The heights that California sports betting revenue could reach make California a tantalizing sports betting market. California is the most populous states, at just under 40 million people, and it has enough wealth to support a lucrative sports betting industry. However, the financial terms can be confusing for bettors and analysts outside the sports betting industry.
The differences between them are important. The most eye-popping numbers aren’t the ones that determine sportsbooks’ tax payments. So, California voters need to know the difference to avoid being duped by Prop 26 or Prop 27 ad campaigns. The main numbers Californians need to know are:
- Gross Revenue
- Net Revenue
- Tax Revenue
The differences between these numbers may not seem important on the surface. But the difference between handle and net revenue is the difference between being gullible and being informed.
California Sports Betting Handle
Sports betting handle is the largest number that bettors will see reported. It’s the total amount of money that bettors wagered on sports. When news sites want to make headlines, this is a go-to number to report.
Since this is the figure that the other types of revenue are derived from, it’s important to understand. It shows how enthusiastic and large the market is. The Los Angeles Times reported that one 2019 study estimated illegal sports wagers Californians placed were worth $15.7 billion. That $15.7 billion would be one estimate of California’s sports betting handle.
However, that figure could be higher in a legal market. Sports betting’s move into mainstream sports has exposed millions of new customers to sports betting. The security of a regulated market could draw otherwise tentative customers into sports betting, too.
But the key to maximizing handle is an online market. About 90% of Iowa’s sports betting handle comes from online bets. With New York sports betting, that figure is closer 97-99%. So, whether sports betting is available online in California will make a big difference in the new industry’s financial performance.
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California Sports Betting Revenue
When news stories cite sports betting revenue statistics, they’re often vague about which type of revenue they mean. Revenue can mean:
- Money leftover after paying winners
- Money spent by customers instead of sportsbooks
- Money included in tax revenue for the state
The type of revenue that matters to voters will differ depending on why voters want to legalize sports betting. However, voters often project the type of revenue they want to see on reports estimating California sports betting “revenue.”
Here are the differences voters need to know between the different revenue types.
Gross revenue is the money leftover after sportsbooks pay winnings. This is where a big chunk of handle gets lost immediately. In New York’s first three weeks of online sports betting, handle was just under $1.7 billion, while gross revenue was just over $124 million. Sportsbooks had a 7.4% hold, meaning they kept 7.4% of the money that bettors wagered.
But gross revenue doesn’t tell the whole story. Gross revenue includes money that sportsbooks gave out in free credits to bet with. So, gross revenue is higher than the revenue sportsbooks actually made in profit. To arrive at that real number, sportsbooks subtract those credits out to arrive at net revenue.
Net revenue is gross revenue minus promotional credits. It’s a little lower than gross revenue, but the gap is much smaller than the jump from handle to gross revenue. Net revenue removes the promotional credits so sportsbooks know how much money came from outside their business. It’s a true picture of profitability.
It’s also why net revenue is taxable revenue. California’s chosen sports betting tax rate will tax this pile of money.
This is why differentiating between net and gross revenue is important for voters, and reporters, to understand. The difference between net and gross revenue can be significant.
For example, the Super Bowl is one of the most important events for sportsbooks. February is a high-handle month, because so many people bet on the Super Bowl. In February 2022, Colorado gross sports betting revenue was just under $20 million. But net revenue was -$1.1 million.
Net revenue was negative because Colorado’s sportsbooks gave out so many promotional credits for Super Bowl betting. Generous promotions attract new customers and build sportsbooks’ customer bases for the next peak season. This is how the month with some of the highest betting activity can have negative net revenue and low tax revenue.
Tax revenue is money that sportsbooks pay to the state in taxes. It comes from net revenue, which is why tax revenue can be lowest during the month of the Super Bowl. (Tax revenue often picks back up during March Madness.)
Tax revenue’s seasonality may surprise Californians in their first year of legal sports betting. It’s higher during football season than during the slow summer season. However, tax revenue often drops in February because sportsbooks award so many promotional credits to bet on the Super Bowl.
Tax revenue is also a sliver of sports betting handle. New York made just over $63 million in online sports betting tax revenue. (New York taxes online sports betting winnings at 51%.) That’s 3.8% of the $1.7 billion that bettors wagered. With a proposed 10% tax rate on sports betting in California, that gap will be larger. Californians should be prepared for these patterns.
California Sports Betting Revenue and Its Many Layers
California sports betting revenue has many layers. Sports betting handle potential will depend on whether mobile betting is allowed in California. Gross revenue varies by handle and sportsbook hold. Net revenue will depend on how heavily sportsbooks rely on promotions. The more promotional credits that sportsbooks award, the less they’ll pay in taxes.
Often, the first month or two of sports betting will be low tax months, despite high betting activity. Sportsbook welcome bonuses are among the largest they offer. So, Californians should expect low tax revenue in the first month or two and surrounding the Super Bowl.
The rest of football season makes up the shortfall, so this isn’t necessarily a reason to vote against sports betting. But California voters should know what to expect from reporters, analysts, and industry insiders so they can make informed decisions about the arguments they hear about Prop 26 and Prop 27.