Colorado Sports Betting Dealt Scathing Audit by State Watchdog

Colorado Sports Betting Dealt Scathing Audit by State Watchdog article feature image

Vincent Ethier/Icon Sportswire via Getty Images. Pictured: Colorado Avalanche standout Nazem Kadri.

Inconsistencies with Colorado's oversight of sports betting are costing it potentially millions in tax revenue, according to a state watchdog.

A Colorado Office of the State Auditor Report, released Monday, found irregularities with operators’ tax filings, holes in the Division of Gaming’s background-check process and aspects of the law they say are ripe for abuse.

The audit, which spans $2.3 billion in bets between May 1, 2020 and April 30, 2021, is the first look under the hood since Coloradans legalized sports betting via a 2019 ballot referendum.

Under state law, audits must occur every five years.

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Revenue Reports Don't Match Up

Investigators found “wide variation between the amount of wagering activity" in operators' daily reports and the totals in their monthly tax filings.

One operator reported $1.4 million more of revenue in its daily filings than it did in its monthly tax report, while another reported $1 million more in its monthly filings compared to its daily filings, according to the audit.

The audit does not name operators.

The "independent integrity monitors" the division uses to verify revenue reports are primarily tasked with safeguarding against suspicious gambling activity, the audit said. It recommended the division and the Colorado Limited Gaming Control Commission mandate operators verify betting activity and explain any irregularities between reports.

The division said it would start doing so by September and added that it's working with the Governor's Office of Information Technology to develop a "sports betting data management system."

“With the implementation of the sports betting data system, the audit team will be able to run reports generated from direct daily data feeds from the operators and verify them to the monthly tax obligations," the report said.

The 10% Tax Functions More Like 9%

Under law, revenue from a 10% tax on sports betting is supposed to fund the state’s water plan, but funding’s come up well short of initial projections.

In 2021, Colorado generated $11.7 million in sports betting revenue, which was far from the $29 million annual figure projected in the ballot measure. That same year, lawmakers sent the largest sum of general fund revenue in state history to the water program.

Colorado’s law allows operators to carry forward negative losses month-to-month and to write off revenue tied to promotional bets/free play from their taxable earnings. That makes the real tax rate more like 9%, according to the audit.

It found that 19 of 27 operators reduced their tax liability by a collective $706,000 in their first year.

A bill sitting on Gov. Jared Polis' desk would phase out the promo write off by 2023, which could make Colorado the first state to get rid of the perk.

The audit found that while states like New Jersey and Indiana allow operators to deduct winnings from free bets paid out to players, Colorado stands alone allowing operators to deduct the entire amount of a bet.

It added that the perk could be enticing operators to increase payouts in exchange for a smaller tax bill.

"Department staff stated that they believe some operations that reported high losses could be losing money intentionally to gain market share, but the Division has not conducted an analysis or investigation to verify, or assess the pervasiveness of, such intentional losses."

Because Colorado operators are subject to the state's corporate income tax on top of the gaming tax, they can take those same losses as deductions twice, giving them even more of an incentive "set odds that result in larger player winnings," the audit said.

Audit: Background Checks Lacking

A deluge of temporary licenses handed out by the commission is sparing most operators from mandatory background checks, the audit found.

According to the audit, as of March 2022, 35 of the 39 sports betting licenses held by casinos were "temporary", which let operators take bets while waiting for permanent approval.

In five of those instances, the division failed to complete minimum background checking required for a temporary licenses, the audit said.

“Incomplete investigations increase the risk that the Commission is making temporary licensing decisions that are not fully supported or defensible,” Audit Manager Jenny Atchley said in a release accompanying the report.

The division does not have formal guidelines for investigating license applicants nor does it define what's to be included in that process, the report found. The division agreed with auditors' recommendation that it put together that regulatory framework, but said it wouldn't implement it until next February at the earliest.

The commission is holding its monthly meeting Thursday, June 16. Attendee information is available here.

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