How Sportsbooks Legally Shrink Their State Tax Bills

Americans wagered a record $166.94 billion on legal sports in 2025, and the nation's licensed sportsbooks generated $16.96 billion in gross gaming revenue from that activity. State governments, for their part, collected taxes on a fraction of it. 

The advertised rates, ranging from 6.75% in Nevada and Iowa to 51% in New York, are the figures that legislators put into law, but in most states they are not the figures that operators actually pay.

How Do Promo Deductions Work?

When a new sportsbook customer receives a $100 bonus bet and loses it, the operator counts that loss against its gross gaming revenue. In most states, this adjusted figure, known as adjusted gross revenue (AGR), becomes the taxable base. 

Credit: FanDuel – Screenshot captured by Felix Dubler on May 27, 2026

The statutory rate applies not to what bettors lost in aggregate, but to what remained after promotional costs were subtracted. ^[1]

Michigan Operators Reduce Tax By 35%

Michigan's licensed internet sportsbooks reported $671.3 million in gross sports betting receipts for the year. After operators applied their allowable promotional deductions, adjusted gross receipts fell to $435.9 million ^[2]. So $235.4 million in revenue generated by books didn’t enter the taxable base. Michigan operators used this deduction loophole to reduce their taxable income by 35%.

Pennsylvania - 12% Difference Between Statutory and Effective Tax Rate

Pennsylvania levies a 36% tax on sports wagering revenue, which is among the steepest in the US. However, the Pennsylvania Gaming Control Board filings confirmed that this rate "is applied after deduction of promotional free bets offered to players." ^[3]

In fiscal year 2024-2025, the Pennsylvania Gaming Control Board reported gross sports wagering revenue of over $710 million, but after deductions, that fell to $487.6 million against a handle of $8.72 billion. ^[4] Thanks to the promo deductions, sportsbooks in PA paid an effective tax of 24%, which is 12% lower than the official 36% rate. ^[5]

Colorado Is Closing the Loophole

In May 2025, Colorado Governor Jared Polis signed House Bill 1311 into law, mandating that licensed operators "shall not deduct any free bets placed by players" from their taxable base, with full elimination taking effect July 1, 2026 ^[6].

In March 2025, Colorado sportsbooks reported $36.2 million in gross gaming revenue. After operators applied promotional deductions, taxable net proceeds fell to $21.9 million, a reduction of more than $14 million in a single month. ^[7] Applied to the state's 10% net proceeds tax, that deduction cost Colorado approximately $1.4 million from a single reporting period. 

HB 1311's official fiscal note estimates that eliminating promotional deductions will generate an additional $12.9 million annually for the Colorado Sports Betting Fund beginning in fiscal year 2026-2027 ^[8].