Among numerous charges included in the indictment against David Carruthers and 10 others involved in the BetonSports online sports book was that of tax evasion. It was a bit of a surprise to many because: 1) Carruthers has stated for years that he would be happy to pay taxes in the United States if a regulatory system was put in place, and 2) offering bets over the Internet is considered illegal in the United States, so how can the government collect taxes on it?
We brought it to the experts. We asked them:
What's the deal with the charge related to the wagering excise tax?
Anthony Cabot: Concerned about the control of illegal sports betting, Congress passed the Wagering Excise Tax (26 U.S.C. § 4401) and the Occupational Stamp Tax (26 U.S.C. § 4411) in 1951, which originally applied to sports, numbers, and horse bookmaking and called for a 10 percent tax on revenues and a $50 occupational stamp required for each person employed in gaming operations. Over the years, these rates have changed; today the occupational charge is $500 and the tax on revenue is 0.25 percent.* Failure to pay these taxes is a criminal offense.
*Robert Schmidt, Charles F. Barr, and David A. Swanson, Socioeconomic Impacts of the Proposed Federal Gaming Tax. 20 International Journal of Public Administration: 1682. (1997).
Tony Cabot has practiced gaming law for over 23 years with an emphasis in traditional gaming law and Internet gaming, sweepstakes, and contests. Prior to joining Lewis and Roca, Mr. Cabot was a partner with Las Vegas firm Lionel Sawyer & Collins where he chaired their gaming practice. Recently, he was a founding member of the International Masters of Gaming Law Association, a worldwide organization of prominent gaming attorneys devoted to the on-going education and communications within the gaming industry.
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"If at trial, it is found that offering gambling over the Internet from outside the USA is grounds to assert American jurisdiction, this will be the first time the issue was ever adjudicated in a U.S. court. And very wrong."
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Martin Owens: Title 26, US Code, known and loved by all as the Internal Revenue Code, requires that every person in the business of gambling who takes state-authorized bets pays Uncle Sam 0.25 percent of the amount of each bet. If the bet is not okayed by the state, the operator/ bet taker owes a flat 2 percent (26 USC §4401) However, state lotteries, pari-mutuel bets and coin-operated betting machines are exempt (§4402). Now, the operator is responsible for keeping track, a daily record in fact (§4403).
Territorial limitations:
4404. Territorial extent
The tax imposed by this subchapter shall apply only to wagers
(1) accepted in the United States, or
(2) placed by a person who is in the United States
(A) with a person who is a citizen or resident of the United States, or
(B) in a wagering pool or lottery conducted by a person who is a citizen or resident of the United States (§4404).
Now in addition, there is a special tax of $500 per year on any person liable for taxes under section 4401, and they must register with the IRS office (4411 & 4412). This has been upheld as a valid exercise of government power under the Constitution on a number of occasions.
So, the Kaplans, and the others who are U.S. citizens have been accepting bets from U.S. citizens, so technically they owed tax on all this, plus, penalties and late fees, and a pa-a-artridge in a pear tre-e-e-e. . . .
But a whole lot of that charge, to say nothing of the whole case, seems to revolve around whether those Internet casinos and sports books are found to be actually "doing business in the USA."
If at trial, it is found that offering gambling over the Internet from outside the USA is grounds to assert American jurisdiction, this will be the first time the issue was ever adjudicated in a U.S. court. And very wrong.
Martin Owens is an attorney who specializes in the problems of operating gambling businesses online. Services emphasize strategic planning and preventive action in such areas as legal compliance and proper corporate structuring, as well as contracts, intellectual property protection, technology transfer, domain names, and the assorted other ramifications of operating online. Feel free to address questions and comments to mowens@trade-attorney.com.