BILL ANALYSIS Ķ
AB 2863
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Date of Hearing: June 22, 2016
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Lorena Gonzalez, Chair
AB
2863 (Gray) - As Amended June 9, 2016
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|Policy |Governmental Organization |Vote:|19 - 0 |
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Urgency: Yes State Mandated Local Program: YesReimbursable:
No
SUMMARY:
This bill establishes The Internet Poker Consumer Protection Act
of 2016 (Act) and authorizes the California Gambling Control
Commission (CGCC) and the Department of Justice (DOJ) to license
and regulate internet poker. Specifically, this bill:
1)Defines the types of entities eligible to get an operator's
license, including that the operator must either be a cardroom
or a federally-recognized California Indian tribe meeting
certain criteria.
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2)Defines the types of entities eligible for a service
provider's license, including anyone who manages, administers,
or controls the games, gaming system, or the bets on behalf of
a licensed operator, or those who receive compensation as part
of an affiliate marketing program for bringing players to an
operator's website, and specifies suitability requirements for
any licensed service provider.
3)Defines the process by which an operator or service provider
obtains their license, including applying to DOJ for a
determination of suitability and applying to CGCC for a
license and paying all fees.
4)Establishes requirements for licensed operators, including
ensuring players are eligible to play and games are fair,
implementing proper data security standards, player
registration and account setup, and providing DOJ with proper
materials to propose a game.
5)Requires CGCC, in consultation with DOJ, to adopt regulations
within 270 days after the effective date of the Act.
6)Defines the types of application fees, regulatory fees, and
license deposits as follows:
a) The application process fee is a fee to cover the costs
of suitability investigations and other application process
costs.
b) The one-time license deposit is a $12.5 million deposit
made by a licensed operator prior to offering any games for
play or accepting any bets.
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c) The regulatory fee is the ongoing fee once an operator
obtains a license and begins offering games.
7)Imposes a duty on gross gaming revenues based on the size of
the overall Internet poker industry. The duty ranges from
8.847% when total annual gross gaming revenues are $150
million or less to 15% when revenues are in excess of $350
million. The first $60 million of these duties and the $12.5
million license deposit in each fiscal year must be deposited
to the California Horse Racing Internet Poker Account and the
Fair and Exposition Fund, for specified purposes.
8)Establishes the Unlawful Gambling Enforcement Fund in the
General Fund, which is intended to ensure adequate resources
for law enforcement. The Fund will consist of an undetermined
share of revenue from civil penalties recovered by law
enforcement authorities, all amounts of property recovered and
all revenue from civil penalties recovered, an undetermined
percent of duties paid by licensed operators, and up to an
undetermined amount may be expended annually, upon
appropriation by the Legislature.
9)Requires CGCC, in consultation with DOJ, the State Treasurer,
and the Franchise Tax Board, to issue a report annually to the
Legislature describing the state's progress in meeting policy
goals, and requires the Bureau of State Audits to issue a
report within four years of the issuing of a license.
FISCAL EFFECT:
1)Annual special fund costs to DOJ in the range of $5 million to
$10 million in 2016-17, 2017-18, and 2018-19, to review and
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approve game rules and gaming activities, hire and retain
staff with technical expertise, and develop and enforce
regulations. Annual costs beginning in 2017-18 will be offset
by application fees and ongoing regulatory fees.
2)Significant one-time special fund costs to DOJ on top of
expected annual costs for the initial processing of potential
licensees. It can be expected that in the initial years of the
authorization of Internet poker, DOJ will need a large number
of additional investigators and enforcement staff to complete
determinations of suitability and to conduct investigations.
The precise number of potential licensees and the
infrastructure that DOJ will need is unknown, but these
startup costs could be as high as $70 million in 2017-18.
3)Significant costs to CGCC of at least $2.5 million, $3.5
million, and $2.9 million in 2016-17, 2017-18, and 2018-19,
respectively. Major cost drivers for CGCC include promulgating
emergency regulations and beginning the development of
permanent regulations, hiring staff with technical expertise,
and one-time equipment costs, and other overhead expenses.
