Coloradans continue to up the ante on their sports bets. So why did tax revenues plummet?

You’ve seen the come-ons, virtually nonstop on TV in between the onslaughts of political advertising: Online sportsbooks offering “free” money to bet on their site, or offering ridiculous proposition bets that make you a winner in an NFL game if either team scores a touchdown.

Maybe you’ve even downloaded an app yourself and made some easy money. That means you contributed to the more than $207 million legally wagered in September on sports in Colorado. Aside from your winnings, you might also feel good that all that money is contributing to the tax revenue that soon will fund Colorado’s much-needed water projects.

Unfortunately, it’s not that simple.

Customers continue to gravitate toward the state’s sportsbooks — the lineup has grown from a handful to 15 online and 12 walk-in retail outlets — and the amount of money bet on sports has grown rapidly, especially since the return to play of major sports in late July after a coronavirus shutdown. But after an initial rise, tax revenues last month plummeted to their lowest level since sports betting became legal at the start of May.

The reasons, industry analysts and sportsbooks explain, are tied to new operators in a highly competitive market offering those practically can’t-lose bets to lure new users, especially online. Additionally, the natural unpredictability of sports competition took a turn against operators — and in favor of Colorado bettors — that resulted in a lower “hold percentage,” which is how much of all those bets operators actually keep (and pay taxes on) after payouts.

In Colorado, the hold was 1.9% last month. Normally, it ranges between 6-12%, according to industry expert Max Bichsel, vice president of U.S. business for the Gambling.com Group.

“Basically, people won money in September, that’s what it comes down to,” Bichsel said. “The players won money and the sportsbooks didn’t. There’s a bunch of reasons why the sportsbooks didn’t perform as well. At some point, that average hold percentage, month over month, will start to rise, and you’ll see considerable revenue coming into the state.”

In September, operators offered free bets to new players who were coming into the sports betting market specifically for football, and they used free bets as a customer acquisition tool during a football push.

Suzi Karrer, Colorado Department of Revenue spokeswoman

But while the sports betting business gets off the ground in Colorado, the competition for new customers has triggered promotion of those easy bets, designed to attract interest by providing a fun and risk-free experience. That has contributed to lower revenue for sportsbooks, and less tax collected for the state.

“In September, operators offered free bets to new players who were coming into the sports betting market specifically for football, and they used free bets as a customer acquisition tool during a football push,” said Suzi Karrer, a spokeswoman for the state Department of Revenue. “We anticipate seeing the same push by operators during other large events. For example, the Final Four or the playoffs could see the same marketing push to gain market share by operators.”

From that $207 million bet in September, a figure known as the handle, sportsbooks retained only about $4.2 million in revenue — down 44% from August. Taxes declined 63% from the previous month.

“That 19% gap can be attributed to those ‘fake bets,’” Bichsel said. “They’re not taxable, just a promotional bonus that the regulator doesn’t tax. The first few months of a market opening up gets ultra confusing.”

Allowing those promotions to be excluded from total revenue for tax purposes isn’t uncommon, Karrer said, as both Michigan and Virginia also allow promotional deductions.

A DraftKings.com billboard is pictured between traffic and highway signage on the 6th Avenue Freeway near Osage Street in Denver on Thursday, August 20, 2020. An advertising blitz offering low-risk bets was one factor that drove down September sportsbook revenue — and with it, tax payments to the state. Photo by Andy Colwell, special to The Colorado Sun

“Operators utilize free bets as a new customer-acquisition strategy,” she said. “We anticipate that once the market is established and saturated in Colorado, the strategy may change to customer retention and satisfaction in promotions offered.”

Projecting tax revenues on sports betting has been difficult, and some early guesses proved high. A more recent analysis by the state Division of Gaming put estimated tax receipts at $1.5 million-1.7 million for fiscal 2020-21. With numbers now available for the first five months of operation, the state has collected just over $808,000, with the most recent month’s receipts, $69,771 for September, ranking as the lowest so far.

State Rep. Alec Garnett, a Denver Democrat who backed the bill that legalized sports betting last year, said the declining tax revenue numbers amid the rising handle are “worthy of a conversation about what’s driving the spread in different directions.”

The first few months of a market opening up gets ultra confusing.

Max Bichsel, V.P. of U.S. Business, Gambling.com Group

“You’d assume it’s part of an advertising investment on the front end — but if that doesn’t slow down, then there are some statutory fixes the legislature can contemplate,” he said.

What few complaints he’s heard so far, Garnett said, have revolved around differences in the way various platforms approach certain types of bets where odds have been revised retroactively.

“I’ve heard other consumer-protection issues around differences on platforms,” he said. “Some rules, people feel are unfair. I think there’s going to be a cleanup bill that I’ll work on with the Department of Revenue and Division of Gaming and all these things will be considered for sure. We just did it, just opened, so these are fair conversations to happen. The door is going to be open for consumers and folks from the industry to sit down and navigate the best way forward.”

He noted that legislation that legalized marijuana in Colorado required fine tuning, but said feedback he’s gotten indicates that “people feel the platforms are honest and well regulated, innovative and really working quite well. But no matter how well the vast majority are going, there’s room to make it better.”

Between the mechanics of a new market and the coronavirus pandemic that threw the sports schedule into disarray, the statewide performance of sportsbooks could be “a couple years out” from predicting the ebbs and flows of money coming into the state.

“The market is healthy, it’s big, there’s competition — that’s what’s driving a lot of the promotional activity people find a little annoying,” Garnett said. “But we want competition because it is good for consumers.”

Some industry experts point out the simple truth that great taxable revenue receipts in the present would mean a lot of Coloradans lost bets. Looking to the future, that could hinder the industry’s growth by discouraging those testing the waters. By forgoing some tax revenue in the short term, allowing for the big promotional push, Colorado boosts its chances of nurturing a mature business and capitalizing on future tax money.

For the moment, they claim, Colorado simply suffers from a small sample size.

“We are just starting to see what the revenue and total handle are with sports returning to full play,” DOR’s Karrer said, “so we are looking for three to four months of solid data to see what the monthly averages will look like.”

Bichsel, of Gambling.com, said that for the first couple of months, sportsbooks are simply fighting for space on a user’s phone as bettors try different platforms and eventually settle on one they like.

“That’s when you see things become steady,” he said. “If I’m a customer in Denver over six months, there’s not that many promotions they can offer me. They may give me incentives, but they’re not giving free money like they did in the first months.”

Sports betting will never produce the kind of revenue that land-based casinos do, he said.

In September, Colorado brought in nearly $8 million in total gaming taxes — up nearly 38% from August.

With regard to sportsbooks, the handle is the most important number because it shows demand and an area’s ability to support a market, Bichsel said. Then, the law of large numbers takes over, and provides greater predictability to the market.

“Once you start taking more and more bets, the results become more predictable and you can rely on them,” Bichsel said. “There’s going to be a big tax windfall at some point.”

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