Don't Mess With Taxes

Attention online gamblers. When you go to ante up today, your bet is likely to be refused.

Enforcement of online gambling legislation, officially known as the Unlawful Internet Gaming Enforcement Act or UIGEA, took effect at 12:01 a.m. June 1.

Actually, many online gamblers have for months already had to find alternate routes for their e-betting.

Earlier this year, online poker rooms and other gambling websites reported that Visa and MasterCard were already blocking transactions for placing bets. The actions by the card networks have forced many sites to secure, if not already implemented, alternate payment services.

But starting today, such efforts to stem online gambling will be mandatory, not voluntary.

Financial institutions, including banks and credit card companies, can no longer legally send money to Internet betting sites.

This prohibition has been a long time coming.

Dubya signed the SAFE Port Act, which contained the internet gambling provision (UIGEA), into law in October 2006. Banks were supposed to enforce the measure last December, but upon request of Poker Players Alliance and a group of Congressmen, Treasury Secretary Timothy Geithner granted a six-month extension.

The ostensible reason for the push back to June 1 was to allow banks and their card companies more time to structure compliance measures.

But it also has given some members of Congress time to push legislation that would erase the UIGEA requirements.

Congressional betting on taxes: The Internet Gambling Regulation, Consumer Protection, and Enforcement Act (H.R. 2267), is designed to legalize and regulate Internet-based gambling. The sponsor of that bill, House Financial Services Committee Chair Barney Frank (D-Mass.) plans to hold hearing on the measure in July.  

But the possibility of taxing online gambling has already come before a Congressional panel.

At a May 19 House Ways and Means hearing on a $42 billion proposal to legalize and tax Internet gambling, lawmakers in both parties raised concerns about how such a move could affect the overall traditional gambling industry.  

In addition to the legalization of Internet gambling, a separate measure would create a 2 percent gambling deposit tax on betting website operators. States and tribal authorities could also could add another 6 percent deposit tax instead of levying their own separate taxes, said Rep. Jim McDermott (D-Wash.), author of the gambling tax measure that likely would become a part of Frank's larger bill.

"Prohibition hasn't prevented the millions of Americans who want to gamble online from doing it," McDermott testified before the committee. "It has forced Internet gambling operators to work offshore, it has put consumers at risk, and it sends billions in dollars of revenue to other nations." 

McDermott believes his bill could raise $42 billion over 10 years, with states also seeing a boost in tax revenue. In addition,he said that the tax proposal could generate close to 30,000 jobs in the first five years.

Most of the billions in new federal revenue, McDermott told his colleagues, would come from individuals who win money gambling on the Internet and then declare their winnings on their income taxes. Licensed gambling operators would be required to send the IRS and the gamblers annual 1099-IG tax forms, listing the customers' net winnings or losses.

Congressional opposition remains: The main arguments against legalization and taxation of online gambling focus on the social ills that sanctioned online gambling could bring.

Lawmakers who represent areas that are home to brick-and-mortar gambling operations also object to the effort. Casinos operate in a dozen states and on tribal lands in 28 states; 42 states have government-backed lotteries.

Nevada Reps. Shelley Berkley (Democrat) and Dean Heller (Republican) both criticized the proposed deposit tax, raising questions over its structure and arguing that the online industry was better served by regulation and not taxation.  

Reps. Earl Pomeroy (D-N.D.) and Danny K. Davis (D-Ill.) also worry about potential jobs losses on North Dakota Indian reservations and on Illinois riverboat casinos if consumers choose to gamble at home via the Internet instead of visiting casinos.

And some lawmakers hedged their support, suggesting a two-step process. Legalize online gambling first and then reexamine how to tax it after an Internet-based industry is allowed to grow.  

However, as the U.S. and states continue to struggle with deficits, the odds could be better for Frank's and McDermott's proposals.

The Joint Committee on Taxation says the gambling industry in the United States did $92 billion in business in 2007, with illicit Internet gambling accounting for an estimated $5.8 billion of that amount.

And such numbers definitely get the attention of tax-writing lawmakers.

And Christopher Wagner, commissioner of the IRS Small-Business/Self-Employed Operating Division, told those at the hearing that the IRS is ready to work with Congress to enhance tax law enforcement in the area of Internet gaming operations.

The reason for Uncle Sam's support? Wagner testified that online wagering contributes to the tax gap.

So online gamblers, cope with the new law now. It might not be around for long.

Related posts:

• Bet on it, gambling winnings are taxable
• Online gambling on its way back to U.S.?
• Delaware preparing to take sports bets
• Federal court halts Delaware betting plan
• Taking a chance
• Super Bowl bets mean IRS losses
• Tax office workers win lottery millions
• Internet betting gets another advocate

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