Updated on 10/28/2013 1:01PM

Pennsylvania law boxes out 'unlicensed' ADWs

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A tax approved by the Pennsylvania le gislature this summer has thrown the state’s account-wagering businesses for a loop, with confusion and uncertainty reigning among customers of the operations.

The tax, which was contained in an enormous budget bill approved June 30, is being applied to “unlicensed” account-wagering operators in the state, a description that fits all but a handful of account-wagering companies. Under the law, the unlicensed companies must pay 10 percent of the handle from a Pennsylvania resident to the state, with the money going to fund the state’s horse racing commission, which has been underfunded for years due to budget cuts and declining handle, despite more than $1 billion in slot-machine subsidies flowing to horsemen over the past six years and the billions of dollars in revenues reaped by the tracks though their casinos.

Pennsylvania racetracks also have some of the highest takeout rates in the country, with takeouts on trifectas and other single-race superexotic bets at 30 percent or higher.

Users of horse racing websites have complained recently that their account-wagering companies have sent them letters telling them to close their accounts, citing the tax. Those reports could not be verified; officials for several account-wagering companies declined to comment on the situation, and other companies did not return multiple phone calls over the past week.

Under Pennsylvania’s account-wagering law – which was passed in the 1980s – only state racetracks are allowed to accept bets over the phone or Internet. The law, which protects the racetracks from out-of-state competition, allows the racetracks to partner with account-wagering operators, and those operations are considered licensed. TVG is a partner with Harrah’s Philadelphia, a harness track; Penn National runs its account-wagering operation through eBet, which is owned by Sportech and licenses ADW operations to racetracks; and XpressBet is a partner with the Meadows. Parx runs its own account-wagering operation as well.

Those operations can accept bets from Pennsylvania customers without paying the tax, according to Samantha Krebs, a spokeswoman for the racing commission. Elizabeth Brassell, a spokeswoman for the state’s Department of Revenue, said that unlicensed companies have been notified about the tax, which went into effect when the legislation was passed.

Brassell said she could not identify which account-wagering companies were sent the letters or which companies have filed the monthly tax returns required under the law because of “taxpayer confidentiality.”

It is uncertain which horse racing entity or entities, if any, in the state pushed for the tax. An official for a racetrack in Pennsylvania – who would only speak on the condition of anonymity, citing the uproar among bettors caused by the situation – said that racetracks did not know about the tax until it was already signed into law. Officials for the state’s horsemen group have not returned multiple phone calls over the past week.

Account-wagering companies typically retain approximately 12 percent to 18 percent of each bet, leaving at least a small margin even with the tax. However, many small account-wagering companies – those most likely to be unlicensed in the state – award generous rebates to their best customers, and a 10 percent tax would likely reduce their margin to zero or push it into negative territory without a rollback in the rebate rate. Bettors are highly adverse to cutbacks in their rebates.

Account-wagering customers who have been cut off from their companies can at least sign up for one of the licensed operations in the state. However, under another protectionist provision of the law, customers within 35 miles of a racetrack are limited to signing up with that racetrack’s operation. Customers outside that radius can pick and choose among the licensed operations.

Those restrictions also have led the licensed account-wagering companies in the state to complain in the past about the unlicensed companies, many of which took customers from inside the radius of a track’s market area.

An earlier version of this article referred to eBet as a subsidiary of Penn National. eBet is a is a company owned by Sportech that licenses account-wagering operations to racetracks.