Virginia Licensing Fees Could Torpedo Sports Betting Before It Gets Started

State of Virginia Made out of Money With Sportsbook Background

Virginia is currently in the process of becoming the next state to launch a legal sports betting market. Its lawmakers passed sports gambling legislation in March 2020.

The legislature is currently working out the details on how the market will operate. So far, everything is moving towards the state taking bets within the next several months.

However, a new proposal from the governor now threatens to derail this market before it even gets started. I’ll cover the proposal in question below along with what could ultimately happen with Virginia sports gambling.

New Proposal Threatens Virginia Sports Betting

Again, the Virginia legislator has already approved sports gambling. It has sent the bill to Gov. Ralph Northam for suggestions.

Northam just recently sent back his proposed amendments. Most of his suggestions seem entirely reasonable.

However, one of his proposals is absolutely terrible. It would cause some operators to pay millions of dollars in licensing fees before they even get off the ground.

Northam wants future sportsbooks to cover a $50,000 fee for background checks regarding any principal. This request doesn’t appear so crazy on the surface.

However, a deeper look at the definition of “principle” cast serious doubt on Northam’s idea. Here’s how his office defines the word:

“Principal” means any individual who solely or together with his immediate family members (i) owns or controls, directly or indirectly, five percent or more of the pecuniary interest in any entity that is a permit holder or (ii) has the power to vote or cause the vote of five percent or more of the voting securities or other ownership interests of such entity.

“Principal” includes any individual who is employed in a managerial capacity for a sports betting platform on behalf of a permit holder.

Why Is This Proposal So Crazy?

State lawmakers have already required that Virginia sportsbooks pay $250,000 for a three-year licensing fee. They need to pay another $200,000 whenever they want to renew this three-year agreement.

These fees already seem big enough when considering that sportsbooks only make around 5% off every bet they take. Furthermore, Virginia isn’t the largest state in America with its 8.5 million residents.

Forcing operators to pay $50,000 for background checks regarding every single member of management is ludicrous.

Bookmakers could end up paying seven figures by the time they’re finished being investigated.

After all, larger operators have dozens of employees who may qualify as principles under the definition of this proposal.

Of course, Pennsylvania has set the standard for insane licensing fees. They require bookmakers to pay $10 million to obtain a betting license.

Again, Pennsylvania is also one and a half times the size of Virginia and already has a thriving gambling industry. The Mother of All States, besides Virginia online casinos, has very little regulated gambling in comparison.

Northam’s Request Is Almost As Crazy As Sports Integrity Fees

A few years ago, the National Basketball League (NBA) joined the push to get a federal ban on sports betting removed.

However, the NBA didn’t join this campaign because it loves the idea of legal sports gambling. Instead, the league wanted a big cut of the profits.

Commissioner Adam Silver asked that any sportsbook running NBA lines pay a 1% integrity fee. This 1% would have come out of the handle—not profit —that bookmakers take.

Handle refers to all of the wagers that sportsbook collect. Meanwhile, they earn around an average of a 5% profit on their handle.

Fans Cheering at a Sportsbook

Basically, NBA officials wanted all sportsbooks to give 20% of their profits to a single league. The NBA eventually realized how nutty their integrity fee sounded and stop pushing for it.

Gov. Ralph Northam’s stipulation that each Virginia operator pay a $50,000 fee for principal background checks is almost as crazy as Integrity fees.

I emphasize the word almost, because at least this fee only happens one time upfront. Still, the cost of these background checks is a huge barrier to entry.

In no world does a background check for a single person cost this amount of money. A $50k cost for principle checks would just be an example of this state getting extremely greedy.

Sports Gamblers Would Bear the Brunt of Fees

Sportsbooks that pay seven figures to obtain licensing in a state with 8.5 million people couldn’t expect to make a profit anytime soon. Therefore, they’d likely look to increase their profit rates.

Their customers are the ones who would suffer in this case. First off, Virginia sports bettors would likely face higher juice than the average state.

Most bookmakers take around 10% juice from the losing side in a wager. They might up this amount to 12% juice, on average, to help recoup some of their licensing fee costs.

Offering smaller bonuses is an even more-common route for recouping such expenses. Virginia bookmakers might only feature a $25 free bet or $50 deposit bonus as a result.

New Jersey sportsbooks, on the other hand, are offering overly generous bonuses that include up to $500 free bets and $250 deposit bonuses. Then again, these operators are only paying a $100,000 initial licensing fee.

Long story short, sportsbooks won’t be the only ones paying for these overly extensive background checks. Gamblers will also bear the brunt of the costs.

Would Any Sportsbook Actually Want to Operate in Virginia?

New Jersey has proven themselves to be model market for both land-based and online sports betting. They offer a wide number of bookmakers, fair odds, and big bonuses.

But then again, the Garden State charges its operators reasonable licensing fees and taxes. So, they’ve had no trouble attracting sportsbooks.

Pennsylvania, on the other hand, has screened out many potential operators with its $10 million licensing fee. It hasn’t helped matters by also demanding a 36% tax rate.

Sportsbooks may still find ways to make money in this market when considering Pennsylvania’s size and propensity towards gambling. However, fewer bookmakers are going to take this chance.

Virginia may very well suffer the same fate if they include Northam’s proposal in the final bill. Many sportsbooks will see the $50,000 fee for background checks on each principal and turn the other way.

Much like Pennsylvania, they’re going to still draw operators. However, they also risk driving away many bookmakers by requiring higher upfront costs.

What’s the Likely Scenario for Virginia Sports Betting?

The current Virginia sports gambling bill allows for up to 18 land-based licensed sportsbooks. Up to 12 of these same licensees can also operate an online sportsbook.

The tax rate is set at a reasonable 15%. However, this tax rate threatens to be overshadowed by the extreme licensing fees.

Northam and the legislature will need to compromise on the background check aspect. If they don’t, then operators could definitely stay away from this market.

Mandalay Bay Sportsbook

Of course, Gov. Northam merely threw out suggestions. He hasn’t publicly declared that these amendments must be included for him to sign off on the bill.

Old Dominion knows that it stands to make a fair amount off sports betting—like many other states. Therefore, the governor and legislature need to create an attractive market.

They’ve already done this to some degree by making concessions for professional sports franchises to offer in-stadium gambling. The Washington Redskins, Nationals, and Wizards will no doubt be interested in this aspect.

However, Virginia needs to ensure that they appeal to the majority of sportsbook operators too. A lower barrier to entry will go a long way to making this happen.

Conclusion

Virginia is on the cusp of offering legal sports betting. However, the legislature needs to look over Gov. Northam’s proposals and get back to him.

The $50,000 background check cost for each principal is a scary proposition. The largest operators may need to pay millions of dollars for all of their principals to get checked out.

Such sportsbooks may just avoid this market. Therefore, Northam and the legislature may need to work more closely on this matter.

Assuming Virginia can come up with a more reasonable proposal for operators, then they stand to have a pretty lucrative betting market.