Page updated March 22, 2012.
See our free special report on California’s proposed internet gambling law, S.B. 1463: “The Foundations of Internet Gambling Policy: California“
Political Background
Internet gambling policy is clearly a priority issue in California. What is less clear is whether the important interests agree about the mechanics of regulation.
The president pro tempore of the Senate, Darrel Steinberg, is one of the legislators who is deeply involved in the process. In August Sen. Steinberg issued a formal letter to notify “stakeholders” that the Senate would be unable to approve a bill before the end of 2011, but he promised that interested parties would continue negotiating so that an improved bill could proceed in 2012.
Steinberg fulfilled his promise on Feb. 24, 2012 by introducing S.B. 1463 – The Internet Gambling Consumer Protection and Public-Private Partnership Act of 2012. He was somewhat late in delivering though. His letter had forecasted a hearing would occur sometime in January. Furthermore, Feb. 24 was the final day on which new legislation could be introduced, which might suggest that the interested parties had still not reached consensus on some of the issues.
The new plan, contained in S.B. 1463, builds off the model that has been supported by co-sponsor Sen. Roderick Wright during the current and prior legislative terms. Sen. Wright is another important legislator because he chairs the Senate Committee on Governmental Organization, which presides over internet gambling issues in the Senate.
… to be inserted into California’s Business and Professions Code, Division 8, as a new Chapter 5.2
Classification as an “Urgency Statute”
S.B. 1463 has been classified as an “urgency statute.” (19990.96(c), SEC. 4). As a result it is subject to a different set of procedural rules than a typical bill would be.
A typical bill requires the approval of a majority of the membership of each house and does not become effective until after January 1st of the following year. But bills classified as urgent, like S.B. 1463, require approval of 2/3 of the membership of each house, although they need not wait until January 1 of the following year but instead become effective immediately upon enactment. (See California Constitution Article IV).
Public-private partnership
S.B. 1463 envisions that a licensed internet gaming facility should be structured as a public-private partnership between the state and a private operating organization. According to the bill’s findings and declarations section:
“The state’s interests are best met by a public-private partnership between the state and private entities, the terms of which would facilitate meeting the important consumer protection interests of the state while ensuring, through the success of the private entities, that the state receives the benefits of the licensing scheme as well as tax revenues that it would otherwise not receive.” (19990.02(h)).
Aside from this language, however, there is little else in the bill which provides specific parameters about how the public-private partnerships are to be created. Nonetheless, it is probably proper to infer that California’s Justice Department will receive broad discretion to negotiate the terms of the state’s partnership with its licensees.
Only poker
Poker is the only game that that will be permitted for an initial two-year period after implementation. (199990.14(b)).
After the initial two-year period, California’s Justice Department will have discretion to authorize the licensing and regulation other games as well. (Id.)
Intrastate only for now, but interstate play is envisioned later
A licensed operator will be able to offer games only to customers located within the territorial limits of the state or one of its Indian tribes. (19990.10).
S.B. 1463 envisions that cooperation with other states could become desirable later, but it does not give permission to any state agency to take action without prior approval of the legislature:
- In the event that U.S. Congress were to enact a federal interstate framework for internet gambling, then California’s legislature may opt into or out of the federal framework by way of a majority vote of both houses. (19990.71(a)).
- In the event that the U.S. Justice Department were to notify the California Justice Department in writing that interstate internet wagering is permissible, then California’s legislature may enter into agreements with other states to offer internet gambling by way of a majority vote of both houses. (19990.71(b)).
Additionally, the California Justice Department may offer provisional findings of suitability to entities who have obtained a license in other states. (19990.235).
Eligible licensees
Only four types of entities are eligible to apply for a license (19990.21(a)):
- An organization which already holds a gaming or poker license, and which has held the license for a period of at least three years preceding its application. (19990.21(a)(1)).
- A federally recognized California Indian tribe that operates a casino or cardroom, and which has done so for a period of at least three years preceding its application. (19990.21(a)(2)).
- A thoroughbred, quarter horse, or harness association licensed by the California Horse Racing Board for a period of at least three years preceding its application. (19990.21(a)(3)).
- An operator of an online advanced deposit wagering site which has regulated by the California Horse Racing Board for a period of at least three years preceding its application. (19990.21(a)(4)).
There is no limit on the number of licenses that may be awarded. (19990.21(a)).
Tribal participation
California’s Indian tribes are welcome to participate in the system, provided they meet the eligibility requirements for licensing (i.e. if the tribe has been operating a casino or cardroom for a period of at least three-years). (19990.21(a)(2)).
Any tribe that applies for a license must waive its sovereignty for the limited purpose of allowing the state to exercise jurisdiction over the tribe in order to evaluate its application. (19990.21(e)).
