With federal online poker regulation off the agenda for the time being, attention has turned to the possibility of interstate compacts. And it’s no surprise that, yet again, Nevada is leading the way
By Tom Washington
Now that talk of an online poker bill moving in Congress has fallen silent, the question for those hoping Harry Reid would kick-start the US egaming market is: what happens next?
No one can really be sure in this topsy-turvy industry, but if we can rely on one thing, it is that the power players will be plotting their next move – this time within the confines of a state-by-state regulatory model.
After supporting a federal approach until this point, it didn’t take long for Nevada’s online gambling proponents to change tack, with the Silver State’s Governor Brian Sandoval calling on the legislature to pass amendments to its interactive poker regulation to allow operators to accept bets from other states.
“In the absence of federal action on this issue, Nevada must continue to lead,” said Sandoval on 16 January. “Other states are moving quickly on this issue and I ask you to pass a bill within 30 days. The promise of these ideas is real. The chance to innovate is exciting,” he added.
The motivations behind his words are clear. Nevada’s limited population – just 2.7m – means only an opportunity to pool liquidity with other states is ever going to see online poker make financial sense. The absence of blanket legislation means its Gaming Commission must now forge individual relationships with newly regulated and regulating states – and that’s where things get complicated.
Implementing Plan B
The provision to allow operators to accept bets from other jurisdictions was, according to former Nevada Gaming Control Board chairman Mark
Lipparelli, discussed as early as plans to adopt regulations were hatched.
“One of the things we had to keep in mind was that without some kind of federal framework, the likelihood was that Nevada and other states would have to create some kind of state-to-state framework for the market to work as efficiently as it could,” he explains.
“I don’t think it will work anywhere close to how a federal framework would have, but in its absence we have to come up with some kind of ability for patrons to cross state lines to play on the same network. As the federal government is struggling to get something done I think the state feels the need to move on.”
He adds that “any and all states” will be interested in entering into multi-state compacts, however he disagrees that Nevada is aiming to be the “ruling state” in this scenario, presiding over other, less progressive states with its much-vaunted gambling regulation. “I don’t think whoever is first will establish the norm.
It would only be in the interest of the various markets that emerge to try to standardise compacts as much as possible, and I think it’s probably too much to ask that any one pair of states becomes the standard model. That’s the problem with not having a federal framework – everyone is going to want to move at their own pace and move with their own interests which will create multiple pathways forward.”
It is not so much a desire by Nevada to create such compacts as much as it is a necessity. Aside from California and perhaps Texas, New York and Florida – all of which have the population to successfully run their own interstate poker games – it would realistically require several states to join forces to produce large enough liquidity pools to match the size of key European markets. Even California’s population of 37 million, for example, is dwarfed by Spain’s at almost 50 million.
Pressure for an interstate framework is also likely to come from large US casino groups with a presence in multiple states, such as Caesars, MGM Resorts and Boyd Gaming.
After all, these operators will have the significant advantage of having common technology and marketing, such as Caesars’ nationally recognised World Series of Poker brand, in order to pool player liquidity. For tribal gaming entities too, entering agreements across state lines could provide the only opportunity for online poker success.
But there are several obstacles standing in the way of this solution. The patchwork of regulation that exists for land-based gambling across the
US means no two states are the same in terms of the types of organisation that manage the industry and which operators are eligible for licensure.
Comparing California with New Jersey, for example, is like comparing chalk and cheese. The former’s gambling landscapes consist of 68 Native American casinos and 90 poker rooms regulated by the California Bureau of Gambling Control, whereas the latter has just 12 licensed operators including four racetracks – all of which are commercial entities. Elsewhere, all gaming is owned and managed solely by the state lottery.
And so the first, and perhaps biggest hurdle will be whether two states can reconcile their licensing and suitability stance. Is one state’s suitability standards better defined, or more vigorously regulated, than another? Who decides if that’s the case?
Furthermore, whether factions within the states in question can agree to any rules set in place, given a racetrack’s revenue may be taxed differently to a casino’s, could also be a complication.
A taxing matter
One area which experts believe will be easier to settle however, is the matter of where any tax revenues would reside, the consensus being that money will stay in the state where the bet has been placed, apportioned to meet the overall tax rate of that jurisdiction. This model would mirror the one deployed by lotteries within interstate games, whereby sales revenue remains in the state in which the ticket is sold.
Bradley Polizzano, a tax lawyer and gaming consultant, says that even if states agree to share revenues based on location of players, there remains an overall benefit to pooling liquidity by substantially increasing the number of players on a given site, and providing a greater variety and quantity of tables to choose from.
However, he also notes that this harder-to-quantify benefit might be worth more to some states than others: “The challenge is figuring out how to distribute the increase in overall benefit so interstate compacting is agreeable to lawmakers and their supporters on all sides of the negotiating table.”
Furthermore, if each state has its own gaming taxation model, operators could be required to apply more than one state’s tax rate to activity taking place on the same online poker table. “Suppose that PokerStars is licensed in both Nevada and New Jersey,” explains Polizzano.
