Two Way Hard Three | Las Vegas Casino & Design Blog

This time around, Jeff dives into the complexity of regulating online poker.

It's an interesting take - be sure to give it a read, after the jump.

This column I'm going to take a crack at an issue that Nevada lawmakers and gaming regulators are currently grappling with: Internet poker.

I've been covering the issue for a long time and, during the past few months, there seems to have been a big change in how government officials and casino company executives viewed online poker and the opportunities it offers. First, Senate Majority Leader Harry Reid briefly tried during the lame-duck Congressional session to attach an online poker bill to other important legislation. Even though he decided to withdraw the measure, probably because he wasn't willing to risk other important goals to fight for online poker, Reid's flirtation with online poker opened the possibility that he could eventually use his bargaining position to make a legislative deal for it at some point in the future. While I believe a federal move to legalize online poker would be a wise decision, I remain skeptical that Reid and pro-poker legislators will be successful in the next few years.

I think it is unlikely that the Democratic party will retain its Senate majority after the 2012 election, as Reid's party has to defend more than twice as many seats and now holds only a 53-47 advantage (including two independents who most often vote with the Democrats). With less than two years left with a Democratic Senate majority, a Republican majority in the House and a number of important issues Congress must deal with, I will be surprised if Reid uses his political capital to make a deal with House Republicans (a majority of whom oppose online poker) to approve a bill liberalizing and explicitly legalizing online poker play. That is unfortunate for those American casino operators anxiously waiting to tap the online poker market (and for the existing international operators who'd like to enter the market or, if they already accept American play, to do so with the approval of the government) as the likelihood may be less advantageous after the 2012 election. President Barack Obama is considered likely to sign an online poker bill if Congress sends him one, but he has less than two years left in his term. If he doesn't win reelection a new GOP president would almost certainly be opposed to legalizing online poker, and, even if he does get a second term, Obama will probably have at least one Republican-led congressional chamber, a significant obstacle for online poker.

If Reid does decide to use some of his political capital trying to get a bill in the next two years (by trading something of value to the Republican-led House) he should try for a bill that is as simple as possible and defers regulation to the foreign country or to the U.S. state the operation is based in. There should be no federal tax, as irresistible as it may be to try to tap additional revenue, as online operators in competing foreign jurisdictions pay very little in the way of taxes and too big a tax burden will be a competitive disadvantage for U.S. operators.

A federal online poker law should:

Exempt poker sites from the onerous rules preventing banks from allowing players to fund their online poker accounts with credit cards and other forms of electronic payment. The change would leave intact rules against funding casino-game and sports betting accounts.

Allow foreign and U.S.-based operators to allow poker players to play only if they live in a country or American state that doesn't consider online poker play to be illegal.

Defer to online poker sites' host countries or American states the responsibility to establish regulatory regimes.

The trickiest issues will be taxes and regulation. Establishing reciprocal tax regimes will be difficult, as a big portion of poker site revenue comes from "raking" individual pots. Tables full of players from different jurisdictions (with different home tax rates) could be a bookkeeping nightmare if sites had to pay taxes to both their own home jurisdiction as well as additional taxes to those of each player. That said, a system in which the poker site's home jurisdiction levies the only tax on the site has its own problems:

Low-tax jurisdictions would have an inherent advantage over higher-tax regimes as sites would rather operate from low-tax havens and generate more profit, other things being equal.

Poker sites in low-tax jurisdictions would have more available revenue to spend on player promotions, another competitive advantage that would disadvantage sites in states with higher tax rates. (Almost all of the existing international poker sites operate from jurisdictions with very low tax rates, while it is extremely unlikely that U.S.-based operators will be able to avoid higher tax rates.)

Tough regulatory regimes that protect players from unscrupulous operators would cost more to run, and most players are not savvy enough to select a better-regulated site and pay the higher costs associated with better regulation. (Another advantage for the existing and leading international operators, most of whom are based in jurisdictions with bare-bones regulation.)

I'm not sure how the federal government can get around the tax and regulation obstacles. World trade rules probably won't allow a mandate that requires U.S. players to play on U.S.-based sites. American states, including Nevada, are unlikely to establish the kind of low-tax, minimal-regulation regimes that would allow U.S.-based sites to compete on an even basis with the existing leading operators, while highly-taxed, better-regulated U.S. sites would have trouble attracting players when existing sites have gigantic player bases and the advantage of lower taxes.

The best solution may be for states to encourage their own operators to partner with existing big international operators, with the understanding that those operators would also pay taxes to its American players' applicable U.S. state -- and this possibility appears to be what some Nevada operators and potential international partners have in mind. (Wynn Resorts with PokerStars and Fertitta Enterprises with Full Tilt.)

At the state level, Nevada lawmakers are now considering a bill (Assembly Bill 258, or AB 258) that would direct the Nevada Gaming Commission to enact regulations allowing state casino operators to establish online poker sites which would be able to allow play from jurisdictions where online poker play is not illegal. The bill would allow outside operators to be licensed by Nevada as long as they've been operating for at least two years from a jurisdiction with similar licensing requirements. The bill would also allow the commission to enter into compacts with other states and nations to establish rules for sharing of tax revenue. Aside from any such compacts, revenue from Nevada players would be taxed at the current big-land-based-casino rate of 6.75 percent while revenue from non-Nevada players would have a 4 percent tax rate.

There are a couple of problems with the bill that I guarantee some Nevada regulators don't like. First, the bill explicitly says that licensing can't be denied to online applicants solely because they accepted players from the United States. The federal Justice Department ruled early in the last decade that online poker was illegal in the U.S., though a few appellate court decisions ruled that federal law didn't prohibit online poker. But when the Unlawful Internet Gambling Enforcement Act of 2006 passed, prohibiting online sites from accepting funds from Americans to be used for online gambling, several big operators pulled out of the U.S. market (including the biggest, Party Poker, which was publicly traded on the London Stock Exchange). Others kept accepting American play, including PokerStars and Full Tilt, who quickly become the big dogs in the industry. I can't imagine regulators will like being told that they must not factor those sites' flouting U.S. law into their licensing decisions.

Second, the federal government has never reversed its initial finding that (interstate and international) online gaming is illegal, and a Nevada study early last decade found that almost every state's laws barred online gaming, either explicitly or implicitly.

A few other states are considering whether they should legalize online poker, and it certainly is in Nevada's interest to be the first or one of the first to do so. But I believe state action before the federal government acts to explicitly make online poker legal would be a mistake. I don't think Nevada legislators will pass AB 258, but, if and when Harry Reid or others can get a federal legalization bill passed, Nevada operators will no doubt move quickly to push state lawmakers to pass a law enabling speedy licensing and poker-site operation and regulation.

-- Jeff Simpson, April 2011