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Key Internet Gaming Issues

Joseph H. Webster
3/31/11

Legalized Internet gaming: opportunity or threat? Efforts in Congress last year to pass a federal Internet gaming bill failed, but a new bill was introduced in the House on March 17 and it is anticipated that a new Senate bill will be introduced later this year. A number of states are considering Internet gaming legislation, including states where there are tribal gaming operations, such as California, Iowa and Florida. It is far from certain that any of these bills will pass this year, but it does seem likely that efforts to pass Internet gaming legislation will continue and intensify, particularly since both the federal and state governments are desperate to find additional sources of revenue.

Each tribal government must make decisions about Internet gaming based on its unique circumstances. Before making a decision to support, propose amendments to or simply oppose a particular Internet gaming bill there are important issues to consider:

Will Tribal Governments Be Eligible to Participate?

Some of the proposed bills would exclude tribes entirely or contain restrictive conditions that would allow few tribes to qualify. Others would require that tribes compete against commercial gaming entities for the opportunity to participate, effectively shutting out most tribes. As governments authorized to conduct gaming under federal law, tribes are in a strong position to argue that they should be able to participate in Internet gaming without meeting new licensing requirements or being forced to compete against commercial entities for the opportunity.

Will Tribes Be Able to Compete?

Proponents of Internet gaming often argue that it will allow Indian tribes to generate more gaming revenue since they will be able to offer games to players located beyond tribal lands. This is not necessarily true because every other entity authorized to conduct Internet gaming will be competing for those same customers. Depending on the bill, competitors could be other tribal gaming operations, commercial casinos, game vendors, card rooms, pari-mutuels, off-shore interests and other entities. Since all Internet gaming sites are equally accessible to any player with a personal computer and an Internet connection, a gaming site operated by a tribe with a small or medium-sized gaming facility may not have the name recognition or resources necessary to compete with a site operated by a major casino company. The level of competition allowed by an Internet gaming bill is an essential consideration for determining if it will provide a significant opportunity or will simply cannibalize an existing customer base.

Does the Bill Respect Tribal Sovereignty and Regulatory Expertise?

Many Indian tribes have experience and considerable expertise in regulating all aspects of gaming. This is particularly true in the case of poker, which is the focus of many of the current Internet gaming proposals. Therefore, there is no reason why tribes should be subjected to separate federal and/or state regulation when offering the same games via the Internet. Also tribes should insist that any bill include a meaningful regulatory role for tribes that decide to offer Internet gaming, especially if the game servers will be located on tribal lands. The details are critical as some Internet gaming bills pay lip service to tribal regulation, but nothing more.

Does the Bill Clearly Prohibit Internet Gaming Cafés?

Unless carefully drafted, a bill that authorizes “Internet gaming,” even one supposedly limited to poker, could expressly or inadvertently authorize commercial Internet cafés with banks of Internet gaming terminals that look and play like slot machines. The concern about Internet gaming cafés was reportedly one of the reasons that Governor Chris Christie of New Jersey vetoed an Internet gaming bill passed by the state legislature.

Does the Bill Violate Compact Exclusivity?

Many compacts have exclusivity provisions that could be triggered if a state permits non-Indians to engage in Internet gaming. While the compacts in each state are different, the potential impact on tribal compact payments is a major concern for many state governments. But even if tribes are relieved from making compact payments because exclusivity has been violated, that would not necessarily make up for revenue loss resulting from unbridled Internet gaming activity.

Would Tribes Be Taxed?

Many Internet gaming bills would tax all Internet gaming, whether conducted by a tribal government or a commercial entity. Such an approach is contrary to federal policy that Indian tribal governments are not taxable entities. The payment provisions of any such bill must be carefully considered lest they establish negative long-term precedent for the taxation of tribal gaming revenue.

Legislators must recognize that Indian governments have a stake in this complex debate. Indian nations need to be part of the discussion. Above all, they need to make sure that any Internet gaming legislation that has a chance of being enacted, at either the federal or state level, protects existing tribal gaming operations and respects tribal sovereignty.

Joseph H. Webster is a partner with the law firm of Hobbs, Straus, Dean & Walker, LLP in Washington, D.C.

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