What is an integrity fee?
Integrity fees were introduced by the National Basketball Association (NBA) and Major League Baseball (MLB) In 2018 during the Supreme Court case involving the state of New Jersey and the major sports leagues. It was introduced as a way for the leagues to capitalize on the spread of legal sports betting.
At its core, an integrity fee is essentially a tax on legal sports betting, but it does not go to state regulators. Instead, an integrity fee is paid directly to the professional sports leagues on the basis that it will go towards protecting the integrity of the sport.
Integrity fees also differ from traditional taxes in that it is a tax on “sports wagering handle,” rather than revenue. Handle is the total amount that bettors wager on sports- the money that a sportsbook handles. These fees have the potential to grant sports leagues much more money than a tax on revenue would in that a sum must be paid to leagues before a sportsbook has established how much revenue it has made.
What is integrity in sports?
In order for a sport to be fair, honest and safe it needs to have integrity. Integrity in sports is essentially making sure that everything going on in and around a sport is above board and that there is nothing going on that could make the sport look unfair, dishonest or unsafe. Things that could damage the integrity of sports could include match-fixing as well as team owners, managers and players betting on their own games.
How does an integrity fee work?
The integrity fee that was proposed by the leagues set a 1% tax on sports betting handle that would be payable to each league on which bettors could make a wager.
On average sportsbooks retain about 5% of sports betting handle. A 1% integrity fee has the potential to cut a significant chunk out of sportsbook revenue. On the basis that sportsbooks usually hold onto 5% of handle, a 1% integrity fee could lead to sportsbooks paying about 20% of their revenue to the leagues.
How can fees help ensure sports integrity?
There are a variety of ways for sports leagues to monitor the integrity of their games. One of the easiest things for the leagues to do is to educate the people involved in the sport. Leagues can educate players, managers and even the owners of teams by holding workshops and producing resources to help them understand why sports integrity is so important.
Another way to ensure sports integrity is to monitor betting patterns with the help of sports betting data providers. Some companies, like Sportradar, have dedicated integrity services available for their partners to use. The Sportradar integrity service has a number of solutions that help safeguard a sport’s integrity, including:
• Fraud detection systems
• Monitoring and detection services
• Education and prevention solutions
• Consultancy and regulation advice
Sport Integrity Global Alliance (SIGA) also works to protect sports integrity, ensuring that all forms of sport are played and governed under high standards making sure they are free from unethical and criminal activity.
SIGA champions a set of universal standards that all sports leagues should aim to meet and holds several events ranging from debates on integrity to mentorship programs. SIGA works with all stakeholders in the sports industry including sports teams, lawyers, academics and regulatory bodies.
The argument for integrity fees
The main argument for imposing integrity fees is that they will provide the sports leagues with an extra source of income that can be used to ensure that sports have sufficient integrity measures in place. The extra income would provide the sports leagues with the resources and opportunities to enforce tighter rules and regulations helping to police the integrity of sports.
Others in favour of integrity fees argue that, since sports betting companies make a profit from the leagues, they should be entitled to some of the money they make. Many lawmakers and industry stakeholders have dismissed such arguments.
In an interview with Gambling Insider, Sara Slane, Senior Vice President of Public Affairs at the American Gaming Association (AGA) said that these fees will “essentially be taking money away from the taxpayers and state. There will be less state revenue as the deductions are made before tax and revenue is paid to the state. The leagues appear to be more concerned with paying themselves.”
The arguments against integrity fees
Many arguments against integrity fees lie in the interest of states with smaller sports betting markets, given that these fees are based on income before sportsbooks have paid out any winnings. This means that profits are not taken into consideration and that businesses are at risk of making an overall loss after paying integrity fees, winnings and state taxes. If states were to lower taxes to lessen the financial impact on the sports betting market, meaning this additional fee could cut into state tax.
However, it’s not just businesses and states that could be affected by integrity fees. Integrity fees could also impact the consumer in that, in order to cover increased business costs and reduced tax revenue, bettors may be taxed on any winnings. This could mean they favour unregulated offshore gambling sites over legal Tennessee sports betting sites.
Others have argued that it would be unfair for sports leagues to expect a share of revenue from the industry and that, whilst they provide the sporting events, they don’t play an active role in the sports betting industry. In fact, Steve Sweeney, Democratic State Senate President, described the fees as ‘extortion’ in a letter addressed to governors and legislative leaders, arguing that, in essence, ‘the leagues are asking to be paid to allow games to be played fairly.’
Sweeney also highlighted another argument against the fees, questioning ‘what [leagues] would now start doing to preserve the integrity of their games that they have not been doing for years.’ This stems from the belief that sports leagues should already have measures in place to protect integrity and should not be reliant on the extra income.
Could integrity fees work?
Only one state has entertained the notion of integrity fees in its legislation, and even this was unsuccessful. Representative Alan Morrison in Indiana, included integrity fees in his sports betting legislation, but this legislation was unsuccessful. Whilst this legislation did not become reality, it does demonstrate that not all states are opposed to the inclusion of integrity fees.
The Indiana representative consulted the NBA and MLB during the process of crafting the legislation. He understood the leagues’ argument and concluded that it was up to them if they felt they should be compensated for wagers being placed on their sports.
Sports betting regulation in Australia demonstrates that integrity fees can work. In Australia, sports leagues enter into private integrity agreements with sports betting operators and gambling companies. These agreements stipulate that operators pay fees of up to 4% on betting turnover to the sports regulatory body. On top of this, the sportsbooks must meet integrity standards and regulations set by the sports leagues if they wish to offer sports wagering.
Alternatives to integrity fees
The sporting leagues in North America could learn a lot from other countries that have legal and regulated sports betting. For instance, UK sportsbooks don’t pay integrity fees but pay data rights fees to sports leagues in the country. The English Premier League is a prime example of how data rights fees have helped boost revenue, having sold official match data to sportsbooks.
In the years before the repeal of PASPA, the sports leagues in America have sold access to their sports data to the daily fantasy sports operators DraftKings and FanDuel. Selling access to their data to sportsbooks would certainly be more popular among state lawmakers than implementing integrity fees, as this wouldn’t cut into state tax revenues.
In the months after the PASPA repeal, we have already seen several partnerships between sports betting operators and sports leagues which grant the sportsbooks exclusive access to league data. On top of this, a number of sponsorship deals have been forged, showing there are other ways for the leagues to capitalize on legalized sports betting in America.
Integrity fees have not been popular with stakeholders in the sports betting market. Not only do they have the potential to cut into a state’s tax revenue, but they could also make it much harder for smaller operators to survive in a highly competitive market. Right now it is very unlikely that state lawmakers would implement sports betting legislation that would call for an integrity fee as it would cut into revenue that would go towards the state and could create a much harsher environment for businesses to compete in.