Annual costs beginning in 2017-18 will be offset by
application fees and ongoing regulatory fees.
4)Annual transfer of revenue generated from license deposits and
a duty on gross gaming revenues of up to $57 million to the
California Horse Racing Board and up to $3 million to the Fair
and Exposition Fund, as required by this bill.
5)Unknown General Fund revenue, possibly in the millions, from
the tax on gross gaming revenue and the license deposit for
licensed operators.
STAFF COMMENTS:
1)Purpose. According to the author, this bill will establish a
regulatory framework for Internet poker. AB 2863, which is the
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product of lengthy discussions between stakeholders, is
intended protect consumers, help the California economy, and
generate state revenues. The author hopes that this bill will
be the model for the nation for promoting economic growth
while providing a safe, regulated, and responsible
entertainment option for consumers.
2)Background. Federal law prohibits online gambling by U.S.
citizens but includes specific provisions that allow
individual states to offer intrastate Internet gaming,
provided that state laws permitting and regulating that
activity impose reasonable protections against participation
by underage persons or by persons located outside the
boundaries of the states. So far, only three U.S. states
allow licensed online casinos and poker sites: Nevada,
Delaware, and New Jersey.
3)Recent efforts to legalize online poker in California: Between
2008 and 2014, 11 legislative proposals were introduced in
California in an attempt to change the nature of Internet
gambling. In 2015, four more bills were introduced, and only
AB 431 (Gray), which declared the intent of the Legislature to
authorize Internet poker in California, passed legislative
committee. That bill was held on the Assembly Inactive File
for further discussion.
4)Recent amendments. AB 2863 was amended by the author on June
9, 2016 to include new financial components (tax rate and a
license deposit), as well as new suitability standards for
licensed service providers. In summary, these amendments:
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a) Established a graduated tax rate based on the size of
the Internet poker industry. The amended version of AB 2863
imposes a tax rate that is based on the size of the overall
online poker industry in California, as measured by
aggregate gross gaming revenues. The tax rate ranges from
the current corporate tax rate (8.847%) when total gaming
revenues are less than $150 million, to 15.0% when the
industry brings in gross gaming revenues in excess of $350
million a year. This graduated tax rate is meant to help
foster industry growth in the initial years.
The amended version of AB 2863 does not change how this tax
revenue is allocated. The first $60 million in tax revenue
collected on gross gaming revenues and license deposits
from operators (described below) will be allocated to the
California Horse Racing Board ($57 million) and the Fair
and Exposition Fund ($3 million). Collected revenue from
the tax and license deposits in excess of this $60 million
will remain in the General Fund.
b) Established a one-time license deposit of $12.5 million
for licensed operators. Unlike the previous version of AB
2863, this deposit can no longer be offset in future years
by reduced taxes on gross gaming revenues.
c) Created new suitability standards for licensed service
providers. The amendments also created a "rebuttable
presumption" that an applicant is unsuitable if either the
applicant accepted bets of wagers of U.S. residents after
December 30, 2011, or if at any time a person in the
applicant, as defined, was instrumental in the executive
decision to accept bets or wagers and that this person is
still affiliated with the applicant. The amendments also
allow applicants to rebut this presumption with a
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preponderance of evidence that proves a number of
scenarios, including that the acceptance of a bet after
December 30, 2011, was not knowing or intentional.
d) Allows regulators to address the issue of "tainted
assets" of service providers. The amendments also include
two provisions designed to limit the use of previously
acquired assets or infrastructure in the new legal Internet
poker market. Specifically, the bill allows CGCC to specify
what kind of assets that were previously acquired before
enactment of this legislation can be used moving forward.
The bill also specifies that no customer list acquired
prior to the enactment of this legislation can be used
until January 1, 2019.
