US

Act 42 of 2017 authorises online in

By enacting Act 42 of 2017 at the end of October this year, Pennsylvania joined the small group of US states to have authorised . As well as facilitating an expansion of the State’s land-based sector, Act 42 authorises, regulates and taxes online fantasy sports contests, internet gaming websites and sports wagering activities, with the latter only efective in the event that US federal law changes to allow states to regulate sports wagering. Anthony R. Holtzman and Robert A. Lawton of K&L Gates examine in detail the provisions of Pennsylvania’s i-gaming statute, and comment on reactions to the Act so far.

After entertaining the idea for more the relative knowledge and skill of Licensed operators must implement than five years, Pennsylvania, on 30 participants’ and ‘are determined by procedures and controls that meet October 2017, enacted legislation that accumulated statistical results of the a number of consumer protection authorises and taxes internet gaming performance of individuals, including and other criteria. They must, for activities. With the enactment of Act 42 athletes in the case of sports events.’ example, develop and ofer certain of 2017 (‘Act 42’), Pennsylvania joined No winning outcome, moreover, may fantasy contests that are limited to New Jersey, , and Delaware as be based on the score, point spread, beginners and others ‘in which highly the only US states that have authorised or performance of ‘a single actual team experienced players cannot, either an online wagering program. As or combination of teams or solely on directly or through another person as a Pennsylvania strives to close its $2.2 a single performance of an individual proxy, participate.’ Certain people are billion budget deficit, it estimates athlete or player in a single actual event.’ restricted from participating in fantasy that Act 42 will generate more than contests, including corporations and $200 million in tax-and-fee revenue Under Act 42, the Pennsylvania Gaming other entities, people under the age of during the 2017-2018 fiscal year. Control Board (‘Board’) is charged 18, and a ‘licensed operator’s principals, with regulating fantasy contests in employees and relatives living in the Act 42 is a multifaceted gaming bill Pennsylvania. The Board is empowered same household of an employee or that not only facilitates an expansion to issue fantasy contest regulations principal[.]’ A licensed operator must of land-based gambling activities in and licences to operate fantasy contest also verify a person’s age, location, Pennsylvania, but also authorises, websites. It is also authorised to and identity before allowing him/her to regulates, and taxes the operation of enforce the fantasy contest provisions make a deposit into a fantasy contest online fantasy contests, internet gaming in Act 42 and the regulations and account. Fantasy contests, in addition, websites, and online lottery games. licences that it issues by, for example, cannot be based on collegiate or high imposing administrative sanctions school athletic events or players. Act 42, in addition, authorises, regulates, for violations of those authorities. and taxes the operation of land- Any licensed operator that holds based and internet sports wagering Under Act 42, an entity is eligible for a Pennsylvania licence is activities. This authorisation, however, a licence to ofer fantasy contests in permitted to operate not only a is not efective unless and until US Pennsylvania regardless of whether it fantasy contest website, but also federal law changes so as to permit holds any other gaming authorisation. ‘fantasy contest terminals’ within the states to regulate those activities. To acquire the licence, the entity casino facility. The terminals are land- must demonstrate that, among other based devices that allow individuals Online fantasy contests things, it possesses the ‘financial to participate in fantasy contests. Act 42 establishes a comprehensive stability, integrity and responsibility regulatory regime for online fantasy to comply with [the statute] and Under Act 42, each entity that receives a contests in Pennsylvania. regulations established by the Board.’ licence to ofer fantasy contests must ‘pay The term of the licence is five years. to the Board a license fee of $50,000.’ The statute defines a ‘fantasy contest’ The fee for renewing the licence as an ‘online fantasy or simulated Act 42 establishes requirements for (after its five year term) is $10,000. game or contest’ that has an entry fee enabling fantasy contest participants and a prize and in which, among other to set up, fund, and make payments Each month, moreover, a licensed things, all winning outcomes ‘reflect from online ‘fantasy contest accounts.’ operator must pay ‘a tax of 15% of

4 ONLINE GAMBLING LAWYER Act 42 has been met with mixed reviews. Although the gaming industry has generally applauded the statute, some of its members have criticised the 52% tax on internet revenues as being oppressively high.

