The following was written by Gambling Law Professor I. Nelson Rose and updated August 7, 9:49am.
Two Bills = Passed Faster
On August 6, 2009, Senator Robert Menendez (D.-NJ) introduced his proposal to legalize Internet gambling in the U.S. Senate. The bill, S.1597, is supposed to be a companion bill to the measures introduced by Barney Frank (D.-MA) and friends in the House of Representatives. This is the common way laws are made in Congress: Similar bills are discussed simultaneously in the two houses and then reconciled in conference committee. It makes everything go faster and neater.
But the Menendez bill is to the Frank bills what a hurricane is to a summer squall. At 91 pages, it is longer, and more comprehensive, than all of the other proposals put together. Although it still needs some revisions, it answers many important question left unclear by the proposals in the House. Yet, it also is more limited, starting with the fact that it would only authorize Internet poker and other games of skill.
Only Exempts Poker and Games of Skill Determined by State
In fact, Menendez expressly exempts games of skill that are now “not regarded as gambling under an applicable provision of State or Federal law . . .” What a mess this would create: Imagine the fights over whether online poker operators have to be licensed in a state like Colorado, where a trial court jury recently ruled poker was not gambling because it was predominantly skill.
The bill is clear in expressly preventing entrepreneurs from setting up clubs where players go to play poker online.
Basically All Power Goes to Nevada and States
All the proposals share the same general structure: They appear to be establishing a federal licensing and regulatory system, when they will actually be turning power over to the states, particularly Nevada. True, the U.S. Treasury will be issuing the actual licenses and will be regulating some of the operators. But both the Menendez and Frank bills make it clear that states and tribes can apply to be given the power to certify and regulate applicants, and Treasury has only 60 days to determine whether it will grant that power.
It would be more than a little embarrassing if the federal government said that a well-established regulator, like the Nevada Gambling Control Board, is incompetent. And once a state or tribal regulator is approved, its certification “shall be relied on by the Secretary as evidence that an applicant has met the suitability for licensing . . .” These agencies can also volunteer to do the actual regulation. So state and tribal regulators will be the real deciders when it comes to which of their operators are to be found suitable, and will undoubtedly take over the grunt work of the day-to-day control on online gaming.
Sportsbooks Out, Same with Online Casino Games
What shape that gaming takes depends on whether Menendez or Frank prevail. Both make it clear that there will never be sports betting, and that horse racing is already legal. But Frank’s bills would also allow online casinos, bingo and lotteries. Menendez limits gaming to: “an Internet-based game in which success is predominantly determined by the skill of the players, including poker, chess, bridge, mah-jong and backgammon.”
Of these, only poker is further defined, and this obviously needs some work: “The term ‘poker’ means any of several card games that are commonly referred to as poker; that are played by 2 or more people who bet or wager on cards dealt to them; in which players compete against each other and not against the person operating the game; and in which the person operating the game may assess a commission fee or any other type of fee.”
Backgound Checks on the Site Operators
The bills entered in the House and Senate both require programs to keep out anyone under 21 and bad guys and protect compulsive gamblers, though the Menendez bill goes into greater detail here. It requires that there be background checks on at least the top five “individuals receiving the most compensation from the applicant.” The burden is on applicants to prove by clear and convincing evidence, a tough standard usually reserved for such things as civil commitments, that they are persons “of good character,” they won’t “pose a threat to the public interest or to the effective regulation and control” of gaming, are competent, adequately financed, etc., to get a five-year license.
Sites Accepting Bets Prior to UIGEA Possibly Out, Including PartyPoker
The Menendez bill included the provision in the Frank bills that looks like it was designed to exclude foreign operators who accepted poker players from the U.S. prior to the passage of the Unlawful Internet Gambling Enforcement Act (“UIGEA”) in 2006: No one can be licensed if they failed to file a federal or state tax return that they should have, and there is no provision allowing applicants to cure. But Menendez also has interesting language saying that no one can be found suitable if they knowingly accepted sports bets from the U.S., indicating that an applicant could be suitable if they knowingly took poker bets. As if that weren’t enough, buried on page 69 is this provision:
The Secretary of the Treasury may not deny an application for a license . . . submitted during the 90-day period beginning on the date that the Secretary begins accepting applications . . . because the applicant operated an Internet game-of-skill facility, in interstate or foreign commerce, in which bets or wagers were knowingly initiated, received, or otherwise made by individuals located in the United States, without a license issued to such person by the Secretary . . .
So, either operators like PartyPoker cannot be turned down because they took poker bets from the U.S. without a license, or they can be turned down because they did not file some obscure state tax returns.
No License = Illegal
The Menendez bill makes it clear it is a crime to operate any form of Internet gaming without a license. As with the Frank bills, there would be a tax of 50% of funds on deposit on any operator who takes bets from the U.S. without a license. But Menendez also establishes a detailed structure for imposing costs and fees on applicants and licensees, including fines of up to $100,000.
