The idea of taxing prediction markets is gaining traction in New Jersey as Democratic lawmakers in both chambers of the Garden State legislature advanced bills on Sunday.
Senate Bill 4447 and its counterpart, Assembly Bill 5336, were both approved with a committee substitute on June 28, moving them forward to second reading in their respective chambers. The Senate Budget and Appropriations Committee voted 9-4 in favor of SB 4447 forward and the Assembly Budget Committee voted 10-4 on AB 5336.
The revised version of the legislation would implement a “surtax” on prediction market platforms, charging them 9% of the gross income they make on prediction markets during a tax year. That tax would be in addition to any other taxes the companies are on the hook to pay under the New Jersey Gross Income Tax Act.
NJ legislators scale down prediction markets bill
While committee members voted along party lines in favor of the legislation, they scaled down the extent of the proposal in the substitute text.
The original bill’s text was far more detailed and suggested a licensing regime for prediction market platforms, including regulation of sports event contracts as if they were sports betting and a ban on prediction markets involving things such as:
- Death
- Disasters
- Political elections
- Public officials trading on political markets
The initial versions of SB 4447 and AB 5336 would have required prediction market platforms to obtain licenses from the state Division of Gaming Enforcement and pay New Jersey’s 19.75% sportsbook tax as well as an additional 10% surcharge, thereby effectively proposing a sports event contract tax of 29.75%.
Prediction market operators would also have been held to responsible gaming standards, and any violators offering sports event contracts without a license would have faced criminal charges. The New Jersey Attorney General’s office would have had the right to seek a preliminary injunction against any non-compliant operator and fine them up to $1m per day.
The bills as first filed also included numerous anecdotal references to prediction markets and a summary that described an event contract as a product that is “the functional equivalent of a wager.”
All of those details were scratched in the substitute bill and replaced with a simple 9% surcharge.
New Jersey Senate President Nick Scutari and Budget and Appropriations Committee Chair Paul Sarlo are the sponsors of the Senate bill, while longtime state Assembly Speaker Craig Coughlin is among four sponsors of the Assembly version.
SBC Americas contacted the sponsors of the legislation to ask about the changes to the bills but has not yet received responses.
New Jersey legislators act after Kalshi wins injunction
The New Jersey legislators filed the bills in June, weeks after Kalshi won a preliminary injunction against the Division of Gaming Enforcement in the prediction market platform’s federal court case in the Garden State.
In April, U.S. Court of Appeals for the Third Circuit judge affirmed a lower court’s decision that Kalshi was entitled to temporary relief against the state gaming regulator. After the DGE appealed, the appeal court judges decided 2-1 in favor of the notion that Kalshi’s sports event contracts fall under the federal regulatory remit of the Commodity Futures Trading Commission (CFTC).
“New Jersey frames the issue broadly (regulating all sports gambling) rather than narrowly (regulating trading on federally designated contract markets),” read the Third Circuit decision. “The text of the [Commodity Exchange Act] suggests that the narrow framing is the better reading.
“The Act preempts state laws that directly interfere with swaps traded on DCMs [designated contract markets like Kalshi]. Kalshi’s sports-related event contracts are swaps traded on a CFTC-licensed DCM, so the CFTC has exclusive jurisdiction.”
Since that Third Circuit decision, Kalshi has sued multiple states in which legislators are trying to tax prediction markets, including Kentucky and Illinois, where such legislation has been signed into law.
