State Legislators Are Going To Drive Soon-To-Be Legal Sports Betting Right Back To Offshore Sites And Neighborhood Bookies

The 'integrity fee' is how sports leagues intend to get paid by legalized gambling.

Despite a federal ban on sports betting, Americans will wager nearly $5 billion on the Super Bowl this weekend.

Yes, that is billions with a “B.”

Of the $4.76 billion that the American Gaming Association estimates Americans will bet on the big game, only three percent will take place legally in Nevada — the sole state exempt from the Professional and Amateur Sports Protection Act of 1992 (PASPA) that can offer full single game wagering.  This, of course, means that offshore sportsbooks and local bookies are cashing in.

However, this Super Bowl should be the last big payday for the underground betting market as the United States Supreme Court appears poised to rule that at least part of PASPA is unconstitutional.  Following oral arguments in December in the consolidated cases, Christie v. NCAA and New Jersey Thoroughbred Horsemen’s Association v. NCAA, all signs point to the death of the federal prohibition against state-regulated sports betting by June.

Once PASPA falls, Congress could certainly step in and create a national regulatory framework for sports betting.  But we all know the members of Congress can barely walk and chew gum at the same time.  Agreeing on something as polarizing as sports betting is just not going to happen.

It will be up to individual states to determine if and how they want to regulate, license, and tax sports betting.  Twenty states have already passed or introduced legislation pertaining to sports betting with Pennsylvania, New York, Mississippi, and New Jersey ready to go if SCOTUS gives the greenlight.

Certainly, states could just copy what Nevada does as it has successfully sanctioned sports betting for decades. But this is 2018 and nothing is that easy.

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Enter the “integrity fee.”

Realizing that their anti-gambling charade is about to come to an end, sports leagues are now trying to lobby state legislators to get a cut of the action via a an “integrity fee” whereby the leagues receive a piece of every dollar wagered in exchange for somehow ensuring the integrity of their games.

The integrity fee first appeared in Indiana thanks to the lobbying of the NBA and MLB.  House Bill 1325 calls for any “sports wagering operator” to “remit to a sports governing body” an “integrity fee of one percent (1%) of the amount wagered on the sports governing body’s sporting events.”

The NBA then lobbied for an integrity fee at a New York senate hearing last month.  This is clearly the route the leagues are going to take as more states eye sports betting. The leagues want paid and they want paid “bigly.”

Remember, the integrity fee proposed thus far is 1 percent on the handle, or the total amount wagered, not gross revenue.  This is in addition to the federal 0.25 percent excise tax on the handle and whatever revenue tax a state enacts. Indiana has proposed a 9.25 tax on revenue.  Pennsylvania wants a whopping 36 percent tax on revenue.

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Enacting an integrity fee on the handle in addition to a tax on revenue would crush an already low margin industry.  Just look at Nevada.  In 2017, the state’s sportsbooks took in $4.8 billion in wagers and won $248.7 million.  That’s a margin of about five percent.

If the leagues had taken a 1 percent integrity fee of the total amount wagered they would get $48 million. And that is from just a single state. Imagine if 10, 20, or 30 states legalized sports betting with an integrity fee.  It would be an enormous windfall.

But for what?

What would more money do to protect the integrity of sporting events? Will more money really help anyone know what the hell a catch is in the NFL? Will more money prevent umpire CB Bucknor from ruining baseball games?

This is a money grab, plain and simple.  The irony, though, is that the leagues are going to drive regulated sports betting right to the black market where there is zero monitoring for integrity.

It seems unlikely that sportsbooks could withstand an integrity fee and increased taxation.  So it is almost certain that books would increase the vig or the juice.  Right now, almost all books operate at -110 on a straight wager favorite, meaning that a gambler must risk $110 to win $100.  To account for the integrity fee, that figure will almost certainly jump to -120.  A gambler must then have to risk $120 to win $100.

That might seem like a negligible difference, but to anyone who bets regularly or with large amounts, it is a massive change.  Think about blackjack.  It used to be common to find 3:2 tables in casinos.  This means a player gets paid $3 for every $2 bet.  Now, 6:5 tables are standard ($6 paid for every $5 bet).  6:5 tables give the house an extra two percent edge!

Again, average gamblers may not notice, but integrity fees will force sportsbooks to adjust the vig, which, in turn, will send the big money right back to bookies and offshore sites.  Nearly every wager placed in America is already done so illegally, why would anyone change if the stakes are tilted against them?

Shaving already thin margins through an integrity fee will also limit competition and innovation as only the largest book operators could stomach potential losses or margins reduced to one to three percent.  Integrity fees certainly do not help the consumer. The only ones benefiting from integrity fees are the sports leagues.  

Yet, they are not necessary.  If SCOTUS strikes down PASPA, then the leagues have zero power and states can do as they please.  The leagues had chances to craft legislation at the federal level, but elected instead to defend an incoherent law while putting teams in Vegas and buying stakes in daily fantasy sports companies that — get this — now want to be sportsbooks.

Talk about integrity.  If DraftKings really does become a sportsbook then the NHL and MLB would have a stake in a bookmaker.  Are you comfortable betting on a game knowing that the league has a clear financial stake in a given outcome?  I’m guessing not, but then again, we’re living in the upside down now, so who the hell really knows.

All that is clear, however, is that an integrity fee is a just a fancy term for a piece of the action.  Funny how the leagues told SCOTUS that they oppose sports betting while simultaneously lobbying for a cut of the wagers, isn’t it?  Just pure integrity.


Steve Silver is a former sports reporter for the Las Vegas Sun and is now a lawyer in Portland, Maine. You can reach him at steve@thelegalblitz.com or on Twitter @thelegalblitz.