H.R. 2366 [PDF here], introduced in the U.S. House last week, supposedly aids millions of American whose on-line poker play for money has been curtailed since the “Black Friday” raids this spring by the U.S. Department of Justice (DOJ). These raids shut down three major internet poker sites and resulted in the indictment of several of their principals on charges related to bank processing of wagering transactions.
DOJ raided the sites to enforce the Unlawful Internet Gambling Enforcement Act of 2006 which criminalizes the operation of on-line gambling sites involving games of chance, though the law does not criminalize sites involving games of skill. DOJ classifies poker as a game of chance, while most poker aficionados view it as a game of skill. The bill fixes this clash by categorizing poker as a game of skill and then legalizing and regulating the operation of on-line poker play for money.
Both of these aspects of the bill are well warranted and could have been accomplished with a few words amending the 2006 act. But the 101-page bill goes on to do much more than that. It intertwines federal law with state law by blurring distinctions between the two and making certain state and federal powers reciprocal. This is legally unprecedented in this country and it is blatantly unconstitutional.
The bill also raises a number of other questions. Before getting to them, here is an overview of how the state-federal regulatory mechanism is to work.
First, the bill creates a new Office of Internet Poker Oversight in the U.S. Department of Commerce (Poker Office).
Second, states desiring to regulate internet poker must establish a state poker licensing agency to be federally approved by the Poker Office according to its size, qualifications, number of enforcement agents, experience in gambling regulation, adequacy of funding, experience in sophisticated internet regulation, and such other requirements as the Poker Office establishes.
Third, before it can legally operate across the United States, an on-line poker establishment must obtain a license but only from the state agency in the state where its servers are located. This license then authorizes nationwide operations, except in states opting out, allowed under the bill.
To issue a license, an approved state agency must review, among other things, the applicant’s complete financial information and that of its affiliates, related businesses, and senior executives, and perform a criminal background check, followed by a background investigation.
To receive a state agency license, applicants must also have “appropriate safeguards and mechanisms” to “ensure, to a reasonable degree of certainty” that: (1) minors can’t bet; (2) players are not located in states prohibiting poker wagering; (3) players have paid all federal, state and local taxes due; (4) gambling facilities have paid user fees to government; (5) players are not delinquent in their child support payments, if any. Applicants must also demonstrate mechanisms are in place to detect and prevent fraud, money laundering, terrorist financing, and player privacy protection.
Last, states can opt out of allowing internet poker gambling within their borders. But states opting for federal approval by the Poker Office are to do most of the heavy lifting involved in licensing. All of this state activity is to be financed by state user fees, which states are empowered to enact by this federal bill.
H.R. 2366 was introduced by Rep. Joe Barton (R-Tex), who told the Nashua Telegraph the bill could generate $3 billion in taxes every year, to be split between federal and state government.
Bizarre but important legal questions are raised by this measure, among them the following.
• The bill would convert a license granted to an internet poker site by a single state agency into a federal license to operate nationwide. Authorization to operate nationally happens automatically upon issuance of the single state license, without any further proceedings. Nothing in the U.S. Constitution gives the federal government the power to cram-down the law of one state on people in the other 49.
• The bill would convert internet poker websites into tax collectors for the federal, state, and local government. This is unprecedented – what other federal law converts businesses into tax bounty hunters? And what other industry is precluded from selling its product only to customers whose tax obligations are fully paid? This aspect of the bill is fundamentally unconstitutional.
• The bill would authorize the distribution to a state of 50% of the federal income taxes owed by players. Nothing in the U.S. Constitution authorizes the federal government to distribute its tax funds to the states.
• The bill would authorize states to collect user fees. The federal government lacks the constitutional power to authorize states to collect fees. Only state law can do this.
• The bill would authorize the federal government to prosecute internet websites under state law. This is entirely unprecedented and entirely unconstitutional.
Last, the bill still leaves U.S. residents in legal limbo as to their dealings with sites whose operators are located entirely on foreign soil. The bill requires persons operating an internet gambling site to have a license from a state agency approved by the Poker Office. But the bill’s licensing requirement does not apply to an “Internet gambling facility” operated by a person outside the United States and accepting bets or wagers solely from persons located outside the United States. It is silent as to the legal status of players in the U.S., however.
This bill, originated with conservative Rep. Barton (R-Tex), who has been joined by others, including Rep. Ron Paul (R-Tex), who should know better. Co-sponsors also include Democrats such as Rep. Barney Frank (D-MA) and one can readily see their influence.
More than anything else, though, this bill demonstrates it’s bipartisan business as usual in tax-and-spend big government in Washington, D.C.