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Interplay Between Federal Laws and State and Tribal Governance in Sports Betting

This is an excerpt from Business of Sports Betting epub, The by Becky Harris,John T. Holden & Gil B. Fried.

Although the federal government lacks the authority to dictate to states how to govern, it does possess the authority to enact laws that may nonetheless affect the way certain activities are operated and regulated. Although many states have added or are looking to add sports betting to their portfolio of legal regulated businesses, they do so in environments in which other gaming activities are already occurring, whether they be pari-mutuel activities, lotteries, Tribal gaming, riverboat gambling, cardrooms, or land-based commercial casino activities. The case in many states may be that there are other stakeholders as well, including stadiums, leagues, and sports franchises, with interests in sports betting. Although states are left to govern themselves and authorize or criminalize activities within the bounds of their own state constitutions and statutes, federal law still serves to limit sports betting to intrastate activity and require the states, when applicable, to cooperate with their Tribal gaming partners in offering sports betting options to the public.

Furthermore, though the process for the legalization and regulation of sports betting is state law specific, there are still some federal regulations that apply, including for example, a federal excise tax on sports betting of 0.25 percent (note that this is applied to handle, not revenue). State-based lotteries and pari-mutuel operators are exempt from this tax; see 26 U.S.C. § 4402. In addition, the Internal Revenue Service (IRS) provides a minimum threshold of $600 for reporting gambling winnings, such that operators of sportsbooks send IRS forms to those customers to report that income and may also have withholding obligations when a substantial payout is involved. These federal requirements, although regulatory in nature, are not at odds with state regulations and accordingly apply to sports betting operations across the country, as do any state-based taxes, compliance obligations, and gaming regulations enacted in a particular jurisdiction.

State Authorization and Regulation of Sports Betting

States interested in authorizing sports betting can and do pursue different legal avenues to permit gambling activity, depending on the particular state’s constitution, current legislation, and policy prerogatives. In some instances, the legislature can pass laws to legalize and create a structure for regulatory oversight of the industry. In other cases, sports betting requires a constitutional amendment and vote of the state citizenry to be approved.

After passing legislation, states generally establish a regulatory framework, either by creating a new agency or designating an existing state agency to handle the regulation, licensure, and oversight of the new industry. The regulatory framework establishes the qualifications required for operating sportsbooks and where the conduct of sports betting will be permitted (whether physically or in the online space, and what the geographic limitations will be). Whether the activities are operated by lottery or by private business, a structure is put in place whereby an arm of the state’s executive branch (in some cases, a gaming commission) promulgates rules and regulates the industry. Rules generally set forth the licensing requirements for operators and vendors, taxing and other reporting requirements, and all other details necessary for those operating the commercial enterprise to conduct their business accordingly. Regulations governing sports betting are state based and established in accordance with the respective state’s Administrative Procedures Act requirements, which may include a certain manner of providing notice to interested parties, a comment period, and other statutory and judicial mandates ensuring that the rules are both procedurally and substantively lawful. Because the legislature provides the authorization, any and all rules promulgated by the regulatory body as well as that body’s decisions in furtherance of the task of overseeing and regulating the industry must comply with the legislation. State regulatory agencies are entrusted to implement rules, forms, and policies that are in line with the statutory authorization granted to them and are restricted to act within the contours of those laws.

Thirty-eight states, Washington, D.C., and Puerto Rico have set forth varying regulatory structures, each determined to be appropriate for the jurisdiction’s goals and purposes in authorizing the activity. Some jurisdictions may have authorized third-party vendors running state-offered sports betting via the lottery, whereas others license existing racetracks and brick-and-mortar casinos, others permit online sportsbooks tethered to existing physical locations, and still others dictate no in-person requirements at all. Those tasked with creating the applicable laws and rules have to consider whether to limit the number of licenses made available, to whom licenses are made available, the fees and taxes associated with licensure, and whether (and to what extent) an operator granted a license may operate multiple skins (sports betting brands) pursuant to a single license.

In addition, certain limitations on advertising and types of bets may be found in one particular jurisdiction but not another. The business of sports betting is incredibly state specific. For example, New Jersey has an in-state collegiate ban, such that sportsbook operators cannot allow bettors in New Jersey to bet on New Jersey collegiate sports.

Tribal Operation of Sports Betting

Many states are home to federally recognized self-governed Native American tribes. Tribes determine their own form of government, pass laws, have their own court systems, create their own gaming regulatory structures, and maintain police departments. A primary goal of IGRA is “to promote tribal economic development, tribal self-sufficiency, and strong tribal government” (25 U.S.C. § 2701(4)).

Tribal Compacts governing sports betting are subject to two overarching requirements:

• The Compact must conform to IGRA.
• Sports betting must be lawful in the state in which the tribe will offer it.

IGRA requires very particular steps to be taken toward the approval of a Compact, even prior to its submission to the Secretary of the Interior for review and approval. The governing body of the tribe must pass an ordinance or resolution to engage in the sports betting activity, which must meet certain requirements and then be approved by the chair of the National Indian Gaming Commission, at which point the tribe requests that the state negotiate a Compact governing the sports betting activity (25 U.S.C. § 2701(d)).

As a result of the passage of IGRA, opportunities may arise for those in the business of sports betting to conduct business with tribes. As explained previously, Tribal operations of sports betting, a type of Class III gaming, must be authorized by virtue of a Compact with the state.

If a Compact is approved by the secretary of the interior, the tribe may wish to enter into a management contract with an existing sportsbook operator. IGRA requires the approval of all management contracts by the chair of the National Indian Gaming Commission, with review including an investigation to ensure the contract complies with IGRA and furthers its intent, as well as to determine the suitability of the manager and its employees (25 U.S.C. § 2710(d)). Management contracts that are not approved are void (25 U.S.C. § 2710(d)).

Thus, a tribe authorized by Compact to operate sports betting generally enjoys the right to regulate such gaming activity on its Indian lands—in accordance with and as set forth by IGRA. Despite the fact that most state regulations may not apply to activities on Tribal lands, tribes are still bound by federal law, including the Wire Act.

More Excerpts From Business of Sports Betting epub

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