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AP Analysis: Justice Dept. reversal could cost states $220M

Posted at 12:49 PM, Apr 26, 2019
and last updated 2019-04-26 13:49:36-04

LAS VEGAS (AP) -- A recent opinion by the U.S. Justice Department has put a handful of states in danger of losing at least $220 million in annual lottery profits that they use to fund college scholarships, senior citizen services and a variety of other programs.

The states are anxiously waiting on a clarification from the Justice Department about its opinion that, if strictly interpreted, would outlaw lottery tickets sold online and prohibit all lottery-related activities that use the internet, including popular games like Powerball. A federal judge last week gave the agency until late April to clarify the opinion.

The uncertainty was created by an opinion on a 1960s law enacted to crack down on the mob.

Congress enacted the Wire Act in 1961 to target the mob's gambling activities by prohibiting wagering across state lines. Decades later and with the internet ruling everyone's lives, New York and Illinois asked the Obama administration whether selling lottery tickets online violated the law.

The department in 2011 concluded that online gambling within states that does not involve sporting events would not break the law. But the agency changed its mind in November, explaining in a written opinion that the law applies to any form of gambling that crosses state lines.

The differing opinions left state lottery officials puzzled.

Seven states now sell lottery tickets online and others offer residents internet-based lottery subscription services. They are fearful that those lottery games are now illegal under the opinion. States with online sports betting believe their sportsbooks can continue operating because the betting doesn't cross state lines.

When state lotteries use the internet to transmit data for online ticket sales, the network signal can cross state lines, and games that are played in multiple states, like Powerball and Mega Millions, transmit data to a central database out of state, according to the North American Association of State and Provincial Lotteries.

"It's like trying to run a business and not knowing the rules about it," said David Gale, the association's executive director. "That clarity is the important thing to us now as far as the DOJ issue goes."

Some believe the shifting sentiment in the two Justice opinions is the result of the influence that GOP megadonor Sheldon Adelson exerts over the internet gambling debate.

Adelson, chairman and CEO of the Las Vegas Sands Corp., is a staunch opponent of internet gambling. He believes it would have a negative impact on the gambling industry and society in general. The Las Vegas Sands Corp. has nine properties worldwide with casinos in them.

Former Acting Attorney General Matthew Whitaker, who was in charge of the Justice Department at the time of the opinion, denied that there was any improper influence from Adelson. Adelson, through a spokesman, declined to comment on whether he intended for lotteries to become a casualty of his push to stop internet gambling.

Data gathered by The Associated Press show states stand to lose over $220 million in net profits annually if the Justice Department zeroes in on single tickets sold online or more than $23 billion if the agency takes a broad interpretation that would prohibit all lottery-related activities that use the internet, including popular games like Powerball.

"It's like trying to run a business and not knowing the rules about it." -- David Gale, the association's executive director

Six of the seven states that sell lottery tickets online, including Michigan and Pennsylvania, expect to provide a combined $224 million to a variety of programs during the fiscal year that ends June 30. In Michigan, money goes to public education while Pennsylvania dedicates all proceeds to programs that benefit older residents.

The combined figure does not include proceeds from Georgia's online lotto sales. Neither the state's lottery agency nor the governor's office provided responsive information after repeated requests.

The internet is crucial for the lotteries. Not only are some tickets sold online and payment processing companies use it for debit and credit card payments, but backup systems needed in the event of bad weather are located in other states. Communications can cross state lines due to the way the internet is routed.

Several state lotteries have proposed moving some of their games online to modernize, be more convenient and compete in a market that now includes the expansion of legalized sports betting.

Rhode Island launched sports betting in November. Democratic Gov. Gina Raimondo recommended in her budget proposal that the Rhode Island Lottery offer the sale of traditional lottery products, such as Keno, through a mobile app, to increase fiscal year 2020 lottery revenues by $900,000.

In Massachusetts and Connecticut, lawmakers are considering whether to legalize sports betting and lottery directors there want to offer online lottery games.

Delaware's lottery director, Vernon Kirk, said he's worried about how the department's legal opinion is interpreted because of the potential loss of revenue. He said exactly how much revenue is in jeopardy depends on how it's enforced.

"I can't bring myself to believe they'd stop Powerball and Mega Millions," he said. "It's beyond my comprehension they'd allow that to happen but that's what the law is saying, any betting data that crosses state lines is not allowed. And those are some of the larger revenue sources for Delaware, especially when the jackpots are high."

The New Hampshire Lottery, which began selling single-draw tickets online in September, sued the department in February over the opinion. The Justice Department in court filings last week claimed that the opinion "did not address whether the Wire Act applies to State lotteries and their vendors" and that the agency is "now reviewing that question."

A federal judge gave the department 14 days to figure it out.