Anthony R. Holtzman Partner [email protected] Robert A. Lawton Counsel [email protected] K&L Gates, Harrisburg

its monthly fantasy contest adjusted Under Act 42, each entity that is licensed requirements include standards revenues.’ It also needs to pay an to operate a casino in Pennsylvania is for collecting and confirming age, ‘assessment,’ which is set ‘for each eligible for a licence to ofer online ‘peer- identity, residency, address, contact, licensed operator’ as ‘a percentage to-peer interactive games,’ like poker and password information. People assessed on the licensed operator’s (‘peer-to-peer games’), a licence to ofer under the age of 21 are not permitted fantasy contest adjusted revenues.’ ‘non-peer-to-peer interactive games to participate in internet gaming. The assessments are used to help which simulate table games’ (‘table The Board is required to approve all ofset the costs of administering the games’), and a licence to ofer ‘non-peer- of the online games that each internet fantasy contest provisions in Act 42. to-peer interactive games which simulate gaming licensee ofers. The Board must slot machines’ (‘slot machine games’). If, categorise each game that it approves Internet gaming websites within a specified timeframe, the casino as a peer-to-peer game, a table game, or As with the regulation of fantasy chooses not to apply for any one of a slot machine game. And it is obligated contests, Act 42 vests the Board with the these licences, a ‘qualified gaming entity’ to ‘establish, by regulation, technical exclusive authority to regulate internet may apply for it. The statute defines a standards for approval of interactive gaming activities in Pennsylvania. ‘qualified gaming entity’ as ‘a gaming games and interactive gaming devices entity licensed in any jurisdiction which and associated equipment, including Under Act 42, the Board is required to has satisfied the requirements of this standards to govern mechanical, issue a wide variety of internet gaming chapter and any other criteria established electrical or program reliability and regulations, including standards for by the Board, including financial and security against tampering and threats[.]’ testing and receiving approval for online character suitability requirements.’ The gambling games and devices, setting term of each licence is five years. Under Act 42, each casino must pay an wagering limits and payouts, calculating authorisation fee of $10,000,000, within a revenues, allowing wagerers to create With the Board’s approval, an internet set timeframe, to receive licences to ofer and use online gaming accounts, gaming licensee can, by contract, all three categories of online gambling conducting age, location, and identity authorise another online gaming operator games (peer-to-peer, table, and slot verification activities, and collecting, to operate its gaming website for it - in machine games) or $4,000,000, within reporting, and paying taxes and fees. accordance with a Board-issued licence a subsequent timeframe, to receive a that has a five year term. The internet licence to ofer any one of the individual The Board is also responsible for issuing gaming licensee can also, under an categories of games. To the extent that, licences to ofer online gambling games arrangement with a ‘qualified airport,’ within the latter timeframe, the casino and licences (or other authorisations) provide for internet gaming to be does not apply for one of the three for people to be employed by the conducted through ‘multi-use computing licences and a ‘qualified gaming entity’ operators of the games or to supply devices’ that are located in ‘gaming areas’ applies for it instead, the qualified gaming them with certain internet gaming- at the airport or, if applicable, authorise entity must pay an authorisation fee of related goods and services. And the other online gaming operator to $4,000,000 to receive the licence. The the Board is empowered to enforce undertake that task on its behalf. fee for renewing each of these licences the internet gaming provisions in (after its five year term) is $250,000. Act 42 and the regulations and Act 42, in addition, establishes licences that it issues by, for example, requirements for enabling wagerers Separately, an online gaming imposing administrative sanctions to set up, fund, and make payments operator that receives a licence to for violations of those authorities. from online gaming accounts. Those operate a gaming site on an internet

A Cecile Park Media Publication | November 2017 5 US

Act 42 is a massive, complex, and historic gambling expansion statute, one that places Pennsylvania into a small group of states that have authorised an online wagering program and gives it the broadest program among those states.

