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worldonline gamblinglawreport

From the 104th (1995-1996) through to the 109th Congress (2005-2006), Bills were introduced in the House of Representatives (‘the House’) or the Senate for the purpose of specifically prohibiting betting or wagering using the

• internet. The culmination of those

efforts in 2006 was the enactment

• f the Unlawful Internet Gambling

Enforcement Act (UIGEA)1. The 110th Congress (2007-2008) saw the introduction of the first Bill that would regulate and license internet gambling. In the 111th Congress (2009-2010), three Bills were introduced that would, if enacted, provide for the regulation and licensure of some form of internet wagering - one in the House and two in the Senate. A companion to the House Bill would address taxation of licensed

• perators. The Senate Bills would

also address taxation. Under the UIGEA, state- authorized ‘intrastate’ and tribal- authorized ‘intratribal’ wagering activities were excluded if the activities met certain requirements from the definition of unlawful internet gambling2. These exclusions initiated much commentary about whether one or more states would authorize some form of intrastate internet

• wagering. This article looks at the

Congressional bills and legislative efforts that have been taking place in two States - California and Florida - with respect to the regulation and licensure of intrastate internet poker. The Congressional Bills Three Bills are currently pending in the US Congress that, if enacted, would provide a licensure and regulatory scheme for certain types

• f internet wagering.

Representative Barney Frank (D- MA) introduced on 6 May 2009 H.R. 2267, the Internet Gambling Regulation, Consumer Protection, and Enforcement Act (‘the Frank Bill’). Senator Robert Menendez (D-NJ) introduced on 6 August 2009 S. 1597, the Internet Poker and Games of Skill Regulation, Consumer Protection, and Enforcement Act of 2009 (‘the Menendez Bill’). Senators Ron Wyden (D-OR) and Judd Gregg (R-NH) introduced on 23 February 2010 S. 3018, the Bipartisan Tax Fairness and Simplification Act of 2010 (‘the Wyden Bill’). All three Bills would add a new Subchapter V to Title 31, Chapter 53, of the US Code. Subchapter IV of Title 31 contains the UIGEA. Two Bills introduced by Representative Jim McDermott (D- WA) would amend the Internal Revenue Code to provide for the taxation of entities that might be licensed pursuant to the system the Frank Bill would institute. The first, introduced on 6 May 2009, is H.R. 2268, the Internet Gambling Regulation and Tax Enforcement Act of 2009. The second, introduced on 25 March 2010, is H.R. 4979, the Internet Gambling Regulation and Tax Enforcement Act of 2010’ (‘McDermott’s Bill’). While H.R. 4979 likely moots H.R. 2268, its provisions appear to have been the model for the taxing scheme in S. 3018. All the Bills were referred to and remain in committee. The House Committee on Financial Services held a Hearing on the Frank Bill

• n 3 December 20093. The House

Committee on Ways and Means is is scheduled to hold a hearing on ‘tax proposals related to legislation to legalize internet gambling' on 19 May 2010’. This section addresses two things. First, we consider similarities and differences in how the Frank and Menendez Bills would deal with the licensure and regulation of internet wagering. Senator Wyden's Bill - S. 3018 - is not discussed because its regulatory and licensure scheme is similar to that in Rep. Frank's Bill. Second, we consider the tax schemes of Senator Wyden's Bill (S. 3018), Senator Menendez' Bill (S. 1597), and Rep. McDermott's second Bill (H.R. 4976). The Frank and Menendez Bills As noted above, those Bills would amend Chapter 53 of Title 31 of the US Code by adding a new Subchapter V to follow Subchapter IV, which contains the UIGEA. The Bills would provide a regulatory and licensing framework in which the Secretary

• f the Treasury would issue licenses

to internet operators. However, the type of internet wagering activities covered by each Bill is different. The Frank Bill would authorize all forms of wagering (including casino games, poker, bingo and lotteries) except for sports wagering, while the Menendez Bill would authorize poker and other games it describes as predominantly of skill (i.e chess, bridge, mahjong and backgammon). The Bills would attempt to clarify how other laws impact internet wagering, including the Professional and Amateur Sports Protection Act (PASPA)5, the Interstate Horseracing Act (IHA)6, the Wire Act7 and the UIGEA.

world online gambling may 2010

03 USA

Legislative efforts to authorise and licence internet gambling

Despite previous efforts to prohibit internet gambling, the US has reviewed its position as the Congress - and several States - are in the process of enacting Bills to regulate internet wagering. Linda J. Shorey, Anthony R. Holtzman and Robert A. Lawton, of K&L Gates, examine the latest legislative developments in the USA.

