AB 1677 – California Online Poker Bill For 2017

[toc]In February, California Assemblyman Reginald Jones-Sawyer introduced the state’s first (but likely not last) online poker bill of the 2017/2018 legislative session.

The Internet Poker Consumer Protection Act, AB 1677, reads like many other recent online poker efforts, and features the numerous compromises that have been forged over the years.

And like its predecessors, it fails to resolve the overarching issue that has been a key factor in California’s inability to pass online poker legislation: suitability, and whether or not PokerStars should be allowed access to the market.

Here’s a look inside AB 1677.

Eligible operators

Jones-Sawyer’s bill authorizes licensed tribal casinos and card rooms to offer online poker games to anyone over the age of 21 and located inside California.

The state’s racetracks aren’t eligible to operate online poker sites, but they would still benefit via a yearly stipend.

In lieu of operating online poker sites, AB 1677 creates the California Horse Racing Internet Poker Account, which calls for California racetracks to receive a yearly stipend (95 percent of the first $60 million collected each fiscal year).

This same compromise was introduced by Assemblyman Adam Gray in 2016, and was amenable to all sides.

Racetracks would also be eligible to act as affiliates or sub-brands (a skin operating on the same network) to licensed online poker operators. The latter part is a step beyond the concessions the horseracing industry received in last year’s online poker efforts.

Per Jones-Sawyer’s bill:

“Racetracks would be allowed to act as service providers so long as at least 50 percent of the revenue from the partnership between the operator and the track goes to the track.”

Licensing

Jones-Sawyer’s bill would license California online poker operators for a period of seven years.

The cost of an online poker license is $12.5 million, or about $1.8 million per year.

The good news is, the up-front payment is deposited into a general online poker fund (the fund that would pay the horseracing subsidy) and credited against future taxes owed. Essentially it acts as a deposit that the state will draw on when taxes are owed.

Even though its credited against future taxes owed, the hefty up-front licensing cost will be prohibitive for smaller, independent operators, and a cost they may never fully recoup.

Based on Chris Grove’s analysis of the California online poker market, the industry as a whole will generate $215 million in Year 1, and $310 million at full maturity. Grove speculates that the market could support no more than three or four poker networks (there could be multiple brands operating on each network).

Tax rate

AB 1677 uses a progressive tax rate based on total online poker revenue generated by all operators. This tax structure was first seen in Adam Gray’s 2016 online poker bill.

Here’s how it works.

If the industry generates:

  • Less than or equal to $150 million, the rate percent is 8.847%.
  • More than $150 million and less than or equal to $250 million, the rate percent is 10%.
  • More than $250 million and less than or equal to $350 million, the rate percent is 12.5%.
  • Greater than $350 million, the rate percent is 15%.

On suitability and bad actors

Even if the state’s numerous and varied stakeholders agree to all of the above points, AB 1677 will still run into the same problem that has derailed previous online poker efforts: suitability.

This issue has divided the state’s stakeholders into two camps:

  1. The PokerStars coalition.
  2. The Pechanga coalition.

The PokerStars coalition is comprised of Amaya/PokerStars and the Morongo Band of Mission Indians, the San Manuel Band of Mission Indians, Bicycle Casino, Commerce Casino, and Hawaiian Gardens Casino. All of the tribes and card rooms in the coalition have partnered with PokerStars.

The Pechanga coalition is a group of around a half-dozen gaming tribes led by the Pechanga Band of Luiseño Indians and the Agua Caliente Band of Cahuilla Indians.

There is also a third, loosely affiliated coalition that includes the horseracing industry, card rooms, and tribes that lean towards the PokerStars coalition.

When it comes to the prickly issue of suitability, AB 1677 falls clearly on the PokerStars side of the ledger, leaving the determination of suitability completely in the hands of regulators.

this is PokerStars and its allies best-case scenario, and a better deal than PokerStars was ostensibly willing to accept last year.

In 2016 Assemblyman Gray tried to bridge the suitability gap by imposing a one-time payment of $20 million on operators who continued to accept wagers from US poker players after December 31, 2006.

Rumors suggested the proposal was some dozen votes shy of the number needed for passage and was scrapped, at which point Gray decided to give the other side’s proposal a go, and changed the suitability language of the bill to reflect the Pechanga coalition’s views.

This second effort would not only imposer a fine, it required PokerStars to sit-out for a period of at least five years. This version also failed to garner enough legislative support and was never voted on.