All the bills allows states a short 90 days to opt out. And there are fairly clear provisions that if the governor of a state fails to send a letter to Treasury opting out, that state’s anti-gambling laws will be pre-empted. In practice, this will mean that licensed operators from a state like Nevada will then be free to operate poker games aimed at players in states that can’t get their acts together, like California.
Indian Tribes and States
There are complicated provisions involving tribes and the interrelationship between tribes and states. This is an area that will need to be thought through completely. There are dozens of tribes involved with Class III gaming that can act very quickly, to license themselves and others to take bets from everyone else, while demanding that no other licensees be able to take bets from anyone physically on their land.
Confusion in the Bill - Opting Out
The single greatest confusion in the Menendez bill relates to the opting out provisions. It states “No provision of State law enacted prior to [this Act] shall be construed to require a State to provide notice pursuant to this subsection [giving governors 90 days to opt out].
I have no idea what that means, or even which way it is supposed to cut: Does it mean that state with anti-gambling laws, which means all of them, or those that can pass statutes now saying they want to opt out if this bill becomes law, don’t have to send the notice opting out? Or does it mean the opposite, that no matter what a state does before this bill becomes law, it only has 90 days in which it must send a written notice opting out?
Details, Details, Details
The Menendez bill has more details than the Frank bills on requirements imposed on operators, including having to allow problem gamblers to self-exclude, to bar bets from states and tribes that have opted out, to maintain player privacy, to prevent money laundering, and, of course, to pay taxes. Both sets of bills make cheating a crime.
Here Come the Taxes
Taxes might be a problem. The Frank bills have no limit on what taxes states can impose on operators, but limit the federal government to what is called a fee of 2% on deposits. Menendez is asking for less and more: A Federal Internet gaming license fee of 5% of deposited funds and a State or Indian tribal government gaming license fee of another 5%. This does get over the big problem with the Frank bills, that the big states, like California, where the customers will be, have no incentive to support Internet gambling operated and taxed by Nevada. Under Menendez, California gets that 5% tax. Although the states won’t like this provision: Tribes are treated like states, so if a player is on Indian land, that tribe gets the full 5% and the state in which the tribe is located gets nothing.
Of course, the tax system is still screwy, since it is a tax on deposits, not revenue. But it might work.
And don’t worry about Nevada. There is nothing preventing the state that is recommending and regulating the online poker operator from imposing a state tax on gross gaming revenue, or even another tax on funds on deposit, if the operator has a physical presence in that state.
Tax Reporting and Witholding
But another set of tax provisions puts operators licensed under the Menendez bill at a distinct disadvantage compared to overseas poker sites that refuse to be part of this system. S.8309 requires operators to report to the U.S. Treasury, which, of course, includes the Internal Revenue Service, the following information on “each person placing a bet or wager”: name, address and tax-payer identification number, meaning Social Security number; “gross winnings, gross wagers, and gross losses;” “net Internet gaming winnings;” amounts deposited and withdrawn; taxes withheld.
The last applies to anyone who wins more than $5,000 in a poker tournaments; the current rate is a minimum of 25%. The I.R.S. has ruled that land-based poker rooms do not have to withhold, if they turn over the names and i.d.s of their big winners.
Menendezs’ Bill Does a Better Job
Interestingly, Menendez does a better job than Frank, who is, after all, Chair of the House Financial Services Committee, in trying to fix up the mess caused by the UIGEA. He would require the Director of the Financial Crimes Enforcement Network (“FinCEN”) to make up a list of every website that takes bets from the U.S. that is not licensed. Anyone, including law enforcement agents, sports organizations and players can ask for this list, and get detailed information about owners and operators. But the real kicker is that all payment processors, or at least those within reach of the U.S. federal government, will then be on notice that they cannot transmit any money to these website operators. All of the other regulations issued under the UIGEA will be redone.
Who will win? There will be hearings on both sets of bills. Frank has enough power, and the Democrats have such a large majority, that he can get anything he wants through the House. But nobody in the U.S. Senate really cares about this issue — except for a few anti’s, like Sen. Jon Kyl (R.-AZ); Menendez, the author of the poker-only bill; and the ultimate power in the Senate, the Majority Leader. Who is he? Sen. Harry Reid, Democrat, representing Nevada.
So ask yourself what the Nevada casinos want. That’s what is most likely to actually become law.
© Copyright 2009. Professor I Nelson Rose is recognized as one of the world’s leading experts on gambling law, and is a consultant and expert witness for industry, governments and players. His latest books, Internet Gaming Law (2nd edition just published), Blackjack and the Law and Gaming Law: Cases and Materials, are available through his website, www.GamblingAndTheLaw.com.