Tennessee Sports Betting Tax Set for Landmark Changes

The business of sports betting in Tennessee will never be the same.

Lawmakers in The Volunteer State recently pushed through a bill that will revamp the way they assess taxes on sportsbook operators. The decision will impact all forms of sports gambling that take place within state lines. It's still unclear when this new tax will go into effect, but the intent is beyond obvious: The state thinks it should be making more off Tennessee sports betting.

What prompted this amendment to active gaming policies? How much will this change the sports betting business in Tennessee? Are there any unseen consequences that could potentially arise following this decision? Could other states follow suit?

We are here to answer all of these questions—and more.

Has Tennessee Sports Betting Been a Disappointment?

Let's begin with the why. Tennessee is attempting to make this change to gambling tax rates because their sports betting revenue is not currently living up to expectations. This will no doubt catch plenty of people by surprise. Revenue from gambling is seen across the country as sort of a golden goose. As legal sports betting throughout the United States becomes more common, we're constantly hearing about record-breaking months and years. For most states, sports betting revenue is either meeting or exceeding expectations. And experts are almost always optimistic every market could see a gradual, if not immediate, increase in the profits they're turning.

Since legalizing sports betting towards the end of 2020, it has been a different story for Tennessee. And it's not necessarily because residents aren't betting on sports. Instead, it's more about their initial decision to institute a minimum 10 percent hold for all gambling operators. This law essentially stipulated that all licensed sportsbooks in Tennessee needed to carry at least 10 percent of their handle—or the total dollar amount of bets placed—at all times. Many thought it was a good idea at the time. It was supposed to ensure the state always had a profit pool from which to draw.

However, predicting sports betting handles is incredibly difficult. It doesn't just change by the month or even week. It can change by the day, depending on the sporting-event schedule and whether there's a higher-stakes game or contest taking place inside the state. As a result, nine of the 11 sportsbooks licensed in Tennessee ultimately received fines for failing to meet the 10 percent minimum, according to Legal Sports Report. Those shortages, meanwhile, are estimated to have cost the state tens of millions of dollars in projected revenue.

This is not to say The Volunteer State isn't making money. Roughly two and a half years into their legal sports betting era, Tennessee has earned about $135.2 million in total revenue. That's the equivalent of more than $50 million every 12 months.

And yet, lawmakers were clearly expecting more. That seems somewhat wild when simply looking at the raw figure. But it makes sense when you zoom out and look at the bigger picture. Sportsbooks have reported a combined profit of around $767.2 million during this time. The $135.2 million in revenue that has gone back to the state represents a tax rate north of 17 percent. This is a much higher rate than many other states have put in place. It's also below the 20 percent tax rate Tennessee wrote into their legal sports betting legislature.

How Will the New Tax on Tennessee Sports Gambling Work?

This new Tennessee sports betting tax is, in no uncertain terms, clearly an attempt to bridge the gap between expected earnings and what the state actually gets. Whether it'll work remains to be seen. But the structure does seem favorable for the state.

"Under the bill, SB 475, Tennessee sportsbooks would pay a 1.85% tax on handle, or the total dollar amount of bets in a month, as opposed to the revenue they make," Legal Sports Report's Sam McQuillan wrote. "The bill was concurred by the Senate after passing the House on Friday, the legislature’s self-imposed deadline for the year. Previously the Senate had sought a slightly higher 2% handle tax."

A 1.85 percent additive doesn't seem like much. But it amounts to quite a bit of money when you are dealing with handles in the billions of dollars. Sportsbooks in Tennessee have reported a combined handle of a little over $8 billion to date. If this tax were in place from the beginning, Tennessee would have turned another $14.8 million in revenue. Tack that on to the $135.2 million they actually received, and their total tax rate would climb above 19.5 percent. That's much more palatable when compared to the proposed 20 percent tax rate they're trying to hit.

Will Tennessee Sportsbooks Push Back Against New Tax?

Opponents of this bill, along with those lobbying on behalf of gambling operators, pointed out that an additional tax on betting handles could drive licensed sportsbooks outside the state while deterring other ones from attempting to operate in it. This is a valid concern on the surface. In the end, though, we don't think it'll amount to anything.

Tennessee curried favor with the top online sportsbooks in the state by slightly lowering the handle tax (from 2 percent to 1.85 percent), and more importantly, by agreeing to ditch the 10 percent handle hold. The latter will prove to be a game-changer for many operators who were struggling amid confusing and unpredictable circumstances.

If Tennessee online sportsbooks are amenable to the new terms, it raises another question: Could more states follow Tennessee's lead? We don't know for sure, obviously. But as the United States sports betting industry matures into a more established market, it absolutely could be a possibility.

Take a look at this list of the top online sportsbooks so you can find one that works for all of your sports betting needs: