Wagering excise taxes

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Wagering excise taxes, also known as federal taxes, are levied against specific gaming forms in the United States. Wagers are accepted by places such as casinos, racetracks, and sports betting companies. [1] Wagering excise taxes are indirect, meaning that rather than the tax being imposed directly on individuals or companies, they are imposed on transactions. [2] These taxes place financial duties on providers while indirectly affecting participants who engage in gambling activities; these taxes work as a dual purpose by raising money for the government while also regulating the gambling sector. [2] [3] Excise taxes are collected by providers as a percentage of each wager, differentiating between state-authorized and unauthorized wagers. [4] While state-authorized wagers are taxed 0.25%, illegal gambling is subject to a higher tax of 2% to dissuade unregulated wagering. [5] The differential tax rate is intended to deter illegal gambling activities. [4]

Historical and Structural Overview of Wagering Excise Taxes

In the United States, excise taxes are applied to specific goods and services, including legal and illegal gambling transactions. Such taxes are deemed as indirect since they are imposed on transactions rather than individuals or corporations. Excise taxes are often used to regulate activities deemed harmful, such as wagering, alcohol, and tobacco, while also generating revenue for the government. [6] [7] Historically, such taxes were known as "sin taxes," created to discourage illegal gambling and manage legal betting operations. [8] [9] Excise taxes continue to play a dual role in society: raising funds and serving as a tool for regulation. [3]

The United states tax structure for wagering varies depending on the legality of the activity. IRS Form 730, Tax on Wagering, is used to compute excise taxes for legal and illegal wagers of certain types. While state-authorized wagers are taxed at 0.25%, illegal gambling is subject to a higher tax of 2% to dissuade unregulated wagering. [5] In addition to the percent excise tax, the IRS holds an occupational tax of $50 for each principal or agent accepting wagers for legal wagers and an annual occupational tax of $500 for illegal wagering agents. [10] With the growth of modern betting platforms such as daily fantasy sports, the application of excise taxes has expanded to cover these new forms of gambling. [11]

Economic Impact

In 2024, the Treasury Inspector General for Tax Administration found that non-filers were associated with over $13 billion dollars in total gambling winnings. [4] These unfiled gambling winnings could increase excise tax revenue by approximately $1.4 billion dollars [4] leading to a significant opportunity for these uncollected taxes to be distributed to government programs in need. By enforcing an excise tax on wagering winnings, the IRS can capitalize on a growing industry in the United States.

Impact on Providers

For providers, these excise taxes means increased costs and reduced profit margins due to the portion of the profits being used to cover the revenue. There is potential for reduced demand if excise taxes are raised for higher taxes may deter participants. These excise taxes also create pressure in the competitive landscape of providers for players may travel to different jurisdictions in search of lower-taxes. Furthermore, unregulated online gambling sites may be seen as favorable, pulling users from the regulated and taxed system.

Impact on Consumers

Consumers are impacted in multiple ways as gambling activities become more expensive. Since some people, especially casual players, find gambling more expensive, higher fees may result in lower participation. Spending patterns may change as a result, with customers possibly shifting their disposable income to alternative entertainment options. Price hikes have varying effects on problem gamblers. Increased expenses might deter some people from gambling as much, but others might react by taking on riskier activities or trying to make up lost money by spending more. Price increases can also make gambling seem less valuable, which could lower consumer satisfaction and general welfare, especially if people feel pressured to keep playing in spite of the higher costs.

Current Issues in Collecting Wagering Excise Taxes

While most wagering is done through regulated websites and casinos, a large portion of wagering is done through illegal bookies and offshore sites. The American Gaming Association estimates that nearly 40 percent of the U.S. sports betting market is done through illicit operators. [12] This brings in an unregulated market revenue of $44.2 billion which translates to nearly $13.3 billion in estimated state tax losses. [12]

Additionally to lost excise tax revenue, there is severe complexity in compliance due to different games and types of wagers needing different tiers of taxation. This complexity can often lead to errors in calculating the excise tax, or some instances, complete non-compliance. Gambling laws in different states and countries creates a consistent stream of difficulty for authorities to maneuver when exercising tax law.

Related Research Articles

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<span class="mw-page-title-main">Gambling in the United States</span>

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References

  1. ↑ "Sports wagering | Internal Revenue Service". www.irs.gov. Retrieved 2024-11-09.
  2. 1 2 Giertz, J. Fred (2016-06-04). "Excise Taxes: From The Encyclopedia of Taxation and Tax Policy". Urban Institute.
  3. 1 2 Cnossen, Sijbren (2022). "Excise Taxation To Preserve Health and To Protect the Environment: A Review". Canadian Tax Journal. 70 (Supp): 159–184. doi:10.32721/ctj.2022.70.supp.cnossen. ISSN   0008-5111.
  4. 1 2 3 4 "The IRS Could Collect Over a Billion Dollars in Taxes From Unreported Wagering Income".{{cite web}}: CS1 maint: url-status (link)
  5. 1 2 Coons, John E. (January 1953). "The Federal Gambling Tax and the Constitution". The Journal of Criminal Law, Criminology, and Police Science. 43 (5): 637–642. doi:10.2307/1139648. ISSN   0022-0205. JSTOR   1139648.
  6. ↑ "Chapter 7. Dominion Commodity Taxes Excise Taxes, Excise Duties, and Miscellaneous Taxes", Taxation in Canada (3rd edition), University of Toronto Press, pp. 137–145, 1951-12-31, doi:10.3138/9781487582807-010, ISBN   978-1-4875-8280-7 , retrieved 2024-10-19
  7. ↑ Wagner, Marcia S.; Salkin, Barry L. (2020-12-01). "Excise Tax on Daily Fantasy Sports". Gaming Law Review. 24 (10): 691–693. doi:10.1089/glr2.2020.29004.mwa. ISSN   2572-5300.
  8. ↑ Wagner, Marcia S.; Salkin, Barry L. (2020-12-01). "Excise Tax on Daily Fantasy Sports". Gaming Law Review. 24 (10): 691–693. doi:10.1089/glr2.2020.29004.mwa. ISSN   2572-5300.
  9. ↑ Coons, John E. (January 1953). "The Federal Gambling Tax and the Constitution". The Journal of Criminal Law, Criminology, and Police Science. 43 (5): 637–642. doi:10.2307/1139648. ISSN   0022-0205. JSTOR   1139648.
  10. ↑ "Sports wagering | Internal Revenue Service". www.irs.gov. Retrieved 2024-11-08.
  11. ↑ Wagner, Marcia S.; Salkin, Barry L. (2020-12-01). "Excise Tax on Daily Fantasy Sports". Gaming Law Review. 24 (10): 691–693. doi:10.1089/glr2.2020.29004.mwa. ISSN   2572-5300.
  12. 1 2 "Sizing the Illegal and Unregulated Gaming Markets in the U.S." American Gaming Association. November 30, 2022.{{cite web}}: CS1 maint: url-status (link)


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