How to Legalize Internet Gambling

GMO Special Report: Originally published 11-07. Recent testimony before Congress by members of the Poker Players Alliance inspired me to come up with a solution to the Internet gambling conundrum that will keep the Federal government's nose out of what is basically a State business. And it came from one of gambling's biggest opponents. Thanks, Congressman Goodlatte!

On November 14, 2007 various members of the public were invited to testify before the U.S. Congress on the topic of legalizing Internet gambling, specifically in front of the House Judiciary Committee, which is chaired by Rep. John Conyers (D-MI), who is at least somewhat in favor of the idea. Annie Duke represented herself and other members of the Poker Players Alliance and did a great job of explaining how we poker players view the topic, especially in her exchange with Rep. Bob Goodlatte (R-VA) who is one of Internet gambling's biggest opponents. It's no secret that Rep. Goodlatte is pretty much against any form of gambling but he's smart enough to not play the "morality card", which so many other Republicans like to pull out during their arguments. Instead, Rep. Goodlatte played the "state's rights" card, a better approach, in my opinion, with which most liberals like me can readily agree.

The states rights argument basically says that it's up to each individual state to allow or disallow gambling within its borders. In fact, 48 of our 50 states allow one form of gambling or another, but Rep. Goodlatte is correct when he said it should be up to each state to determine just how far to go. Some states, like West Virginia have only "racinos", which are gambling facilities at the various horse racing tracks and others, like Nevada, New Jersey, Mississippi, Missouri, Illinois and so forth allow what's called Class III gaming, which covers slots, BJ, Roulette, Poker, etc. - "regular" casinos. Annie Duke expressed support for the House bill we've talked about here - HR 2046 - which would legalize Internet gambling and it was Rep. Goodlatte's comments on the bill that got me thinking. Although HR 2046 does have an "opt-out" clause which allows states that do not want their citizens gambling online to not participate, it does establish some sort of gambling commission, which is just another federal bureaucracy that none of us really need. For the first time in U.S. history, gambling would be controlled by the Feds - Internet gambling, anyway. That's scary. Of course, if it's the only we can get it, fine. Count me in.

But I think there's a much simpler solution to all of this, which I can best explain by example. The state where I live, Missouri, allows regular casino gambling - poker, Blackjack, Video Poker, Craps, slot machines, etc. Therefore, Missouri can easily amend the state gambling laws to allow its residents to gamble online if the licensed casinos here choose to offer it. The law as I envision it would let any casino licensed in the state (like Harrah's, for example) to set up computer servers in one or both of their facilities here, which would offer Internet gambling. By having the servers physically located in Missouri, the Missouri Gaming Commission would have access to them in order to verify their honesty and randomness of the games and - oh, yes, verify the amount of $$$ won by the online casino in order to collect the taxes due.

A big argument of the Internet gambling opponents is that the age and physical location of the participants cannot be verified in a reliable way, for which there may or may not be a technological answer - I just don't know. But I do know how it can be verified under my proposal. Before a Missouri resident can gamble - at say, Harrah's Online - they must physically go to one of the Harrah's casinos here in Missouri and present a valid photo ID, just as we do now for a Harrah's player club card (which is mandatory in Missouri because of our stupid $500 purchase limit). Anyway, after registering in person, a player is given an online ID number, goes back home and signs up with that ID on the Harrah's casino software from one (and only one) computer, whose location can evidently be verified by technological means. So now we have a lot of Missouri residents who use computers located in Missouri to gamble online at a Missouri-licensed casino whose servers are located in Missouri. I'm no constitutional scholar, but it seems to me that the Federal government has no say in all of this, whatsoever. It's called "state's rights."

