The Internet gambling business has always been a lucrative one, but federal law has kept states on the sidelines, barred from tapping into an estimated $4 billion that Americans spend every year to gamble online illegally.
Now that the U.S. Department of Justice has reversed its outright ban on Internet gambling, states are scrambling to figure out what the decision might mean for them.
"Every state will be asking its AG: tell us what this opinion means," says Mark Lipparelli, chairman of the Nevada Gaming Control Board . California, Illinois, Iowa, New York and New Jersey are among other states that are expected to act quickly to get in on the action. That is precisely what Nevada has done, but Nevada put some pieces in place before the ruling in a way that some of the other states have not done. It has also been in the full-fledged gambling business for more than 70 years.
No one really knows for sure how many Americans gamble online or how much revenue states will be able to collect if it is legal. The American Gaming Association figures that worldwide, online gambling generates $30 billion a year. The group figures that states could collect up to $2 billion in tax revenue if online poker were legalized.
Fed reversal a stunner
For years, the federal government has construed the 1961 Federal Wire Act as a prohibition against online gambling. But in a ruling last month, the Justice Department indicated that law only restricts sports wagering. "It's a big surprise," says Keith Whyte, executive director of the National Council on Problem Gambling .
The ruling doesn't automatically legalize Internet gambling. States still have to pass legislation allowing for it and develop regulations overseeing it. And to many, it's unclear whether the decision legalizes only online gambling within a state's borders or also gambling that occurs across state lines.
Some experts interpret the decision to mean that states that pass their own online gambling laws could enter "compacts" with other states that have similar laws to allow online wagering on an interstate basis. Gambling expert I. Nelson Rose writes that the decision means "almost every form of intra-state Internet gambling is legal under federal law, and so may be games played interstate and even internationally."
But the uncertainty has state officials like Lipparelli in Nevada worried. "We need Congress to make clear" what is legal, he says.
The American Gaming Association , which represents the commercial casino industry, agrees. It says the December ruling "validates the urgent need for federal legislation to curb what will now be a proliferation of domestic and foreign, unlicensed and unregulated gaming websites without consistent regulatory standards and safeguards against fraud, underage gambling and money laundering."
Online lottery sales
The Justice Department's ruling, drafted last September but not publicly released until late December, came in response to a request from New York and Illinois. Both states had asked Justice whether it would be legal for them to use the Internet and out-of-state vendors to sell lottery tickets to in-state adults.
"We conclude that interstate transmission of wire communications that do not relate to a 'sporting event or contest' … fall outside the reach of the Wire Act," Justice said in the opinion . "Because the proposed New York and Illinois lottery proposals do not involve wagering on sporting events or contests, the Wire Act does not, in our view, prohibit them."
New York , which has the country's most profitable lottery, already had online "subscriptions" for its Mega Millions and Lotto games, and the ruling is expected to provide the state with the green light it was waiting for to do the same for other games. The way New York's current subscriptions work is that players can log on, sign up and pick and save their favorite numbers, combine entries with friends, and have winnings automatically sent to "prize accounts."
Illinois state officials had always thought their plan to let the Illinois Lottery offer Mega Millions and Lotto online was legal and now that Justice has agreed, "we are proceeding as fast as we can," says Illinois Lottery Superintendent Michael J. Jones. Lottery officials plan to ask the legislature to give them authority to also offer Powerball online.
Lotteries provide states with substantially more revenue ($17.9 billion) than commercial casinos ($4.5 billion). Lucy Dadayan of the Nelson A. Rockefeller Institute of Government , a specialist in state gambling revenues, says the ruling almost guarantees that "most states will consider expanding their lotteries in the hopes of generating more revenue in tough economic times." But she says that "even if the sale of online lotteries is in compliance with the Federal Wire Act, state officials should not jump into legalizing online lotteries and should carefully assess long-term social and financial costs of online lotteries."
Nevada is one of the few states that doesn't offer a lottery. But the Justice Department ruling is expected to give the state the final go-ahead it was waiting for to launch online poker. In fact, the state has had an online gambling law on the books for the past decade, delaying its implementation only out of fear it might be running afoul of federal law. With online betting taking off in Europe and efforts in the U.S. Congress to legalize online poker, the Nevada Legislature last year ordered its Gaming Commission to write a set of online gambling rules . Just last month, Nevada became the first state to adopt online poker regulations. Gamblers could be playing Nevada poker games on the Internet in as few as nine months, with the state taking a cut of the revenue.
"It's good news for Nevada, which now establishes itself as the leader in U.S. online gaming regulation," writes David G. Schwartz, director of the Center for Gaming Research at the University of Nevada , who has summarized the new online regulations.
Action in D.C., New Jersey
While Nevada may have an edge on the online poker front, it will compete with the District of Columbia, which last year became the first U.S. jurisdiction to approve an online gambling product known as iGaming , with plans to offer Texas Hold 'Em Poker, Black Jack, e-scratch games, and Bingo.
New Jersey state Senator Raymond J. Lesniak hopes his state is not far behind. He has vowed to reintroduce his Internet gaming measure in the next legislative session. "This isn't a question of 'if' New Jersey gets Internet wagering, but 'when.' My money's on 'soon,' " he said in a statement , noting that he has already spoken with Governor Chris Christie on the matter.
Other states that could act quickly on the online gambling front include Iowa , which late last year developed a framework for regulating intrastate online poker if the state decides to go that route. California lawmakers have debated online poker for years, and a new proposal is being drafted.
The Justice Department ruling came as something of a shock after a crackdown by federal prosecutors last year against three of the largest online poker websites. The U.S. Attorney's Office in Manhattan last April charged Full Tilt Poker, PokerStars and Absolute Poker with bank fraud, money laundering and illegal gambling. But online gambling, particularly online poker, has received considerable attention from members of Congress looking for ways to balance the federal budget. The online poker industry also got a boost when former FBI Director Louis Freeh and former Pennsylvania Governor Tom Ridge joined a new coalition called Fair Play USA that is lobbying for a new "regulatory framework for online poker."
But not all states are that enthusiastic about the chance to offer online gambling. Utah state Representative Stephen Sandstrom has already vowed to introduce legislation in the coming session that prohibits online gambling in Utah, one of just two states without any kind of legalized gambling. Hawaii is the other. "This bill is a referendum on the DOJ's decision and some in the U.S. Congress such as Senate Leader Harry Reid to proliferate online gambling," said Sandstrom.