The Bills would provide a regulatory and licensing framework in which the Secretary of the Treasury would issue licenses to internet

• perators.

However, the type of internet wagering activities to be covered by each Bill is different

world online gambling may 2010

to the public interest or to effective regulation and control of the licensed activities’ or (b) ‘create or enhance the dangers of unsuitable, unfair, or illegal practices’ of its licensed activities...; and (3) be ‘capable of and likely to conduct’ its business in accordance with the provisions of the legislation and any regulations prescribed under it.

• The Bills would deem unsuitable

for a license an applicant delinquent in filing any applicable federal or state tax return or in the payment of any applicable tax.

• The Menendez Bill would

disqualify from licensure those that knowingly accept or have accepted bets or wagers on sporting events from persons located in the US in violation of applicable federal or state law.

• The Menendez Bill would

provide a 90-day period, starting

• n the date that applications are

first accepted, during which applications may not be denied solely on the basis that an applicant ‘operated an internet game of skill facility, in interstate or foreign commerce, in which bets or wagers were knowingly initiated, received,

• r otherwise made by individuals

located in the United States’ .

• The Menendez Bill would

provide that Section 5382(b) of Subchapter V (making it unlawful to operate an internet game of skill facility without a license) would not apply for a period of up to two years if, no later than 90 days after the Bill is enacted, an operator provides written notification to the Secretary of an intent to apply for a license and, no later than 90 days from when applications begin to be accepted, files an application.

• The Bills would require licensees

to have ‘appropriate safeguards...to ensure the individual placing a bet

• r wager is physically located in a

jurisdiction’ that under the Frank Bill ‘permits internet gambling at the time the bet or wager is placed’ and, under the Menendez Bill,‘has not prohibited such bets or wagers’ , as permitted by the Bill.

• The Bills would require
• perators to take measures to

prevent underage individuals from

• wagering. The Frank Bill requires

wagerers to be ‘of legal age as defined by the law of a state or tribal area in which the individual is located when placing a bet or wager’ , while the Menendez Bill requires a wagerer to be at least 21. The Bills would make an effort to respect state and tribal decisions concerning internet wagering by allowing them to opt-out, i.e. to not allow or to limit licensees from accepting bets or wagers from people within their jurisdictions. Tax schemes All the Bills addressing taxation would employ a similar taxing scheme - a fee imposed on ‘deposited funds’ , i.e. the amount players deposit with an internet gambling operator to fund gambling activities. Deposited funds do not reflect ‘churning’ (winnings or losses that move in and out of accounts). State activity Like Congress, some states see internet gambling as a potential source of new revenue to help ease growing budget deficits. State interest in internet gambling was energized by the provision in the UIGEA that excludes intrastate wagering activities from the statutory definition of ‘unlawful internet gambling’ if certain requirements are met in connection with the activities. Florida and California are two prominent examples. Florida's proposal In February 2010, H.B. 1441 - the Internet Poker Consumer Protection and Revenue

USA 04

Among the clarifications proposed are:

• The Bills would provide that

Subchapter V is not to be construed to authorize a licensee to accept a bet or wager from a US- based person on a sporting event in violation of the PASPA.

• The Menendez Bill would

exclude from its licensure requirement operators who accept interstate off-track wagers under the IHA and operators who accept wagers on games of skill that ‘are not regarded as gambling under an applicable provision of State or Federal law in effect’ , when the Bill is enacted. However, the exception for skill game operators would be qualified by providing that those choosing not to obtain a license would not be able to rely on Subchapter V as validating the legality of their games.

• The Bills would provide a

defense to prosecution or an enforcement action if the activity at issue is authorized and has been lawfully done under Subchapter V.

• The Bills would provide that the

Wire Act and the UIGEA do not apply to wagers occurring pursuant to a license issued under Subchapter V. The Menendez Bill would also provide that the Wire Act and the UIGEA do not apply to wagers permitted under the IHA.

• The Bills would require - to be

eligible for licensure - the determination after ‘a background check and investigation, that the applicant, and any person deemed to be in control of the applicant, is suitable for licensing’ .

