Moving mountains: Lessons in regulation for West Virginia

Last month was a turbulent one for West Virginia considering the online sports betting outage that has plagued the state since flagship casino Delaware North’s platform went down in March.

The outage sparked a heated blame war between the primary technology supplier and a third-party provider, which resulted in both being at loggerheads over alleged copyright infringement.

However, a beacon of light in the form of upcoming online casino regulation has offered potential stakeholders some solace.

State Governor Jim Justice passed the West Virginia Lottery Interactive Wagering Act into law without opposition at the end of March, enabling five local casinos to apply for a license at the enticingly low price of $250,000.

The onus now falls on West Virginia Lottery with the task to write market regulations and meet its self-allocated timeframe of launching in 2020. Some industry folk feel the state is very well-positioned to regulate as the fifth to do so, behind New Jersey, Pennsylvania, Delaware and Nevada.

But with continued Wire Act uncertainty impacting the Mountain State’s suffering sports betting market, and the vested interests of many stakeholders to consider, the WV Lottery has a mammoth task on its hands.

Looking to its fellow states in the northeast for guidance, what can be learned from the online gambling regulations imposed in New Jersey and Pennsylvania? “The value of having these other markets [is] to learn from their mistakes and see what’s worked well and incorporate that into your model,” says John Pappas of iDEA (iDevelopment and Economic Association).

Pappas rightfully says it is not the state’s first time regulating the casino industry, but also the West Virginia Lottery’s strong bond with the New Jersey regulator will likely prove one of the most valuable resources in formulating a framework.

Slightly taxing

Perhaps most crucial to the process of regulation is the establishment of an appropriate tax rate. Pappas cites the state lottery’s proposed 15% of gross gaming revenue as a hugely positive starting point. “One of the big differences between WV and Pennsylvania perhaps is the barriers for entry regarding license fees, which are much higher, so for smaller operators the barrier is very difficult.”

The president of government lobbying consultancy The Porter Group Jon Porter agrees, adding that the tax rate is paramount to growth in any state. In comparison, Pennsylvania taxes operators 54% of its slots revenues and 16% of GGR for poker and table games.

In New Jersey, all games are taxed at 17%. “The tax rate in WV is far more favorable, so it’s a little bit of a more business-friendly environment despite there being a smaller revenue, but it would create a hospitable environment for operators to engage in that market,” comments Pappas, who also spent over 10 years at the helm of the Poker Players Alliance in Washington.

Few have suggested that by promising more favorable conditions to operators, West Virginia could pose a threat to Pennsylvania, despite the latter being poised for launch in the summer of this year. Boutique research firm Eilers & Krejcik Gaming estimates the Mountain State’s first-year gaming revenue to reach approximately $11.6m.

Wire Act setbacks

Pennsylvania’s online product was originally primed for launch in H1 2019 but the Pennsylvania Gambling Control Board (PGCB) pushed back the release date to July on the uncertainty surrounding the Department of Justice’s (DOJ) revised Wire Act interpretation.

And although that uncertainty still prevails today, Porter appeals to West Virginia to leverage its position ahead of regulation and model its framework around whatever outcome Congresssettles on.

“They are in a good place to see how this plays out and what their new interpretation will be. They have the opportunity now to communicate and watch closely what the DOJ is laying out in terms of the Wire Act because there are still some questions over whether gaming companies can advertise on the internet or use it at all,” Porter says.

West Virginia Lottery director John Myers previously told local news outlet WV Metro News the resurfacing of the Wire Act opinion had given his team caution on how to move forward until it is resolved.

The state led the charge in the coalition of 25 states challenging the DOJ’s latest opinion of the Wire Act, with West Virginia Attorney General Patrick Morrisey penning a letter to the attorney general in Washington, William Barr.

“Washington is so paralyzed politically right now with a presidential election coming up, we’re not advising our clients to hold their breath [on any movement with the Wire Act],” adds Porter Group VP Dan Mauer. With this in mind, Mauer hints at 2021 being a much more reasonable timeline for the Mountain State’s launch.

Lessons in retail

Undoubtedly there is something to be learned from 10-year-old retail casino laws and the experiences of other states, particularly in the realm of authorizing new games and keeping up with consumer interests.

Pappas rightfully suggests that the WV regulator maintains flexibility in allowing operators to innovate. By working in close unison, it is crucial for both parties when formulating regulatory guidelines.

Reflecting on the grandfather of gaming regulation in the US, Nevada, Porter says it is certain the gambling hub set the standard, and there is a lot to be learned from that experience. Porter notes: “What traditionally happens is legislators and regulators have the opportunities to meet with other states so they don’t always have to re-invent the wheel because there has been decades of looking at gaming.”

Notably, New Jersey’s governing body the DGE (Division of Gaming Enforcement) has been very welcoming to states keen to regulate and has offered advice on its own structure. Also aiding the process is a group at the forefront of cross-state communication on regulation, the National Council of State Legislators, which meets to discuss gambling issues with regulators, stakeholders and industry types.

As more states set their sights on legalizing online gambling, the process will only get easier as communication with state legislators and regulators spreads. What will remain a challenge are the complex laws set by higher echelons like the Department of Justice and Congress.

Perhaps the greatest lesson to be learned in West Virginia’s case is ensuring all relevant parties collaborate and co-exist in harmony so as not to face the current fate of sports betting in the state, which could remain disrupted for months before Delaware North puts new technology in place.