The New York State Legislature passed a bill last year, which requires “multi-jurisdictional account wagering providers” (MAWPs) to pay a “market origin fee” on all wagers made by New York residents who use the MAWPs’ wagering services, regardless of whether the wager is made on a New York track or a track in another state. The market origin fee requires the MAWPs to pay 5% of each wager made by a New York resident who has an account with the MAWP to the “market origin account” maintained by state racing commission. The question remains: is this constitutional?
The racing commission intends to use those funds to subsidize in-state pari-mutual wagering entities. The commission allows “any racing associations and corporations, franchised corporations, and off-track betting corporations that makes a payment of regulatory fees imposed by this chapter” to reduce those fees by receiving allocations from the commission of “market origin credits”. However, what is not obvious from the text of the statute is that the MAWPs have no claim to these credits. It is only in-state entities that may claim these credits, the total amount of which are equal to 90% of the money placed in the market origin account by the MAWPs.
Although the statute says “any”, the terms that follow are defined terms within the chapter. The definitions limit the entities that may claim those credits to entities who are domiciled within the state of New York, or who at a minimum have a physical presence in New York. Additionally, MAWPs are excluded from the list of entities who may claim the credits and thus cannot claim the credits to offset its own regulatory fees.
So what is the practical effect of this market origin fee on ADW account operators who are domiciled outside of New York? This fee reduces the profit margin of ADW operators, in a big way, on wagers made by residents of New York. The takeout on an ADW wager is split between the host track, the ADW operator and often a proportion goes directly to purses for benefit of the horsemen. These percentages vary based upon contracts between the host track, the host track’s horsemen’s group and the ADW operator. However, this 5% fee immediately reduces the amount to be received by the ADW operator.
This is best seen with an example. Suppose an ADW operator based in Oregon receives a $100 win wager on a race at NYRA-run track from an account holder who is a resident of New York. At NYRA tracks, the takeout on a win wager is 16%. Suppose also that NYRA negotiated for 5% of every ADW wager goes to them as the host track and that 2% goes to the purses (for benefit of the horsemen) and the remaining amount of takeout goes to the ADW account operator. This means that the ADW operator is left with 9% of the wager ($9) as its profit on the transaction. However, with the market of origin fee being 5% of every wager, the ADW operator actually only makes 4%, or $4, on the transaction. The fee cuts the profits of the ADW account provider by more than half.
Suppose also, that the account-holder receives, by virtue of a large volume of wagering, a 7% rebate on all win wagers from the ADW operator. Without the market origin fee, the ADW operator could have paid the rebated amount ($7) and still made $2 on the transaction. However, with the 5% reduction the ADW account operator would actually lose $3 on the wager because the $7 rebate amount would be larger than the $4 profit it realized on the transaction, after accounting for the market origin fee.
Not only would the ADW provider lose money on this wager, but $4 of the $5 it paid to the market origin account would go to NYRA, the regional OTBs, other racing associations and pari-mutual betting facilities within New York, by virtue of the market origin credit system. These entities are essentially the ADW operators competition; other entities that can accept wagers from New York residents. In essence, the market origin fee causes out of state ADW operators to subsidize its competitors when it takes a wager from a New York resident, in addition to taking a larger percentage of the ADW operators’ profits.
Now suppose that the ADW provider was domiciled within New York, but was unaffiliated with NYRA. If an in-state ADW provider had the same contractual terms with NYRA and the horsemen as did the out of state provider, the in-state provider would be able to retain all $9 of the take out leftover after paying the host track and the horsemen. The in-state provider could also afford to pay the $7 rebate to its customer because it still would be able to make a $2 profit on the transaction.
Why would New York Do This?
It is no secret in the industry that ADW represents a large portion of the daily national handle. At NYRA tracks alone in, the four major ADW account operators (TVG, Twinspires.com, Elite Turf Club and Xpressbet) accounted for 27.3% of the Domestic handle for 2013. This number does not include NYRA’s own ADW provider, NYRA Rewards, which they count towards their own on-track handle. The total handle from NYRA Rewards is 10.3% of the daily handle, making the total amount of ADW handle 37.6% of the total handle for the year.
