The Colorado Office of the State Auditor recently released a mandated performance audit of the Department of Revenue’s oversight of the Colorado sports betting industry. To say the report was scathing would be an understatement.
The 50-plus page report covers the first year of legal sports betting in the Centennial State, from May 1, 2020, through April 30, 2021. The report’s key finding:
“During the first year of regulating sports betting, the Division of Gaming (Division), within the Department of Revenue (Department), did not have an effective process to investigate sports betting operations for temporary licensure, or to collect sufficient documentation to determine if sports betting operations’ monthly tax filings were accurate.”
The above statement is just the tip of the iceberg.
Lax Licensing Process
According to the report, “as of March 2022, 35 out of the 39 (90 percent) licensed retail and internet sports betting operators held temporary licenses.” The temporary licenses were meant to give the Department of Revenue more time to conduct background investigations and issue permanent licenses. That doesn’t appear to be the case. With the two-year temporary licenses expiring, the Department of Revenue has decided to issue new temporary licenses.
Making matters worse, the audit concluded that, “The Division did not complete minimum background investigative procedures for the 5 licensed operators we sampled, and the procedures that were completed may not have provided relevant information needed to fully inform the Division’s licensing recommendations to the Commission.”
Conflicting Revenue Reports
In a sample of 22 tax filings, the audit uncovered several discrepancies. Two “variances” the report cites are:
“… an operation reporting $1.4 million more in net sports betting proceeds in its daily wager reports than it reported in its monthly tax filing, to an operation that reported $1 million less in net sports betting proceeds in its daily wager reports compared to its monthly tax filing.”
You Get a Deduction, and You Get a Deduction
Colorado imposes a 10% tax on sports betting revenue. But Colorado policy permitting promotional deduction and loss carryover has reduced the amount the state collects to just 4.4%. The audit also revealed sportsbooks took advantage of a loophole that allows them to deduct losses on state business tax fillings.
The report notes, “This means that sports betting operations benefit from being able to deduct and carry forward losses twice—both from their state income and sports betting tax liabilities.”
The legislature did pass a 2022 law that will limit the amount of promotional credits operators can deduct, but the loss carryover and income tax deductions remain untouched.
How Much Blame do the Regulators Deserve?
To be fair, the Colorado Department of Revenue, like many other states, had sports betting thrust upon it and under pressure to meet impossible timelines. We see the result in many states: temporary licenses and overworked regulators racing to educate themselves on how to regulate a new-to-them technology.
It is the meddling of politicians that causes problems such as those that occurred in Colorado. The direction should be that the pace should be determined by the regulators. The regulators are overwhelmed trying to stand up verticals that they hardly understand. https://t.co/zjNvXVgJPh
— Richard Schuetz (@Schuetzinc) June 15, 2022
As former California regulator and industry expert Richard Schuetz points out, the regulators should determine the timeline, not the politicians or the industry. These outside forces are putting regulators in a no-win situation.
And to be clear, Colorado is in the spotlight because the regulators were subject to oversight.
I think what makes Colorado an interesting case is that someone was actually looking over their shoulders. The others, not so much. Juvenal, the ancient Roman poet said rightly: "Who guards the guards themselves." https://t.co/QZ5qXexqtK
— Richard Schuetz (@Schuetzinc) June 14, 2022
The audit tasks the Division with 10 major recommendations, including improving the “efficiency and effectiveness of sports betting license investigations” through a stricter regulatory framework. It also outlines ways to assure sportsbooks appropriately report tax payments.
Upshot
The Findings in Colorado should be a wake-up call for lawmakers to back off their arbitrary timelines and for regulators to make it clear what they need in terms of time and financing to regulate the industry properly.
