viability for online sportsbooks and sufficient tax revenue for the state.
A below-average tax rate but a high licensing fee strike a fair balance
At 14%, the proposed tax rate for North Carolina sports betting is five percentage points below the national average of 19%.
However, tax rates in the US range significantly from 6.75% in Nevada and Iowa up to 51% in New York and New Hampshire. The tax revenue mode for all legal US markets is 10%, suggesting that while North Carolina sits below the national average, the few outlier states with high tax rates make the average tax rate a poor tool to capture the most common tax rates offered across the country.
In reality, a tax rate between 10%-15% is common in more than half of the states that offer online sports betting.
In this 10%-15% range, all major operators would be enticed to apply for a license in North Carolina, the ninth-largest state in the country by population with 10.7 million people.
North Carolina is posing one of the highest licensing fees in the country. HB 347 allows for up to 12 online commercial sports books to open in the state for $1 million per license. That fee renews every five years.
The only states charging higher licensing fees are Massachusetts ($5 million), Pennsylvania ($10 million) and New York ($25 million, but legislation has been proposed to raise it to $50 million).
The above states offer much higher tax rates than North Carolina, making North Carolina’s combination of a low tax rate and relatively high licensing fees a moderately-priced product for the nation’s sports betting industry.
Promotional deductions factor hugely into short-term revenue for North Carolina
Promotions are deals offered by sportsbooks to attract new customers. These deals come in the form of deposit matches, bonus bets, account credits and other such ways of allowing new bettors to start placing bets while spending little of their own money.
From the proposed Jan. 8, 2024, launch through Jan. 1, 2027, North Carolina’s sports betting bill proposes to allow online operators to deduct these promo offers from their total gross gaming revenue (GGR) – the amount of money the sportsbook brings in after paying out winnings – before reporting that revenue to the state.
In states that allow promo credits, GGR can be cut by as much as 40%-50% through such deductions.
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The basic idea behind allowing promotional deductions is for states to allow operators to get their business off the ground, especially after paying application fees to the state plus the costs incurred in setting up the business infrastructure in the state.
Not all states choose to offer promo deductions. Some states, such as Colorado and Virginia, have changed tact after realizing that promo deductions allowed online operators to deduct too much and pay a minuscule tax rate.
To avoid incurring some of the problems seen in Colorado, North Carolina would phase out promo deductions after the first three years of legal sports betting. The phase-out structure would look like this under HB 347:
- No limit on the amount of promo deductions claimed until Jan. 8, 2025;
- Up to 2.5% of GGR can be claimed in promo deductions until Dec. 31, 2025;
- Up to 2% of GGR can be claimed in promo deductions until Dec. 31, 2026;
- No promo deductions are allowed on or after Jan. 1, 2027.
Fiscal note on HB 347 predicts minimal tax revenue in early going
That number will probably come as a surprise to most North Carolinians following the industry.
It shouldn’t, considering the state wants its online operators to build a clientele and would grant a licensee promotional deductions to help do so. Interested parties should remember that online operators would have to pony up the $1 million application fee just for the privilege of working in the Tar Heel State. That could be up to another $12 million in revenue for the state in the first year.
The aforementioned fiscal note on HB 347, predicts that the state’s tax revenues for the next five fiscal years show a significant bump from FY2023-2024 to FY2024-2025 and then again in the subsequent three years.
|Fiscal Year||FY 2023-2024||FY 2024-2025||FY 2025-2026||FY 2027-2028||FY 2028-2029|
|Estimated Tax Revenue (millions)||$2.9||$22.2||$32.0||$47.6||$61.0|
All factors considered, sportsbook operators have a slight upper hand in the long term
North Carolina’s combination of an operator-friendly tax rate and short-term promo deductions with a high application fee renewed every five years strikes a balance that, while not unfair by any means, gives the sportsbooks the better end of the deal.
In North Carolina’s third fiscal year, lawmakers predict North Carolina will generate $32 million annually in tax revenue. That translates to a per capita tax revenue of roughly $3. To put that in perspective, in its second full year of sports betting, Indiana, with a population of 6.8 million, generated $36.8 million in tax revenue, or $5.80 per capita.
However, lawmakers predict that the North Carolina sports betting market will mature by year five, settling into a steady-state tax income of $61.6 million, or roughly $5.20 per capita.