However, as discussed above, the host track does not receive the same benefit from ADW wagers as it does from on-track wagers because it is forced to split the take-out with the entity that takes the wager. Although not ever stated in similar terms, it is my belief that the state legislature passed this bill in order to discourage its residents from wagering with out of state ADW operators.
The thought is: if we can increase the costs of doing business for out of state ADW providers while they are doing business inside our state, we can effectively reduce any competitive advantage they have because it will require them to reduce rebates to customers. If rebates are reduced for all out of state ADW providers, all New York residents will seek in-state alternatives that can afford to offer a more competitive rebate. Also, if there were more ADW wagering taking place in New York, it would increase tax revenues as well.
Additionally New York might do this because NYRA is being overseen by the State of New York because of past financial and administrative problems. The state expects to sell the racing association, which owns and runs Saratoga, Belmont and Aqueduct along with the ADW platform NYRA Rewards. If the state can incentivize residents to hold accounts with NYRA Rewards, the sale price for the NYRA license rights will be higher.
Finally, New York might do this to encourage ADW providers to have a physical presence in the state. A good example of this is Churchill Downs Inc. (CDI) partnering with Saratoga Gaming for a bid to have a casino in upstate New York. By doing this, CDI (and their ADW entity twinspires.com) will have a physical presence in New York and not be required to pay the market of origin fee. Other ADW providers might take this route to avoid the fee.
Can New York State Do This? : Dormant Commerce Clause Analysis
This “market of origin fee” raises a constitutional issue: does the fee burden interstate commerce to enough of a degree that it violates the Commerce Clause of the Constitution? Article I, Section 8 clause 3 of the U.S. Constitution states:“[S]tate laws violate the Commerce Clause if they mandate ‘differential treatment of in-state and out-of-state economic interests that benefits the former and burdens the latter.’” As stated in Gibbons v. Ogden, the purpose of the commerce clause is to “rescue [commerce] from the embarrassing and destructive consequences, resulting from the legislation of so many different states and to place it under the protection of uniform law.” The Court in Gibbons was referring to the disastrous consequences of the governance of the Articles of Confederation, under which individuals who wanted to do business in other states often were subject to competing and conflicting laws that hindered commerce.
In an analogous case, the Supreme Court in Granholm v. Heald, held that two state laws, one from New York and one from Michigan, discriminated against interstate commerce because they allowed in-state wineries to ship their product directly to their consumers, but did not allow out of state wineries to do the same thing. The law allowed in-state producers to escape the three-tier system used in most states for the regulation of the sale of alcohol, without allowing out of state producers the same opportunity. The court held that it gave the in-state wineries a competitive advantage. As the Court stated in New Energy Co. of Ind. v. Limbach, states can only discriminate against out-of-state economic interests if the law “advances a legitimate local purpose that cannot be adequately served by reasonable nondiscriminatory alternatives.”
Analyzing the current state of the law in New York under this umbrella, it appears that the market origin fee gives a similar competitive advantage to in-state ADW providers, and places an unwarranted burden on out of state ADW providers. The burden to the out of state providers is an increase cost in doing business in New York and a reduction in its profits. Additionally, because the proceeds of the fee are being given to the in-state competitors of the ADW provider, it directly benefits an in-state interest.
In addition to the direct benefit attributable to the market origin credit system, there is an indirect benefit to in-state competitors of the MAWPs. Because the law does not require ADW providers who are either domiciled in New York or have a presence in New York to pay the market origin fee, those ADW operators have a competitive advantage because they can offer higher rebates. Because they are not subject to the 5% fee, that is 5% of every wager that they could offer to a customer in the form of a rebate that the out of state competitor could not. This clearly gives in-state ADW providers a competitive advantage in being able to attract customers within New York State.
The market origin fee in New York directly conflicts with the dormant commerce clause because it favors in-state ADW providers to the detriment of out of state ADW providers. Not only does it directly impose a restriction on interstate commerce, it also indirectly imposes a restriction by subsidizing the in-state competitors of the entities that pay the fee.
Although the law appears to be unconstitutional, it will require a judicial challenge to be struck down. Some entity that pays these fees must be prepared to take on the financial burden of litigating this case. However, once some one decides to do so, this law should be struck down as an unwarranted restraint on commerce.