continued gaming licensee’s behalf must pay as well as traditional lottery tickets, that under the age of 21 are not permitted an authorisation fee of $1,000,000. are ‘ofered through iLottery.’ ‘iLottery,’ in to participate in sports wagering. The fee for renewing that licence turn, is defined as a system that ‘provides The one-time fee for a sports wagering (after its five year term) is $100,000. for the distribution of lottery products’ certificate is $10,000,000 and the through various online channels that renewal fee (due every five years) Each internet gaming licensee, moreover, allow ‘players to interface through a is $250,000. A sports wagering must pay a tax of 14% of its daily gross portal for the purpose of obtaining lottery certificate holder must pay a tax of revenue from peer-to-peer games, products and ancillary services[.]’ 35% of its daily gross sports wagering 14% of its daily gross revenue from revenue. It must also pay a ‘local share table games, and 52% of its daily gross While Act 42, as a general matter, gives assessment’ equal to 2% of its daily revenue from slot machine games. It is the Department broad authority to ofer gross sports wagering revenue. likewise required to pay a ‘local share online lottery games, it precludes the assessment’ in the amount of 2% of its agency from ofering online games that Conclusion overall daily gross interactive gaming simulate poker or casino-style games. Act 42 is a massive, complex, and revenue. This assessment will be used Under the statute, moreover, an iLottery historic gambling expansion statute, one largely to support public interest projects. player ‘must be at least 18 years of age to that places Pennsylvania into a small establish an account with the Department group of states that have authorised Apart from these requirements, each and must be physically located within an online wagering program and gives internet gaming licensee must pay a the geographical boundaries of this it the broadest program among those special fee ‘upon [its] authorization,’ if Commonwealth to play iLottery games.’ states. By giving the go-ahead to online any, ‘to conduct interactive gaming at fantasy sports, internet gaming websites, a qualified airport through the use of Sports wagering and online lottery games, Pennsylvania multi-use computing devices[.]’ The fee Act 42 also establishes a comprehensive expects to generate substantial revenue ranges from $125,000 to $2,500,000, regulatory regime for sports wagering, to reduce its budget deficit and, at depending on the population size of the including internet-based sports wagering, the same time, protect consumers county where the airport is located and that will go into efect if, and when, from unscrupulous ofshore suppliers whether the airport is designated as an ‘federal law is enacted or repealed or a of online wagering opportunities. international one. The internet gaming federal court decision is filed that permits licensee must also pay the following a state to regulate sports wagering.’ That said, Act 42 has been met with taxes on the revenue that it generates mixed reviews. Although the gaming from the multi-use computing devices at The statute defines ‘sports wagering’ as industry has generally applauded the the airport: 14% of its daily gross revenue ‘accepting wagers on sporting events or statute, some of its members have from peer-to-peer games, 14% of its daily on the individual performance statistics of criticised the 52% tax on internet gross revenue from table games, and athletes in a sporting event or combination slot machine revenues as being 52% of its daily gross revenue from slot of sporting events by any system or oppressively high. Other stakeholders machine games. And it must pay a ‘local method of wagering, including over the have criticised Act 42 for being passed share assessment’ equal to 2% of the internet through websites and mobile by the Pennsylvania legislature too overall daily gross interactive gaming applications.’ Sports wagering methods quickly (within 18 hours after being revenue that it generates from the multi- include exchange wagering, parlays, introduced), channeling tax revenues use computing devices at the airport. over-under, pools, and straight bets. into certain lawmakers’ ‘pet projects,’ and unduly favouring . Online lottery games Act 42 empowers the Board to As another component of Act 42’s provide licensed casino operators Overall, though, most economic and online wagering regime, the statute with certificates that allow them to industry analysts see Act 42 as a win for authorises the Pennsylvania Department ofer sports wagering at their licensed Pennsylvania and its cofers. The State of Revenue (‘Department’) to operate casino facilities, at temporary facilities, is mobilising to implement the statute ‘iLottery games.’ The statute defines or over the internet through websites as quickly and efectively as possible. those games as ‘internet instant games,’ and mobile applications. People

6 ONLINE GAMBLING LAWYER