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What Lies Beneath: The GRIT Act and the Slow Burn Battle Over Federal Sports Betting Excise Taxes
Wednesday, February 21, 2024

A new bill marks a major turning point in federal involvement in the largely state government-controlled arena of problem gambling and responsible play. If it passes, it will no doubt have far-reaching impacts on major sports gaming operators and the Internal Revenue Service (IRS).

On Jan. 11, 2024, U.S. Senator Richard Blumenthal (D-CT) and U.S. Representative Andrea Salinas (D-OR-6) introduced the Gambling Addiction, Recovery, Investment and Treatment Act (commonly referred to as the GRIT Act) [1]. The act is the first-of-its kind in that it would create the first-ever federal funding source dedicated to addressing and studying gambling addiction. The programs and grants created by the GRIT Act will be fully funded by the federal sports wagering excise tax, and not include any increase in taxes [2]. The act would appropriate 50% of all revenue generated by the excise tax to fund state grants to “address gambling addiction” and National Institute on Drug Abuse grants to “support research on gambling addiction." [3]

In the immediate term, passage of this bill will authorize spending for 10 years and require the Secretary of Health and Human Services to submit a report to Congress on the effectiveness of the funded programs. Passage will also open a spigot of new funding, via grants, to gambling addiction treatment and research. Zooming out, the pathway from bill to law, including likely committee hearings and floor debate, will shine a light on responsible gaming and problem gambling and related topics such as marketing restrictions and industry gatekeeping. 

Currently, each state has autonomy over the regulation, funding, and availability of responsible gaming programs, education, and initiatives within its borders. There is no one-size-fits-all state approach nor is there a uniform method of funding for these items. The GRIT Act’s creation of a new funding source for state grant programs may cause states to revisit current sports wagering legislation and regulatory schemes to include new provisions related to the creation or expansion of such programs to provide a hook for GRIT Act grant eligibility. Other states will be immediately eligible for funding, either via programs already created by sports wagering legislation and related gaming commissions or through state departments of health, human services, and behavior. 

Industry opinions and reactions to the GRIT Act are decidedly mixed. On one side, the National Council on Problem Gambling is a staunch proponent of the act and has already publicly endorsed its passage. On the other side, the American Gaming Association (AGA) opposes the act on grounds that the federal sports betting excise tax, which fully funds the act, is antiquated and should be repealed. 

As the AGA acknowledged in its statement against the GRIT Act, there is an interesting subplot to the GRIT Act bubbling just beneath the surface. The federal sports wagering excise tax was first enacted in the 1950s. Following the Supreme Court’s repeal of PASPA in 2018 [4], mobile and retail sports wagering laws and regulatory frameworks have been enacted in more than 35 states, putting a renewed focus on the tax. It is important to note that the excise tax itself is levied on handle as opposed to gross or net gaming revenues. The vast majority of states, save for Tennessee [5], typically imposes a tax on gross gaming revenues, with some states even allowing deductions for free play, promotional credits and federal excise tax payments [6]. The federal sports wagering excise tax allows for no such deductions, thus making the tax even more onerous in the eyes of some stakeholders.

Further complicating matters, a 2020 memorandum from the IRS Office of the Chief Counsel found that “[a Daily Fantasy Sports] operator is liable for the excise tax on wagers under IRC § 4401.” [7] In reaching this conclusion, the IRS Office of the Chief Counsel found that daily fantasy sports entries constitute “wagers” pursuant to IRC § 4421 despite recognizing that various state laws and the Unlawful Internet Gambling Enforcement Act expressly carve out daily fantasy sports entry fees from the definition of wager.

Although lines continue to be drawn and it remains an open question where all industry players stand on the GRIT Act, the Senate and House versions of the bill appear to have some momentum. The bills have recently been referred to the Senate Committee on Health, Education, Labor, and Pensions and the House Energy and Commerce Committee, respectively. We will continue to track this legislation and provide further updates as these matters develop. 

[1] H.R. 6982 and S. 3579. Bill text can be found here.
[2] The IRS currently imposes a federal excise tax of 0.25% on all sports wagers authorized by the state. See IRC § 4401.
[3] H.R. 6982 § 2(a) & (b). 
[4] See Murphy v. Nat’l Collegiate Athletic Ass’n, 138 S. Ct. 1461 (2018).
[5] Tennessee assesses a 1.85% tax on each operator’s total betting handle.
[6] State taxes imposed on mobile sports wagering operators range from 8.4% (MI) to 51% (NY). 
[7] IRS AM 2020-009 (published August 7, 2020).

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