S.B. 1463 further envisions that the Governor’s office should consult with Indian tribes regarding additional issues:
“It is the intent of the Legislature to encourage the Governor, immediately following enactment of this chapter, to enter into meet and confer negotiations with interested tribal governments that have tribal-state gaming compacts with the state to resolve the questions related to exclusivity of tribal gaming, and to ensure that the signatory parties to compacts may exercise their rights under the compacts in a timely manner and that the state may commence the authorization of Internet gambling as provided by this chapter.” (19990.02(m)).
Fees and taxes
Application fees will be between $1 million and $5 million, as determined by the California Justice Department to cover anticipated costs of conducting background checks and evaluating suitability. (19990.22(d)).
Upon being awarded a license, a licensee must deposit a nonrefundable fee of $30 million with the state. (19990.58(a)).
- The $30 million fee serves as a credit to the licensee. For a period of three years, the licensee’s monthly gaming tax on gross revenues will be deducted from this $30 million credit. (19990.58(a)).
Licensees will be taxed at a rate of 10% of their monthly gross revenues. (19990.58(b)).
- “Gross revenues” is defined as “the total amount of money paid to a licensee pursuant to activities authorized under this chapter. Gross revenues shall not include player deposits and wagers.” (19990.05(l)).
Authority to modify license contracts after three years
Three years after a licensee has received a license, the Department of Justice will obtain the ability to renegotiate the terms of the agreement it has entered into with the licensee. The language of the bill states:
“…The state reserves the right to make reasonable modifications to the terms and conditions of licenses…. to balance the relationship between the licensees and the state.” 19990.26(b-e).
For now, it is probably too early to foresee whether the licensee will have true bargaining power to renegotiate or whether the negotiations will be unilateral demands imposed by the state.
General agency duties
S.B. 1463 grants primary authority for licensing and regulating internet gambling to California’s Justice Department. Otherwise, the bill is vague regarding the distribution of powers and functions between the Justice Department and other state agencies, including the California Gambling Control Commission.
The Justice Department clearly has responsibility for evaluating license applications as well as broad authority to promulgate a range of necessary regulations. Presumably, power to oversee the ongoing compliance of licensees will be delegated to the California Gambling Commission, but S.B. 1463 does not make this explicitly clear.
Necessary contacts with the state
Licensees and all of their subcontractors must be organized in California. (19990.22(b)(1)).
All facilities and bank accounts related to intrastate internet gambling must be located in California. (19990.22(b)(1)).
Credit card payments
S.B. 1463 differs from federal legislative proposals and those of other states in that it envisions players would be permitted to use credit cards to fund their gambling accounts:
“…The licensee shall submit to each credit card company with which it has credit card sales, information in an appropriate form and format so that the words “Internet gambling” may be printed on the purchaser’s credit card statement when a payment to a licensee is made by credit card payment.” (19990.35(c)(2)(C)).
Sen. Steinberg’s letter to stakeholders, Aug. 22, 2011
On August 22, 2011, the President Pro Tempore of the Senate, Darrel Steinberg, issued a letter to inform “stakeholders” that the Senate will not rush to approve internet gaming legislation.
“…Having stated that, we also believe a significant amount of progress has been made on intrastate internet gaming to the point where, absent unforeseen circumstances, we fully expect an objective proposal will be developed during the interim in time for consideration when the legislature reconvenes in 2012.”
The letter specifically identifies the following as unresolved issues: a) tribal exclusivity and waiver of sovereignty immunity, b) the types of games that would be authorized, c) who would be eligible to apply for gaming site licenses, and d) potential federal constitutional questions.
Senate Bill 45
S.B. 45 is the older version of the current policy plan. S.B. 45 was introduced by Senator Roderick Wright, Chairman of the Senate Committee on Governmental Organization, in January 2011.
S.B. 45 would obligate the California Justice Department to enter public-private partnership contracts with up to three “hub operators” of intrastate internet gambling. The contract term would span 20 years.
“Internet gambling” is a broad term which includes casino games and poker. Oversight and enforcement of internet gaming regulations would be conducted by the California Gambling Control Commission.
The California Justice Department would be obligated to require that each hub operator and all of its subcontractors be domiciled in California. This would not “preclud[e] foreign entities from creating California subsidiaries for the purposes of applying to become a California hub operator.” Indian tribes are also eligible to receive contracts to become a California internet gaming hub operator.
A hub applicant would automatically be deemed unsuitable if has offered internet gambling games in California at any time since the enactment of the Unlawful Internet Gambling Enforcement Act of 2006.
S.B. 45 envisions that a hub operator would “remit an agreed-upon percentage, but no less that 10%, of its gross revenue to the Treasurer on a monthly basis.”
Senate Bill 40
S.B. 40 was introduced in the state Senate by Senator Lou Correa on December 6, 2010.
Other Research Sources
The Senate Committee on Government Organization has debated internet gaming legislation prior to the 2011-2012 legislative session. Substantial documentation related to a hearing on February 9, 2010 is available on the Committee’s website, including the hearing transcript and testimony from 21 interested individuals.
Website of the California Legislature
Website of the California Gambling Control Commission
Website of the State of California Department of Justice