Licensing And Tax Burdens Aren’t Suppressing Pennsylvania Online Casinos

Pennsylvania online casino revenue

It’s too early to draw any concrete conclusions, but the high licensing fees and tax rates imposed on the Pennsylvania online casino industry don’t appear to be suppressing the sector.

The first bit of tangible evidence on that front was the willingness of the state’s casino operators to apply for the pricey online gambling licenses Pennsylvania made available.

The second bit of evidence comes from the first online gambling revenue reports released by the Pennsylvania Gaming Control Board.

As noted above, two weeks of online gambling isn’t going to provide meaningful data. However, the New Jersey online casino industry does provide a good comparison point. And by looking at the early days of online gambling in New Jersey, we can start to see if and how the high tax rates and expensive licensing fees are impacting the nascent Pennsylvania industry.

Implications Beyond Pennsylvania

Pennsylvania’s high fees and tax rates continue to be a lingering question for the industry.  It’s also an important question. How the Keystone State’s online casinos perform will likely influence the approach other states take on those fronts.

Online gambling advocates may have been jumping for joy when Pennsylvania legalized online casino and poker back in 2017, but that joy was tempered by some of the specific policies included in the legislation.

First, Pennsylvania’s online casinos have to overcome a licensing fee that could run as high as $12 million (depending on the licensing route operators select). They also have to deal with an unwieldy 54% tax on online slot revenue.

Pennsylvania Online Casino Licensing System

Pennsylvania implemented a bifurcated licensing system that created a total of 39 licenses – one for each land-based casino licensee in the following three categories:

  • Online slot machines
  • Online house-banked table games
  • Online peer-to-peer games (poker)

The licensing system was designed to give Pennsylvania casinos the first and second crack at all of the licenses.

Phase 1, 2, and 3

During Phase 1, Pennsylvania casino could apply for all three licenses (by the specified deadline) for the discounted price of $10 million.

In Phase 2 the licenses were separated and offered a la carte, with each costing $4 million.

Following the exclusive period for PA casinos, the PGCB allowed qualified outside entities to apply for any remaining licenses at the same $4 million cost.

The Price-Sensitivity of Online Gambling Operators

There was speculation the licensing fee would scare away prospective operators. Based on the results, it didn’t scare away too many.

When the dust settled the state collected $94 million in licensing fees, with 11 of its 13 licensed casinos taking the plunge. It will pad that number with another $20 million from two outside companies — MGM and Golden Nugget during Phase 3.

Here’s what the state has collected/stands to collect from each licensee.

Pennsylvania casinos:

  • Harrah’s Philadelphia- $10 million
  • Hollywood Casino- $10 million
  • Mohegan Sun – $8 million
  • Mount Airy- $10 million
  • Parx – $10 million
  • Presque Isle Downs – $8 million
  • Sands Bethlehem- $10 million
  • Stadium Casino – $8 million
  • Sugarhouse Casino – $10 million
  • Valley Forge- $10 million

Qualified Gaming Entities:

  • MGM Resorts (QGE) – $12 million
  • Golden Nugget Atlantic City (QGE) – $8 million

At the end of the day, it looks like Pennsylvania will pocket $114 million in licensing fees. That’s 88% of its $130 million goal.

And What About That Online Slot Tax Rate?

As noted, there was a second concern beyond the licensing fee, the 54% tax imposed by the state on online slot revenue.

With online slots accounting for about three-quarters of all online gambling revenue in New Jersey, the PA tax rate is a serious cause for concern.

But the early indication is players aren’t scared-off by whatever cost-cutting measures Pennsylvania online casinos are implementing.

To illustrate that point, one needs to look to the east, and compare Pennsylvania with the early returns from New Jersey.

The New Jersey Comparison

The New Jersey online casino industry sprang into being on November 26, 2013. Including the five-day soft launch period from November 21-25, the six online casino operators tallied $653,425 in November. That number increases to $980,165 with the inclusion of online poker – online poker wasn’t available at Pennsylvania online casinos in July.

Pennsylvania’s online casino industry launched on July 15, 2019. By the end of the week, the state had three online casino operators, and those three operators generated $812,306 during the partial month.

It’s not apples to apples, but Pennsylvania’s early results line up nicely with New Jersey.

That’s good news for Pennsylvania, as it demonstrates the state’s burdensome licensing fees and tax rates aren’t tamping down revenue.

And the higher tax rates translate into more money for the state.

New Jersey collected $147,048 in taxes (15% of GGR) from the $980,165 the state’s online gambling industry generated in November 2013.

Pennsylvania collected far more tax revenue in its first full month, $326,700, even though its industry generated less revenue. The reason being, PA taxes online table games at 16% and online slots at a whopping 54%.

Inside the Numbers

One area of interest from the July PGCB report is the breakdown of slot and table game handle.

As Chris Krafcik notes, Pennsylvania generated a significantly higher percentage of online gambling revenue from table games than New Jersey typically does.

The discrepancy could very well be a single month anomaly, a market preference difference, or normal for the early stages of a market. Or, it could be a signal that Pennsylvania operators have found a way to shift slot spend to the less taxed table games.

Only time and future reports will tell if any of the above reasons accurately describe the market.

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