The Tennessee legislature raised a few eyebrows last year when it opted to change its method of taxation from the traditional nationwide levy on revenue from sports betting operators, to one based on handle starting with Fiscal Year 2023-24.

Fast forward 12 months and the state’s Sports Wagering Council reported $87.6 million in state taxes for the recently completed fiscal year after $342.2 million handle for June generated $6.3 million worth of receipts. That was nearly $4.3 million higher than FY 2022-23, when tax revenue was based on 20% of operators’ adjusted gross revenue, and nearly $9 million more than what the state agency estimated for FY 2023-24.

“Regarding your question of whether tax collections have met expectations with relation to the switch – our answer is yes,” SWC Director of Engagement David A. Smith said in an email exchange with Sports Handle. ” … This streamlined tax structure allows our regulatory agency to focus on issues outside of tax accounting that protect the public interest: underage wagering, sports betting integrity, illegal sportsbooks, and responsible gaming to name a few.”

There weren’t many fans of Tennessee’s previous method of taxation, but that had more to do with the state-mandated and much-derided 10% hold required than the 20% rate on AGR. Multiple operators were willing to pay a five-figure fine when failing to reach that win rate in 2022, when the state agency estimated it missed out on $11 million in tax receipts.

The trade off that came with shifting to taxation on handle was mobile sportsbooks were no longer able to deduct promotional bonuses and credits. On the public-facing side, there was no way to compare the methods of taxation from FY 2023-24 against FY 2022-23 because once the SWC made the switch to taxing handle, it no longer collected sports betting revenue figures from Tennessee sportsbooks as they were no longer relevant to how taxes were collected.

That meant the SWC needed a new method for forecasting tax revenue, contrasting a still-growing sports betting industry in Tennessee that would align with projections by the State Funding Board that expected “low or no growth in tax revenue for the state overall” for FY 2023-24.

The result was the SWC projecting a 5% increase in handle from the $3.97 billion generated in Fiscal Year 2022-23, and the $78.8 million in estimated receipts would have been a 5.4% year-over-year decline from the $83.3 million collected in FY 2022-23. Tennessee bettors, however, proved far more aggressive over the past 12 months, and the $4.74 billion wagered represented a 19.5% increase.

“We did not think that a zero growth estimate in sports betting revenue was likely given the interest and the relative ‘newness’ of it,” Smith explained. “However, we wanted to be cautious in what we estimated so that the state didn’t count on money that it might not receive.

“Thus, we estimated a 5% growth rate in overall wagering volume, which would have resulted in a slight dip in tax revenue for (Fiscal Year 2023-24), and a rebound to normal the second year. It turned out to be higher because wagering volume was higher.”

Tennessee’s figures will continue to be scrutinized to see if it is indeed a winning formula as it remains the only state taxing handle. It also provides an intriguing contrast to the traditional taxation of revenue with sportsbooks continuing to evolve their products to offer more parlays, same-game parlays, and in-game wagering — three aspects of sports betting that generate higher holds than simple single-event wagering.

Handle in Tennessee for the first six months of 2024 totaled $2.42 billion, up 23.4% from the same period last year. Also auguring well for the SWC for Fiscal Year 2024-25 is that three of Tennessee’s all-time, top-five handles came in the second half of 2023. That is when NFL and college football are kings and the state’s sports betting apps are at their busiest. Smith is confident the more simple method of taxation will continue to provide dividends for the state.

“Tennessee legislature enacted a tax formula that is clear and unambiguous,” Smith said. “(It) removes potential inconsistencies in tax calculations by the operators, allows sportsbooks to operate their trading functions without adhering to a set hold rate, and removes the threat of fines or suspension from the state in the event that the operator did not have a high enough hold relative to its revenue, which could have disrupted revenue to the State.”