What I do not know is how many Missouri residents will actually sign up, but I can guess it won't be millions; more like 10 or 20 thousand in the beginning. That's not an impressive number, but it will undoubtedly grow as the concept becomes more widely known across the state, (especially if Harrah's advertises on a site like this; hint, hint.) But I have an even better suggestion; what I call the "State Uniform Internet Gambling Act" or SUIGA ("Sweeja") for short. Again, I'm not a law expert but what's to stop a state like Illinois from adopting the same law for their casinos as Missouri? Nothing, of course. So, if Illinois, which has casinos all over the state, allows them to set up online operations for Illinois residents with the same "show up at a real casino to register" rules I propose, that's the first step in what could be an interesting synergy.

Today, it's entirely legal for me to drive to Illinois and gamble at a casino there. But if I do that and lose (admittedly not likely, but it could happen) the state of Missouri gets none of the revenue - it all goes to the state of Illinois. If I win, the state of Illinois gets nothing, but the state of Missouri benefits because I must pay state income tax on my winnings. If I play in Missouri, the state benefits whether I win or lose, so it's in the best interest of Missouri that I never gamble outside my state. Well, that's not going to happen, but if I gamble online, I might want to gamble at, say, a casino in Illinois that offers good Video Poker. Of course, that now becomes interstate commerce, which is ultimately governed by Federal laws. But the Feds typically only get involved if the states cannot agree with each other and that's where SUIGA comes in.

One thing that's unique about the Internet is that it can track our activity (assuming we want it tracked) in great detail. So, let's say that Missouri and Illinois sign a reciprocity agreement with each other regarding Internet gambling. It would basically say this: "Missouri residents who are properly registered for Internet gambling can play at online Illinois casinos and Illinois residents who are properly registered for Internet gambling can play at online Missouri casinos." The trick here is that (drumroll, please) each state would receive the revenue generated by its citizens, regardless of where it's generated. So, if I play at an online casino located in Illinois and lose, the amount "won" by the casino will be credited to Missouri for tax purposes. Oh, don't worry, the casino will get to keep my $$$; they earned it, after all, but if I lost, say, $1000 then the casino would owe the state of Missouri 12% of that or $120, which is what the tax is on casinos here (I think.) Of course, Illinois taxes their casinos also, but the Illinois casino where I lost would receive a tax credit for the $120 they paid Missouri so that they aren't taxed twice. Sound complicated? Well, it isn't.

For those of you who do not run Websites supported by advertising, let me tell you about what's called "affiliate advertising." While we don't use it here - all of our ads are prepaid by the advertiser with no guarantee of success - a site like this could choose to become an affiliate of, say, "XYZ Casino", where each player we send to them would be tracked by software and we would receive credit for their activity. We might be paid a fixed sum if our reader opens an account or we could be paid a portion of the player's losses; which way doesn't matter for my purposes here. The point is this: If a Missouri resident gambles online at an Illinois casino, the casino can track the results and pay the state of Missouri its share, just as though Missouri were an affiliate of the casino. On the other hand, Missouri online casinos can track the activity of Illinois residents and pay Illinois in the same way. By doing this, each state gets its share of all the gambling done by its citizens online; something that cannot happen if residents physically travel to brick and mortar casinos in other states.

This reciprocity agreement allows properly registered residents of one state - where online gambling is legal - to gamble online in another state - where online gambling is also legal - yet the "home" state of said gambler will benefit from the taxes generated. Sure, Illinois may have a different tax rate, say, 8% (just a guess), but they will owe that amount only on Illinois residents who play there. For all of the winnings the Illinois casino gets from Missouri residents, they'll receive a 12% tax credit because they paid that amount to Missouri. The only problem is that the casino may not like paying 12% tax on some winnings and 8% tax on other winnings, but because their operation is online the expenses involved in getting the revenue from Missouri residents is typically less than it would be if the Missouri resident physically visits the casino. Remember, online casinos have no dealers, no restaurant comps and so forth, which means they'll probably make nearly as much profit, dollar-for-dollar from a Missouri resident who visits them online, in spite of having to pay taxes to Missouri.

