U.S. Tax: Taxation of Online Poker, Gambling Considered in Congress

by Dustin Gouker, 19 May 2010 -- The House of Representatives' Ways and Means Committee held a hearing on Wednesday about internet poker and gambling, listening to proponents and an opponent of legalization, regulation, and taxation of online wagering in the United States.

The committee meeting considered H.R. 4976, a bill that would tax online gambling in the United States. That bill is meant to be a companion of H.R. 2267, which would regulate online gambling. The authors of those two bills, Rep. Barney Frank (D-Mass.) and Rep. Jim McDermott (D-Wash.), were among those who testified on Wednesday. Also testifying was Bob Goodlatte (R-Virginia), one of the proponents of the Unlawful Internet Gambling Enforcement Act when it became law.

Frank testified first, and you can watch some of his testimony below:

Frank began his testimony by talking about how it is not the federal government's place to tell adults what they can and can't do with their own money. He then got into why regulation and legalization of online gambling would be a good thing for the United States. Here is some of his statement:

"American consumers who wish to gamble online are currently without safeguards against fraud, identity theft, underage and problem gambling and money laundering. Some operators adhere to rigorous regulatory regimes in foreign jurisdictions, but U.S. customers have no local recourse if they have a problem.

And, more to the point for today's hearing, billions of dollars in taxes – both under existing law and those that would be established under Mr. McDermott's bill – remain uncollected. Enacting these bills would bring this industry out of the shadows, benefit consumers and ensure that all of the revenue does not continue to exclusively benefit offshore operators.

"McDermott was next, and he addressed the financial reasons to regulate and tax online gambling. Some of his testimony here:

McDermott talked about how much of the money spent by Americans in online gambling is going offshore and is not being taxed currently. He said prohibition has been ineffective in the United States. Here's an excerpt from his testimony.

"According to industry analysts, Americans have this year alone deposited about $12 billion for offshore online gambling activities. People in the U.S. made somewhere near $100 billion total wagers online, generating an estimated $5 billion a year in gross revenues to offshore operators. All these transactions are underground. None of these activities is regulated and taxed by the U.S. government.

Driving internet gambling offshore has been a policy failure. The GAO has called internet gambling "borderless" and I think it's time for Congress stop pretending that the future won't come.

"Revenue generated by McDermott's H.R. 4976 would go to the federal government, states and tribal governments. Some of the funds generated would also be earmarked to help foster-care systems.

Goodlatte, an opponent of legalized online gambling, spoke next:

Goodlatte spent much of his testimony citing studies and polls that portray legalization of online poker and gambling as a negative for the United States. He used the argument that allowing online gambling is bad for society:

"The anonymity of the Internet makes it much easier for minors to gamble online. Furthermore, online gambling can result in addiction, bankruptcy, divorce, crime, and moral decline just as with traditional forms of gambling, the costs of which must ultimately be borne by society. In fact, I have been contacted by a constituent in my district whose college-aged son fell prey to an Internet gambling addiction. Faced with insurmountable debt from Internet gambling, he took his own life. Unfortunately, financial ruin and tragedy are not uncommon among online bettors.

"There was both support and opposition of the bills regarding online gambling in the committee membership, some applauding the added revenue stream for the goverment and the idea that an offshore industry come under federal oversight. One member questioned the method of taxation, which would be a tax on deposits, not on winnings or withdrawals.

The committee also heard testimony from Christopher Wagner, the commissioner of the Small Business Self- Employed Division of the Internal Revenue Service; and Charles M. Steele, deputy director for the Financial Crimes Enforcement Network of the U.S. Treasury. The testimony given was not as important to the hearing as the preceding testimony. Wagner talked mostly about current tax law as it applies to gambling, while Steele said his office had no experience dealing with online gambling and talked mostly about fraud and money laundering as it concerns brick and mortar establishments.

John Pappas, the director of the Poker Players Alliance, an advocacy group, had this to say after the hearing: "Today's hearing underscores the increasing Congressional interest in a licensed and regulated online gaming environment. While the robust consumer protections provided by regulation are the biggest selling point, in the current economic environment, additional tax revenue derived from a licensed industry is certainly appealing as well."

The next step for the bills regarding online gambling is to undergo a mark up in the House Financial Services Committee, which Frank chairs. If the bills can get past a committee vote, they could be voted on by the full House of Representatives. Frank, through his testimony, said the next committee meeting should take place in July. We'll have more details on the legislation and its progress in Congress as events warrant.