“Nevada’s tax is 6.75% of GGR while the pending New Jersey egaming bill calls for a 10% tax on GGR. If liquidity is pooled between the states, there could be both Nevada players and New Jersey players on the same PokerStars cash game tables. Gaming revenue to PokerStars would be the collected rake for each hand played. The question then becomes: how do the two state’s taxation models apply to each online poker hand played?”
These complications lead many experts to argue that Nevada should take the lead in this process, with one anonymous executive at a leading casino group, who preferred not to be named, saying: “If something goes wrong, who do customers appeal to? It will only work if you have one regulator which everyone concedes to. One state must adjudicate.”
Scarlet Robinson, founder of consultancy Rungood Gaming, who has been working with organisations on the subject of interstate compacts, predicts these issues could see smaller states turning to Nevada and New Jersey (should the Garden State pass its own egaming laws in February) for regulatory guidance and services.
“If a state wants to run certain games but doesn’t want to go through all the trouble of regulation, I think Nevada could offer its regulatory services for some sort of percentage of the GGR. Or, if New Jersey is in the picture, states could have a choice between the two. It might even be an East Coast versus West Coast thing with states in those areas all under one type of regulation.
“The question then becomes how state gaming commissions would enter into an agreement with other states. Nevada could offer its regulatory services to a lottery or a tribe for example – depending who manages gaming in a certain state – and then one of its licensed operators could make agreements with if not the lottery itself then the lottery vendor [to pool liquidity].”
Learning from lotteries
Lottery games have long been played across multiple states. In 2009, the Mega Millions consortium and Multi-State Lottery Association (MUSL) reached an agreement to cross-sell the Mega Millions and Powerball games in US lottery jurisdictions, designed to increase ticket sales and therefore revenues for small states by offering jackpots larger than their lotteries could alone.
Given that several states where lotteries control gaming operations are in the process of passing regulation, such as Illinois and Massachusetts, this system could provide a blueprint for interstate egaming, too. MUSL, which oversees both Powerball and Mega Millions, is a consortium of individual state lotteries.
Should these organisations evolve from draw games into wider games such as poker, a similar association would perhaps need to be formed in order to oversee any compact-type agreements, be they between state lotteries, or where the lottery is privately managed, between the technology suppliers, in order to pool liquidity.
“One scenario [for compacts to start forming] is if MUSL or a different consortium of lotteries got together to create interstate poker tournaments with a split prize pot,” explains Robinson.
“So, if the Illinois Lottery wants to connect with the Pennsylvania Lottery for poker tournaments, all the players would pay a set amount into one prize pool and that would be distributed accordingly. Just like a Powerball or Mega Millions.”
Illinois’ lottery superintendent Michael Jones says lotteries are a “good indication” that states can successfully combine to improve revenue and profitability, however he concedes that the organisation is having to “fully educate” itself in the mechanics of the opportunity before proceeding.
“In theory it is the same as when Lotto was first introduced in the US, with large states joining with other, smaller jurisdictions to build bigger prize pools and generate more ticket sales. But I would think that it is one of the many things people must educate themselves around egaming – we are creating a brave new world here.”
Delaware’s Gaming Competitiveness Act of 2012 meanwhile puts its lottery in complete control of all gambling with the exception of horseracing. Vernon Kirk, director of the Delaware Lottery, says the state has considered creating interstate compacts, and will continue to do so given its population is less than one million people.
“We will consider compacts with any jurisdiction in which online gaming has been determined to be legal and is not inconsistent with federal law,” he says.
“If it is determined to be legal in those jurisdictions, then yes, I think it will be a smoother process, especially for those states that operate internet gaming through their lotteries because we all have history with each other. We can certainly take note of the existing infrastructures and their associated management that are already in place in such organisations as MUSL.”
Another question that is likely to arise is the role the federal government would play in the scenario of state compacts and whether it would see fit to intervene. By its very nature the internet is an interstate business, which implies the federal government would enforce some degree of oversight.
The message from those spoken to for this article, however, is that this is purely a states’ rights issue.
As Lipparelli points out: “If poker is not covered by the Wire Act, then under what federal law would the government want to take up action against a pair of states that have decided to join forces? How is that different to any other internet business? And if they do want to intervene, maybe they should take up that federal online poker bill.”
No matter how strong the arguments for interstate compacts become, and how close agreements come to forming, there will no doubt remain a desire in certain circles for a federal law to scupper its progress.
Jan Jones, Caesars’ executive vice president of communications and government relations, told eGR NA in November that given the interstate nature of the internet, “federal legislation is the only way to deal with crucial internet gambling considerations – effecting prohibitions, enforcing laws to deal with cross border issues, and protecting consumers”.
So, while the interest in creating compacts is strong, not least from Nevada and progressive state lotteries, there remain more questions than answers. Yet for this industry to truly flourish as other ecommerce businesses have done over the past 10 years, crossing state lines is absolutely necessary.