I can hear the casinos whining now: "But if we set up Internet casinos, we're competing with ourselves and we might lose revenue." Like most American businesses, casinos are happy to talk about being competitive, but what they really want is a monopoly. Well, I've got news for them. They're already losing revenue to online casinos and that's not going to stop until the "Brand Names" (Harrah's, MGM-Mirage, etc.) step up to the plate. In all candor, I don't have a lot of respect for most casino managers on whatever level, because they've been my competition for years and the vast majority have little or no imagination, which is best illustrated by the: "He's winning, so he must be cheating" mindset. Instead of embracing the fact that skill plays a part in some of their games, they prefer to toss out anybody who demonstrates that skill; except for Poker, of course, where the casino gets its revenue from the rake or tournament entry fee off the top. Obviously, the casino has no interest in who ultimately wins at Poker - they just want to run a good, honest game so that the $$$ keep coming in.

While it may seem obvious that online casinos established under my proposal should begin by offering Poker (table poker, like Hold'em, etc.) my feeling is that they won't have the "critical mass" needed for Poker, at least in the beginning. By offering the other casino games like slots, Video Poker and so forth, they can handle a small number of customers at little extra cost over that of setting up the operation in the first place. At least it gets the revenue stream started, which will allow them to advertise and promote their online operations. In time, it will grow, not only as new residents of the state sign up, but also as the state they're in signs reciprocity agreements with other states. Which brings us to residents of countries other than the United States; should they be allowed to sign up at, say, an online casino domiciled in the state of Missouri? I say yes, because right now the U.S. is under fire from the World Trade Organization (WTO) for allowing some electronic gambling like horse-racing and lotteries, but not "regular" casino gambling. On the flip side, if the casinos here allow non-U.S. citizens sign up, then they must also allow non-U.S. casinos to offer their products to U.S. citizens. Uh, oh....the old competitive thing. Well, I have an answer for that, too.

If a non-U.S. casino wants to attract U.S. citizens, my proposal includes the ability for the establishment of "electronic gaming-only" operations. Let's say that Poker Stars wants to do business with Missouri residents. First, they must obtain a Missouri gaming license, which - because it's not for a physical casino - should cost a lot less and secondly they must open an office here where Missouri residents can go in order to show the proper ID to get a registration card, just like they do at regular brick and mortar casinos. By having a physical presence here (I'm not sure that it's necessary to have their servers here, but I suppose that's possible), Poker Stars has now established a place where Missouri state tax collectors can pick up a check, so to speak. Yes, Poker Stars would pay the same state tax on their income as any other casino and because there is a licensed, legitimate presence in the state, anyone who has a dispute with Poker Stars has, what I believe is called, a "place of service"; that is, a place where the paperwork for a lawsuit can be served or delivered. We don't have that now; (not that I want to sue Poker Stars), but at least the operation will have more transparency.

In reality, I don't see Poker Stars opening an office in St. Louis, Full Tilt opening an office in Kansas City and Ultimate Bet opening an office in Columbia (the home of Mizzou - gotta get the college crowd!), but I do see the online operations combining forces to jointly open offices around the state - sort of an electronic gaming office where residents cannot only register for Internet gambling, but could attend "how to play poker" lessons, learn how Craps works and so forth. Having several offices like this in each state where Internet gambling is legal would cost these operations some $$$, but it would put a public face on them that is currently missing and they would ultimately attract more players because they run good operations.

As an alternative, my law will provide for operations like Poker Stars, et al. to join forces with a casino here, like the President Casino, which might not otherwise want to open up an online operation. The smaller, independent type of brick and mortar operations could serve as very nice "niche" fillers in the online casino business, which would keep mega-operations like Harrah's from taking over all of it so we end up with low-pay Video Poker and Blackjack games with lousy rules. And, the ability for the non-U.S. based operations to offer their product here keeps us in compliance with the World Trade Organization, yet keeps the tax $$$ on the state level, rather than shipping it off to Washington. Plus there's no need for a Federal Gaming Commission because all of this would happen on the state level. After all, gambling is a state's right.

The GameMaster