Report by State Auditor Office

Colorado state auditors warn regulators on too many temporary sports betting licenses; urge to adopt further controls

Kerri L. Hunter, Colorado State Auditor.
Reading time 2:47 min

According to an audit issued by Colorado’s Office of the State Auditor on Monday, which analyzed how the Division of Gaming has regulated the first full year of legal sports betting in the state, the division allegedly hands out too many temporary licenses. The Office of the State Auditor, Kerri L. Hunter, says that due to this, and by not requiring more documentation, the state could be losing tax revenue.

The 56-page report covers the time period between May 1, 2020, and April 30, 2021 — when Colorado customers bet almost $2.3 billion — and included the Colorado Limited Gaming Control Commission.

"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," a report summary states.

These incomplete investigations "increase the risk that the Commission is making temporary licensing decisions that are not fully supported or defensible," Audit Manager Jenny Atchley said in a news release summarizing the audit, as reported by The Gazette.

Hunter's office discovered that as of March 2022, 35 of the 39 casinos licensed for sports betting or internet sports betting operators held temporary licenses. "This meant that these operators underwent a much more limited background investigation than they would have for a permanent license,"  the summary explains.

However, the temporary licenses allowed them the same privileges as permanent licenses. And in five of those cases, auditors found the division "did not complete the minimum background investigative procedures" required for a temporary license.

Auditors have now recommended that "the Division of Gaming should improve the efficiency and effectiveness of sports betting license investigations by incorporating them into a regulatory framework that provides the strict regulation intended by statute” and implement written rules and procedures for license background investigations, according to the report.

Gaming division officials have agreed to these terms, stating in the report: "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."

Colorado imposes a 10% tax on all net sports betting proceeds reported by the operators. That amounted to $8.6 million in the fiscal year 2021. However, according to the summary, auditors found "wide variation between the amount of wagering activity that operators reported after each gaming day and the totals they reported in their monthly tax filings."

In one case, an operator reported earning $1.4 million more in its daily reports than in the monthly report issued to the state to determine tax levels. In another, an operator reported $1 million more in the monthly report compared to its daily reports. The summary claims the Division does not require 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.

Another practice auditors took issue with is the division has allowed operators to not only deduct free bets from the net sports betting proceeds reports but also "allowing operators to carry forward monthly operating losses, thereby reducing their future sports betting tax liability." 

"Auditors’ analysis of the 324 tax filings reported from May 2020 through April 2021 showed that if operators had not been allowed to deduct and carry forward operating losses, the state would have collected an additional $706,000 in sports betting tax revenues during the first year," according to the summary.

In their response to many of the auditors' recommendations, Division officials reported they are "currently engaged with the Governor’s Office of Information Technology (OIT) to develop our sports betting data management system."

"The Division will assess the current utilization of resources and implement additional policies and procedures for Division staff to use when verifying the wagering data that operations report and the amount of tax they have paid," according to the report. "With the implementation of the sports betting data system, the audit team will be able to run reports generated from direct daily data feeds from the operators and verify them to the monthly tax obligations."

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