Is Colorado's Sports-Betting Tax Rate a Big Win for Operators?

Sportsbooks can write off promos when doing their taxes.
Sportsbooks can write off promos when doing their taxes.
Photo-illustration by Jay Vollmar; photos from Getty Images
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Every month, reports on sports betting in Colorado show that fans here are clearly enjoying the now-legal activity. From May 2020, when the sports-betting market opened in this state, through February, sports bettors  wagered $1.78 billion in Colorado.

The State of Colorado has benefited from the legal market, collecting $4.49 million in taxes during that same period. The vast majority of the tax money generated from sports betting goes to the Colorado Water Plan, a perennially underfunded program created by John Hickenlooper's gubernatorial administration that seeks to ensure that water for agriculture, drinking and recreation remains adequate in Colorado.

But is the tax money just a trickle of what Colorado could collect?

"I think it's strange that the state is making so little," says Jessica Welman, a sports-betting expert and analyst for PlayColorado.com, who describes the Colorado sports-betting market as a "healthy industry."

Although technically there's a 10 percent tax rate on sportsbook winnings, the state allows sportsbooks, which are the mobile apps and casinos that set betting lines for wagers, to write off free bets and promotions. (Bettors don't have to pay any taxes if they bet and win...until it comes time to file income tax returns, of course.) But sportsbooks are able to deduct the cost of promotions from their winnings before taxes.

"Ten percent, which seems like a fair number, suddenly just becomes a lot smaller when the promo dollars come into the mix of things," notes Welman.

In September 2020, the NFL's inaugural month, Colorado bettors placed $207.66 million in sports wagers. Many of those were inspired by can't-lose promos offered by sportsbooks that took a hit on those easy bets but wound up winning new customers.

According to the state, the gross gaming revenue for September — the total amount of money wagered, including free bets and promotional plays, minus payments to winning players — was $4.17 million. But the net sports-betting proceeds for that month — the gross gaming revenue less a .25 percent federal excise tax on the total amount of money wagered, and minus free bets and promotion plays — was negative $3.39 million. While some sportsbooks did have positive taxable income, others did not, and dragged down the overall take by millions. As a result, Colorado got just under $70,000 in tax revenue from sports betting in September 2020 — and the sportsbooks won customers while paying less in taxes.

For Welman, that raises the question of whether the sportsbooks are offering the promos for "the tax setup or to capture market share."

The latter, suggests Jay Kornegay, a Colorado native and vice president of race and sportsbook operations at Westgate Las Vegas Resort & Casino, which runs the SuperBook sports-betting app in Colorado.

"I understand free bets and promos are deductions, but that’s not an incentive for us. It’s a bonus, but not an incentive," says Kornegay. "We want them to discover us, experience us, and become loyal customers in the long run, and that’s why we offer those types of options."

Across the country, tax rates on sports betting range widely. Nevada has a 6.75 percent state tax rate on the activity, while Pennsylvania has a combined 36 percent state and local tax rate on sports betting. (There are no local taxes on sports betting in Colorado.)

Sportsbooks express overwhelming satisfaction with Colorado's 10 percent tax rate, which was written into the language of the Proposition DD amendment passed by Colorado voters in November 2019.

"I think it’s a very fair, competitive rate that allows operators to offer fair pricing and odds to Coloradans that would entice those who have been using illegal channels to make their wagers to certainly consider or switch to a regulated sportsbook," says Kornegay.

Colorado currently boasts twenty licensed online sportsbook operators and seventeen licensed retail sportsbook operators. The difference in odds for bets can vary from one operator to another, so a little app surfing can pay major dividends for smart bettors. And many of the apps are trying to one-up each other by offering bigger and better promos.

Alec Garnett, a Denver Democrat who now serves as Speaker of the House, spearheaded the bill that created Proposition DD. It was the product of "extensive research and careful, in-depth negotiations with stakeholders on every side of the issue," he says.

After a study of sports-betting tax rates across the country, he and other lawmakers settled on 10 percent to "balance the interests and needs of our state water plan, the gambling industry, and especially everyday Coloradans," Garnett explains.

As for promotional write-offs, Garnett says: "Regulations for sportsbooks are carefully outlined in law and enforced by the Division of Gaming. We trust the division to handle ongoing issues related to sportsbook operations."

In the run-up to the Prop DD vote, supporters suggested that sports betting would generate between $5 million to $15 million in state tax revenue in the first years of legal gaming. With $4.49 million in taxes already collected over the first ten months, Colorado should easily top the $5 million mark in the first year — even though major sports leagues were shut down for a few months because of COVID.

But Proposition DD allows the state to collect up to $29 million in sports-betting taxes every year, 93 percent of which can go toward the Colorado Water Plan. And if the promos continue at the current rate, Colorado may have trouble getting near that cap.

In the meantime, though, the water plan is slated to receive another $20 million in stimulus funding from the state under a bill before the Colorado Legislature.

“The Colorado Water Plan is our path forward to ensure Colorado has the water resources we need to foster a thriving economy,” says Garnett, one of the sponsors of HB21-1260. “This investment will help Colorado build back stronger and be better prepared to weather the increasingly devastating droughts that are threatening our water supply. These projects will create jobs and build the water infrastructure of the future so that all our industries, from agriculture to outdoor recreation, can continue to prosper from this essential natural resource.”

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