• The Bills would require

applicants to establish ‘by clear and convincing evidence’ that they meet certain standards, including: (1) to be of ‘good character, honesty, and integrity’; (2) not have ‘prior activities, reputation, habits, and associations’ that (a) ‘pose a threat

Generation Act of 2010 - was introduced in the Florida

• legislature. The Bill would

authorize and tax internet poker transactions conducted within

• Florida. Its opening provisions

express the intent to ‘[e]nsure that intrastate internet poker is only

• ffered for play in a manner that is

lawful under the federal [UIGEA]’ and ‘[p]rovide a new source of revenue that will generate additional positive economic benefits to the state’ . Florida's legislative session ended on 30 April 2010 without H.B. 1441 having been enacted. News reports indicate that Governor Crist is considering whether to call a special legislative session - it is possible the Bill could be considered during such a session8. Among the key provisions of H.B. 1441 are ones that would:

• provide a competitive

procurement process to identify ‘internet poker hub operators’ that would be licensed to offer intrastate online poker wagering

• pportunities;
• allow licensed cardroom
• perators to provide online poker

wagering opportunities through licensed internet poker hub

• perators;
• require that online poker wagers

were placed only by those physically present in Florida and at least 21 of age;

• require that registered internet

poker players would be protected from fraud, identity theft, and similar threats; and

• impose various taxes and fees on
• licensees. For example, licensed

internet poker hub operators would ‘pay a tax to the state of 20%

• f the monthly gross receipts

derived from the play of intrastate internet poker’ . Continued consideration of H.B. 1441, however, is complicated by the gaming compact between the Seminole Tribe (‘the Tribe’) and the State, authorized by Florida's legislature in April 2010. The compact provides that if the State authorizes internet gambling and there is a 5% drop in the Tribe's gambling revenue compared to the previous 12-month period, the Tribe is excused from making its guaranteed revenue share payment to the State9. Rumblings in California Although no Bill that would authorize, license, and tax internet gambling activities has yet been introduced during California's current legislative session, at least

• ne is expected.

On 9 February 2010, the California Senate's Committee on Governmental Organization held a hearing on internet gambling. Testimony was heard from 35 witnesses who addressed issues related to internet gambling in general, and the possibility of authorizing internet gambling in California in particular10. In April 2010, it was reported that Senator Wright, relying on the UIGEA's exception, was poised to introduce a Bill that would authorize, license, and tax internet poker transactions conducted wholly within California11. While the Bill has not yet been introduced, Senator Wright told participants of the 12 May 2010 Global iGaming Summit & Expo that he expects to introduce a Bill shortly12. California's interest in the new revenue that would be generated by licensure of internet poker is complicated by the interests of the State's Tribes. If Senator Wright's Bill or a similar Bill is introduced, the Tribes will likely meet it with

• resistance. If a Bill were enacted

and a court concluded that it allowed competition with Tribes for gambling revenues in violation

• f state-tribal gaming compacts,

California could lose millions of dollars in annual revenue share payments made by the tribes13. Conclusion The internet gambling industry is closely tracking the recent explosion of legislation that would, in some form, regulate internet gambling in the US, whether at federal or state level. While there is no certainty that the various barriers to enactment will be able to be hurdled in the near term, there is hope that new

• pportunities will eventually be

available in the United States for the internet gambling industry.

Linda J. Shorey Partner Anthony R. Holtzman Associate Robert A. Lawton Associate K&L Gates linda.shorey@klgates.com anthony.holtzman@klgates.com robert.lawton@klgates.com

• 1. 31 U.S.C. §§5361-5367.
• 2. 31 U.S.C. §5362(10)(B) & (C).
• 3. See www.house.gov/apps/list/hearing/

financialsvcs_dem/hr_112409.shtml

• 4. See http://waysandmeans.house.gov/

press/PRArticle.aspx?NewsID=11178

• 5. 28 U.S.C. §3702.
• 6. 15 U.S.C. §§3001-3007.
• 7. 18 U.S.C. §1084.
• 8. See Rule 10.11(b)(2)-(4) of the Florida

House Rules, available at www.jaxdailyrecord.com/showstory.php? Story_id=530944 and www.theledger.com/article/20100514/E DIT01/5145009?Title=Special- Legislative-Session-Override-Politics-of- Moment

• 9. See Gaming Compact Between the

Seminole Tribe of Florida and the State

• f Florida at XI.B.3 (28 April 2010).
• 10. See Hearing Transcript, available at

www.sen.ca.gov/htbin/testbin/ seninfo_dated?sen.committee.standing.g

• .intrastate_internet_poker_2-9-10

Senator Roderick Wright, the Chairman

• f the Committee, presided.
• 11. See Tony Batt, ‘California State

Senator Preparing Internet Poker Bill’, Gambling Compliance (26 April 2010).

• 12. See Andrew Gellaty, ‘New California

Internet Poker Bill To Challenge Tribes’, Gambling Compliance (13 May 2010).

• 13. See Hearing Transcript at 79-83

(Lohse Testimony).

world online gambling may 2010

05 USA

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