When it comes to sports betting tax rates, Kentucky is taking a page out of New Jersey’s playbook.
The upcoming Kentucky sports betting industry will tax online sportsbooks slightly more than its retail counterparts. House Bill 551, which officially legalized sports betting after Gov. Andy Beshear signed the legislation, taxes online revenue at 14.25% and brick-and-mortar revenue at 9.75%.
The 4.5% difference between online and in-person tax rates is New Jersey’s exact gap between its two tax rates. However, the rates are slightly lower in New Jersey.
New Jersey taxes online sportsbooks at a 13% rate, while brick-and-mortar sportsbooks pay the state 8.5% of revenue. Since the rapid expansion of U.S. sports betting in 2018, New Jersey has been considered the gold standard.
Copying New Jersey is usually a good idea
For several years, New Jersey was the largest sports betting market in the country. That changed when New York launched online sports betting last year.
The Empire State has the fourth largest population in the country. As a result, it became the largest sports betting market.
But on a per capita basis, New Jersey’s numbers are better. The Garden State’s roughly 9.4 million residents are less than half that of New York.
Last month, New York sports betting operators reported $163.6 million in revenue. On the other hand, New Jersey sportsbooks reported $93 million, or about 57% of New York’s numbers.
In other words, mimicking New Jersey’s framework should prove fruitful for Kentucky.
Five other states took similar steps
New Jersey was the first state to implement different tax rates for online and retail betting. But Kentucky is the latest to copy the trend and the first to use the exact gap as New Jersey.
Arizona, Kansas, Louisiana, Massachusetts and New York also tax online operators at a higher rate. Arizona and Kansas have the smallest gap between the rates, while New York has a whopping 41% difference between its 51% online tax rate and 10% figure for retail.
| State | Online Sports Betting Tax Rate | Retail Sports Betting Tax Rate | Difference |
|---|---|---|---|
| Kentucky | 14.25% | 9.75% | 4.5% |
| New Jersey | 13% | 8.5% | 4.5% |
| Arizona | 10% | 8% | 2% |
| Kansas | 8% | 5.5% | 2.5% |
| Louisiana | 15% | 10% | 5% |
| Massachusetts | 20% | 15% | 5% |
| New York | 51% | 10% | 41% |
Why do lawmakers use different tax rates?
A lawmaker hasn’t gone on the record to explain why different tax rates were used. The most logical explanation comes from the overhead costs of the two operations.
Running a brick-and-mortar sportsbook costs the operator more than an online sportsbook. The physical space brings an increased cost to the operation. Sportsbooks need more employees and have a higher cost of electricity and other utilities.
Therefore, brick-and-mortar sportsbooks operate on smaller margins. Consequently, lawmakers tax those books at a lower rate.
Furthermore, gambling operators of all types would prefer a larger sample of bets to work with. The law of large numbers dictates the more bets operators accept, the more likely the result will be closer to the average.
Thus, more bets handled result in a more consistent income stream for the company.
For example, two casinos spread blackjack, but one accepts $50,000 worth of monthly wagers and the other handles $500,000. The property with the larger handle will have more consistent monthly blackjack revenue.
It’s slightly more intricate than that, but that’s the basic premise. And if you compare online sportsbook handle to retail sportsbook handle, online sportsbooks always have the larger figure.
The convenience of online betting translates to a larger handle for operators. Those companies can project their monthly profits more accurately and can handle a slightly higher tax rate. State bettors can also look forward to benefitting from a diverse range of enticing KY online sportsbook promos specifically designed to enhance their betting experience. This will include such top books as DraftKings online sportsbook KY and Bet365 KY Sportsbook.
Regardless of why the difference exists, it’s clear that New Jersey’s model works. Following its lead is a good sign for the future health of Kentucky sports betting.
