Centaurus Games Poker Blog

On May 19, 2009 California voters defeated ballot Proposition 1C which would have allowed the state to borrow from future lottery proceeds to help fund the estimated $42 billion deficit in the current budget. Some people are now suggesting that the state will move to legalize one form of internet gambling, poker, by introducing and passing the Online Poker Enforcement Compliance Consumer Protection Act. I am not so sure. There concepts addressed in the legislative proposal, (it is not a bill yet) may make sense to some and not to others. A sensible point is that it does seek to comply with the intra-state exemption under the Unlawful Internet Gambling Enforcement Act of 2006 (“UIGEA”). The rationale is simple, as the most populous state in the nation, and possibly the sixth- seventh largest economy in the world, California may be a good free standing model. Many smaller states would likely benefit from federal legislation that would allow cross border reach. But, is now the right time to try and solve the budget deficit in part through legalization of a form of online gambling? It may or may not be.

The yet to be introduced proposal is the subject of intense discussions among and between many of the affected interests, namely, card clubs, race track operators, tribal casino operators, state regulators and other groups. The economic forecasts vary widely, based upon assumptions of market size, average revenue per customer, tax rates and other factors. But, the current deficit cannot, in the short term be reduced by a implementing a system, still in the design phase. It may take several years for all the pieces to come together, and even then, the real outcome, may or may not be meaningful to the state. So the argument is why not at least get started so that in future years the revenues from legalized online poker will at least contribute to a reduction in the growth rate of the deficit. This is both a legal and political question for California. The California enabling legislation would need to comply with all of the requirements of the UIGEA, intrastate exemption, but most importantly it would need political support.

Political support may come from the top down, that is through the influence of lobbyists for those interests expecting to benefit from legalization, and from the bottom up, such as from poker player groups. But, at least one poker players’ organization as supported the Frank bills, HR. 2266, and H.R. 2267 which propose a federal system of licensing, subject to the states opting out. Whether the organized poker player groups would really support a California bill will ultimately test their motivation. Without a broad base of support, it is questionable whether the current efforts will be effective in bringing about legalization of online poker.

On May 6, 2009 three bills were introduced in the House of Representative, two by Rep. Barney Frank and one by Rep. Jim McDermott. The bills were and now are the subject of much discussion.

My impression of the bills and my present forecast future for legalized internet gambling is as follows:

First, the bills can be broken down into their goals. H.R. 2266 extends the implementation of the UIGEA regulations from December 1, 2009 to December 1, 2010. This bill may help the financial services sector, in delaying some implementation costs. This bill can be passed on its own.

The second and third bills, H.R. 2267 and H.R. 2268 respectively establish a federal licensing system and a tax system. These bills seem to be very much inter-dependent and will survive or die as a package. In simple terms, the licensing bill creates a system of regulation which is binding on the states, unless they opt out within 90 days of enactment. This point, may be a deal breaker on its own. The reason is that right now, under UIGEA, states can adopt wholly intrastate internet gambling. This means that large population states, like, California, Texas, New York, Pennsylvania, can capture their the tax revenue and jobs entirely, while the states with lesser population, probably will not have the critical mass necessary to make games (like poker) successful. So the conflict is inherent. Who would benefit beyond the small states, well large multi-state, and multi-national corporations for a start would want a single licensing regime that allows them to have a large scale marketing plan that crosses state borders with a unified message and that minimizes competition. Just how the various tribal interests will respond to the bills, is not totally clear to me at this time. Another aspect of the licensing bill is who is qualified and who is disqualified to be issued licenses. At first blush, the major land based casino companies will surely qualify. Other corporate interests, may qualify as well. Unlikely to qualify are any of the off-shore companies, who offered internet gambling products in the U.S., or any of the officers, directors, or principal shareholders. Further, while some companies ceased to offer services post enactment of UIGEA, there is a distinct possibility that a provision in the licensing bill will be used to keep them out. The provision I am referring to is the requirement that all Federal and State tax returns must have been filed, and not be delinquent, with all taxes paid, including additions to tax, interest and penalties.

In my last note, I described the FBAR rules, well those would seem to be included. Further, as a condition of the application, all applicants submit to U.S. jurisdiction for all purposes. I question whether any of the off-shore operators will submit to jurisdiction with the risk of disqualification. But, one could argue that the off-shore companies will just not apply and continue business as usual. That is a distinct possibility, but they will be subject to claims of U.S. taxation and licensing fees regardless. The tax bill provides that licensees will pay a 2% of gross wager fee monthly, but unlicensed operators will be subject to a fee of 50%. How this fee will be assessed and collected from off-shore operators, is a bit outside the scope of this note. The tax bill does provide for information collection from players and withholding on all winnings as paid.

So, my conclusion is that the future is going to be filled with uncertainty over which form of regulation is adopted, a federal system with the states opting in, or opting out, and who the likely licensees will be. One thing is clear, while some have argued for legalization and taxation, what those advocates will likely find is that they will find a result dramatically different from what they expected.

POKER TAX. That is right. I bet you didn’t file your poker tax return on April 15^th. What is a poker tax return? Well if you played in a real money poker game on line and had $10,000 in your account anytime during 2008 you probably have to file a Report of Foreign Bank and Financial Account, “FBAR” (TD F 90-22.1) by June 30 of 2009. Now, why you have to do that, is that some people believe that an account at an off shore on-line casino or poker site is a “financial account” for reporting purposes.

So what that means to you, is that you probably need to file FBAR’s for every year that you had an account(s) at any off shore poker site and in which you had more than $10,000 in your account at any time in the year. The statute of limitations is 6 years and the penalties are severe (see below). But don’t worry, it may get worse. If Sen. Levins’ recent Bill, S 506 “Stop Tax Have Abuse Act” is passed the $10,000 threshold will go away and if your off shore account has a $1.00 or more in it you will likely have to file and FBAR. Now for the penalties: The penalty for not filing an FBAR is 20% of the highest amount per year in the account. You can file the FBAR’s (and presumably amended returns if necessary for prior years) and make a voluntary disclosure or take your chances. A voluntary disclosure is a formal request to the Internal Revenue Service to waive prosecution and not impose penalties.

WARNING, you must make a full disclosure, file all unfiled FBARS and amend tax returns to pick-up any unreported income (and pay the tax and interest). Many Americans took chances and have accounts at UBS and the U.S. District Court in Washington D.C. will decide whether UBS has to turn over 52,000 names and account information. A U.S. District Court Colorado ruled that First Data Corporation must turn over information on credit card transactions it processed involving off-shore merchant accounts. The ultimate objective of enhanced FBAR enforcement measures and prosecutions is to raise income tax compliance by getting taxpayers to report off shore accounts and off shore income (including poker winnings) and to prevent terrorism and money laundering . Oh, I failed to mention that preparer penalties may apply to return preparers. How the IRS will collect data from off shore operators, and how to avoid or minimize penalties is the subject of future comments. So, now do you think that there is a poker tax? What are your thoughts?

Part 1 of 3 from Sanford I. Millar, the CFO and General Counsel for Centaurus Games and a certified specialist, taxation law State Bar of California. Mr. Millar will be a featured panel speaker at the Southern Gaming Summit on Thursday, May 7, where he will discuss the importance and qualifications for filing a Report of Foreign Bank and Financial Account (FBAR) and other federal tax compliance issues relating to the regulation of Internet gaming.