The Inside Scoop on Signal Fees & Pennsylvania Racing

We had a call last night and found out more information on changes that are affecting the customer in places like Pennsylvania.

Recently, both Pennsylvania and New York decided to follow in the footsteps of states like Virginia by implementing "source market fee." For those of you who may not know, source market fee is a "tax" on the state's residents who play horses through an ADW or a rebate shop.

Here are some answers from a racing insider that has been following this. We pass along this person's opinion for you here:

Q: What happened in Pennsylvania? Why did a state with such a massive slots subsidy for racing decide to implement a source market fee?

A. My understanding is that despite a massive slots subsidy (hundreds of millions of dollars) the Pennsylvania Horse Racing Commission was operating at a deficit - I'm told about $5 million this year.

Rather than allow money from the slots subsidy to be used to fund the Racing Commission, the Pennsylvania horsemen instead lobbied the State Senate and demanded a 10% tax on ADWs and rebate shops.

That's how Pennsylvania's 10% source market fee came about and I see some problems with that:

Despite popular belief by many in racing to the contrary, ADWs and rebate shops don't have enough room margin wise to absorb the tax themselves. So they are forced to make some hard choices.

They will either: Pass the tax on to the customer by cutting rebates in an amount equal to the tax. Or worse, many ADWs have simply decided to stop doing business in Pennsylvania altogether.

Q: What's the feedback been like from the horseplayer community?

A: Within the past week Pennsylvania horseplayers began receiving letters and emails from ADWs and rebate shops notifying them their accounts are being closed.

Naturally, they are not happy about it, and some players I have spoken with have no plans to take the news lying down.

Players have begun writing letters to the Pennsylvania state legislature asking why an industry that gets so much slots money with so little handle would come after customers of the sport.

One bettor who is a landlord is encouraging his tenants to write about it, too - and going so far as to tell his state senator that as a taxpayer he would much rather see the slots subsidy go to health or education instead of racing.

Pennsylvania has never been a favorite state for horseplayers. So it's not surprising to see players upset. Time will tell if it is a handful of players or a groundswell.

Q: Are players whose accounts have been closed been singing up with ADWs that plan to continue doing business with Pennsylvania residents?

A. This varies. Some of the low volume players: Yes. But not all. Many of the smaller volume players I've spoken with say they will stop betting on horses altogether.

However, most of the high volume Pennsylvania players I have spoken with will simply move to another state - one without a source market fee. Other high volume players are saying they plan on opening an account with an offshore bookmaker where they can still get good rebates and bet horses that way.

Sadly, when you look closely at the money generated by Pennsylvania's high volume players under these circumstances:

There will be less total money going to support Pennsylvania tracks and purses after implementing source market fee than total money going to support Pennsylvania tracks and purses before source market fee.

Certainly, none of the money bet by Pennsylvania's high volume players will end up going towards the specific purpose behind the 10% tax: Funding the operation of the Pennsylvania Horse Racing Commission. Why do I say that? Because high volume players are high volume players in the first place because of the lower effective takeout created by their rebates. Take the rebate away and the high volume player will bet significantly less.


Q: Why are New York and Pennsylvania doing this?

A. Easy answer: They can. In the past Charlie Hayward and the NYRA Board of Directors successfully fought against efforts at source market fee in New York because they knew it would cause handle to drop, and with that, cause a net drop in total revenue. However, the NYRA Board of Directors was recently replaced, and to the best of my knowledge, nobody on the new board offered even an ounce of resistance when New York's horsesmen began lobbying for a source market fee.

Q: Do those who lobbied for the source market fee in Pennsylvania realize handle will go down?

A. Sadly I don't think anyone in Harrisburg really thought things through. I'm being told they took Pennsylvania ADW handle from last year - multiplied it by 10% - and used that as the basis in their budgeting for how much tax they would collect.

The reality though is likely to be quite different than that. Personally, I'd be amazed if the real amount collected as a result of the tax turns out to be even half the amount they are budgeting for.

Q. Why do you say that?

A. Because, aside from causing ADWs and rebate shops to close customer accounts - which drives players away from the game - Pennsylvania's source market fee is really a hidden takeout increase.

Pennsylvania players who choose to remain in the system and bet into the parimutuel pools are going to have their rebates cut to the extent that they will basically be paying full takeout. Keep in mind that Pennsylvania has some of the highest exotics takeout rates in the US. As a result of paying full retail, unless a player is exceptionally gifted, his or her bankroll is going to be decimated.

As a result. most players will end up betting significantly less.

Q: Are other states likely to follow suit?

A. It wouldn't surprise me. If they do, there will be a lot of upset customers.

Q: Can horse racing survive long term with fewer choice of outlets, jacking up prices and less distribution of their product?

A: It looks like we might find out.