The Colorado Division of Gaming and the Colorado Limited Gaming Control Commission (CLGCC) have been cited for insufficient regulatory practices during the state’s first year of legalized sports betting.
Those shortcomings and oversights were detailed in a 56-page audit report released Monday by the Colorado Office of the State Auditor (OSA).
The report, completed in April, focused on the agencies’ performance from the launch of legalized Colorado sports betting on May 1, 2020 through April 30, 2021.
Among the audit’s key findings:
- 90 percent of in-state retail and online sports betting operators are operating with temporary licenses, leading to questions about the thoroughness and effectiveness of the state’s background checks.
- Discrepancies were found between sports betting operators’ daily reports and their monthly tax filings.
- Current state tax policies that allow sports betting operators to deduct and carry forward monthly operating losses are a concern and should be considered for review by the Colorado General Assembly.
“Overall, the audit found that the Division and the Commission did not have effective processes to investigate sports betting operators and make sure they were qualified for temporary licensure, or to collect sufficient documentation to determine if sports betting operators’ monthly tax filings were accurate,” an accompanying OSA news release stated.
Division of Gaming: Insight ‘appreciated’
Division of Gaming Director Dan Hartman commented on the audit late Tuesday in an email response sent to PlayColorado. He mentioned the tricky course state regulatory agencies have navigated with Colorado sports betting launching during the height of the COVID-19 pandemic.
Hartman also said CDOG will follow the audit’s 10 recommendations for improvement listed in the report.
“We appreciate the work of the Office of State Auditor and their insight into our first year of operation,” Hartman wrote. “The audit highlighted areas for improvement in terms of policy, procedure and documentation. We believe these improvements, especially with a new regulatory structure and an ever evolving industry, will only make the program stronger. The Division of Gaming has started the process of implementing these recommendations. We look forward to continued dialogue with the OSA staff as we work to implement these recommendations.”
Temporary licenses raise questions
State auditors found that, as of March 2022, 35 of of the 39 Colorado casinos and Internet sports betting operators held temporary licenses.
The temporary licenses allow the operators the same privileges as permanent licensees. But, in obtaining the temporary licenses, they were subject to “much more limited background investigation(s)” by the CDOG and CLGCC.
State auditors took a closer look at a number of these temporarily licensed operators. And they found that “minimum background investigative procedures” were not completed for five of these operators.
The operators were not named.
Those minimum procedure oversights included criminal history checks (three operators), regulatory histories in other gaming jurisdictions (two) and financial stability analysis (three).
“Incomplete investigations increase the risk that the Commission is making temporary licensing decisions that are not fully supported or defensible,” Colorado Audit Manager Jenny Atchley said in the news release.
‘Wide variation’ found in reported wagering numbers
Colorado has a 10% tax rate on operators’ net sports betting proceeds.
Auditors examined 22 sports betting tax filings from the May 2020 through April 2021 time period. And they found “wide variation” between the amount of operators’ reported daily betting activity and and totals reported in their monthly tax filings.
The largest discrepancy was a $1.4 million surplus an unnamed operator reported in daily net sports betting proceeds than was contained on its monthly tax filing.
On the opposite end of that spectrum, another operator reported approximately $1 million less in its daily sports betting reports as compared to its monthly numbers.
The OAS report made it point to note that CDOG “does not require sports betting operators to provide documentation to substantiate changes to reported wager activity, even though these changes have a direct impact on the amount of sports betting taxes paid.”
Questionable policy decreasing tax revenue
Sports betting operators’ statute-permitted practice of writing off monthly operating losses also was flagged in the OAS audit.
In addition to the percentage of “free bets” operators are allowed to subtract from their net sports betting proceeds, they also are permitted to carry forward and deduct their monthly operating losses.
That results, the OAS points out, in reduced future sports betting tax revenue collected by the state.
The report says that auditors analyzed 324 operator tax filings from May 2020 through April 2021.
That analysis showed “that if operators had not been allowed to to deduct and carry forward operating losses, the State would’ve collected an additional $706,000 in sports betting tax revenues during the first year.”
Auditors questioned whether this practice “aligns with voters’ and legislative intent when sports betting was legalized.”
And it’s a policy issue that the Colorado General Assembly should review, the report recommends.
CDOG, CLGCC accept OAS recommendations
As noted in the news release, Colorado state law required the OSA to audit sporting betting regulation at least once before May 1, 2022.
Statutes also require an OAS sports betting audit at least every five years thereafter.
As aforementioned the OAS made 10 recommendations (including recommendation subparts) to the CDOG and CLGCC for improvements. These recommendations focus on tightening up licensing standards and improving the accuracy of determining betting operators’ tax obligations.
The Division of Gaming and CLGCC officials said they will begin implementing procedure and policy changes in September.
In the report, the CDOG also said it is currently working with the Governor’s Office of Information Technology to improve its data management system.
“The goal is to ensure that all policies conform to current statute and rules of the Commission and Division and that there is uniformity, where needed, across all Gaming policies,” CDOG responded in the report.