The landscape of Tennessee sports betting is undergoing significant transformations, with the latest being the approval of the sports betting bill, SB 475, by Governor Bill Lee.
This bill has seen its share of substantial changes recently with the most dramatic among them taxing the total amount of wagers taken, known as the handle, instead of the adjusted gross revenue; being the first such sports betting tax model of its kind.
Handle Tax Unique
Tennessee’s initial sports betting bill called for a 20% tax on adjusted gross revenue, the same tax model used by the rest of the states that currently license sports betting within their borders. But that will change after an amendment recently signed into law by Governor Bill Lee, taking effect in July.
The new tax will be 1.85% of the betting handle which, if implemented when sports betting launched in the Volunteer State back in November 2020, would have generated an estimated $15 million more in revenue.
“It’s a very simple and direct tax, relatively easy to administer, and doesn’t rely on a lot of factors that could change how much the state actually receives,” said Adam Hoffer, Director of Excise Tax Policy at the Tax Foundation, a right-leaning think tank in Washington D.C. said. “If we see this work well in Tennessee, it’s the kind of model that other states could adopt.”
No More Hold Requirement
States that have legalized and licensed online sports betting in the U.S. tax the adjusted gross revenue and not the handle. The adjusted gross revenue is the money remaining after paying out winners and deducting losses for marketing promotions and bonuses.
Sportsbooks are not allowed to indefinitely write off those promos and bonuses but usually, a state will give new operators a year to do so in order to entice customers to sign up. This ultimately benefits both the sportsbook and the state, as the larger customer base derived from the bonuses will translate into long-term revenues for both.
This model has worked across the country but Tennessee had different ideas. The first of which was to impose a mandatory hold of 10% every month. A hold is the amount that a sportsbook will make after paying out the winners.
If a sportsbook in Tennessee doesn’t meet the hold requirement, they are forced to pay a $25,000 fine, and nine of 11 Tennessee books have done exactly that. They could also pay the difference between their hold rate and the 10% but that can become extremely costly and none have opted for that route.
The national hold rate is 7.9% and one way a sportsbook can increase their hold rates is to increase the vig on the favorites and lower the odds on the underdogs.
But some might call that cheating the customer which will often translate into bad blood with the betting public who will either stop betting because the odds are so highly stacked against them or take their business elsewhere.
And by elsewhere we mean the neighboring states that have more customer-friendly odds or the offshore sportsbooks that often have better bonuses and more favorable odds as they must be more attractive to American bettors since online sports betting came into vogue in the United States.
But alas, Tennessee saw the error of its ways and has mercifully done away with the hold rate quota after switching to a tax on the handle and not revenue. And beginning in July, Tennessee will find out if a handle tax makes more sense than the recently departed hold rate requirement.
*Bookmakers Review will continue to monitor this story and update our readers as events unfold.