Colorado Sports Betting Audit Shows Tax Discrepancies and Other Issues

• A recent audit of Colorado sports betting’s first year of operation found large gaps in tax reporting
• The audit found insufficient background checks for several sports betting operators
• Discrepancies between some operators net proceeds and tax payments were also revealed

A Colorado sports betting audit of the state’s first year of operation showed large tax discrepancies and a lack of full background checks for 90% of state sports betting operators.

The Colorado Office of the State Auditor assessed the state’s sports betting program from May 1, 2020, to April 30, 2021, and found the Division of Gaming and Colorado Limited Gaming Control Commission lacked effective background checks for many of the state’s sports betting operators and insufficient documentation to determine if operators’ monthly tax filings were accurate.

Sports Betting Operator Background Checks Lacking

The 56-page report showed that 35 of the state’s 39 operators, as of March 2022, were still operating under temporary licenses. The temporary licenses grant the operators all the privileges of a full license,  but can be issued with a much more limited background investigation than what’s required for a permanent license holder.

For five of these operators with temporary licenses, auditors found that even the minimum background check required for temporary licenses were not completed by the Division of Gaming.

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

Fiscal Analysis Shows Tax Discrepancies

The auditors sampled 22 sports betting tax filings from May 2020 through April 2021. These tax filings showed large variations between the amount of wagering activity that operators reported after each gaming day compared with what they reported in their monthly tax filings.

One operator, the audit showed, reported $1.4 million more in net sports betting proceeds in its daily wager reports compared  to its monthly tax filing. Another operator reported $1 million less in net sports betting proceeds in its daily wager reports compared with its monthly tax filings.

The lack of sufficient documentation makes it difficult for the Division of Gaming to determine if sports betting operators’ monthly tax filings were even accurate, according to the audit.

Colorado currently imposes a 10% tax on the net sports betting proceeds reported by its operators.

Auditors Suggest Sports Betting Tax Liability Change

As a result of the numerous discrepancies, auditors suggested the General Assembly look into modifying the rule that allows operators to deduct “free bets,” electronic credits or electronic promotion provided by sports betting operators, from their net sports betting proceeds. Colorado also allows operators to carry forward monthly operating losses, which reduced future sports betting tax liability.

The auditors suggested that the General Assembly consider disallowing this practice questioned “whether this practice aligns with voters’ and legislative intent when sports betting was legalized.”

From May 2020 through April 2021, auditors found that if operators had not been allowed to carry forward operating losses, the state would have collected an additional $706,000 in sports betting tax revenues in its first year of operation.