5)Opposition. In a June 10, 2016 letter, a coalition of tribes
that includes Agua Caliente Band of Cahuilla Indians, Barona
Band of Mission Indians, Viejas Band of Kumeyaay Indians,
Yocha Dehe Wintun Nation, Lytton Band of Pomo Indians, and the
Pechanga Band of Luiseņo Indians, stated their opposition to
the amended version of AB 2863.
The opposition's primary concerns are about the issues of
suitability and "bad actors" participating in California's
Internet poker market. The coalition believes that "bad
actors" - those who accepted wagers from U.S. residents
between 2006 and 2011, when doing so was assumed to be
unlawful - could still get a service provider's license under
the current version of the bill. They contend that allowing
such bad actors to participate in California's Internet poker
market creates a bad precedent and an unfair competitive
advantage since these entities can utilize "tainted assets",
such as customer lists or their established brand, upon
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receiving a license. While recent amendments do include
provisions meant to limit use of such assets, the opposition
contends these provisions are not stringent enough.
The coalition is also opposed to the tax rate and the license
deposit, citing both as too burdensome on operators.
6)Committee amendments. The Committee suggests a number of
substantive amendments to ensure that the state as a whole
benefits from Internet poker and that the market is
competitive and fair. Following the June 15, 2016 hearing, the
Committee no longer recommends an amendment related to a
service provider's use of assets accrued prior to enactment of
this bill. Specifically, the Committee now recommends
amendments to:
a) Ensure that the General Fund receives funds in all
years. The current version of AB 2863 requires the first
$60 million in tax revenue collected on gross gaming
revenues and license deposits from operators be allocated
to the California Horse Racing Board ($57 million) and the
Fair and Exposition Fund ($3 million). Collected revenue in
excess of this $60 million will be left in the General
Fund.
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The current structure does not guarantee that Internet poker
will benefit the state's General Fund. With a 15% tax rate,
annual gross gaming revenues would need to be in excess of $400
million annually for the General Fund to receive any revenue.
Industry projections suggest this threshold will be met, but
some contend that legalized online poker has often
underperformed projections, especially in initial years of
operation. Therefore, the Committee recommends an amendment that
keeps 10% of tax revenue from gross gaming revenues in the
General Fund, no matter what annual gross gaming revenues are in
any given year. The remaining 90% will go to horseracing and
fairs until the previously discussed $60 million is reached.
After that, all revenue will go to the General Fund, similar to
the provisions in the current version of the bill.
b) Allow some of the license deposit to be offset by
reduced taxes on gaming revenues. AB 2863, prior to the
June 9, 2016 amendments, included a provision that the
license deposit could be offset by reduced taxes on gross
gaming revenues. That provision has since been removed.
Opponents to the current version of the bill argue that
this upfront deposit is prohibitive. The Committee
recommends that half of the $12.5 million deposit ($6.25
million) be offset by reduced taxes on gaming revenues.
This would ensure that more operators are given the
opportunity to participate in the market while still
providing an upfront infusion of revenue as a result of new
applicants joining the market.
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c) Replace the current rebuttal presumption language. The
Committee recommends replacing the rebuttable presumption
language in the current version of the bill with language
that better reflects a timeline that concerns opponents to
AB 2863. Specifically, a service provider (applicant) is
unsuitable if it or its corporate affiliate has a member of
its Board of Directors, Chief Executive Officer, or a
shareholder holding more than 10 percent of its shares, who
held a similar position with an organization that knowingly
and willfully accepted a bet or helped facilitate a bet
after December 31, 2006.
d) Delay when some service providers can be provided a
license. The Committee recommends that service providers
that operated in the United States in the period between
December 31, 2006 and December 31, 2011 not be provided a
license until January 1, 2021. This does not preclude the
applicants from starting the process of applying prior to
this date. Alternatively, such applicants could pay a
one-time fee of $20 million, to be deposited into the
General Fund, to obtain a license before January 1, 2021.
Analysis Prepared by:Luke Reidenbach / APPR. / (916)
319-2081
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