Prediction Markets Sue Kentucky Over Tax on Transaction Fees

The prediction market industry isn’t taking a controversial new Kentucky tax lying down. 

The Coalition for Fair Markets filed a lawsuit against the Bluegrass State over a new tax it passed. It now requires operators to pay a 14.25% tax on all transaction fees in the state. That’s the same rate online sportsbooks are subjected to. The coalition argues the tax is discriminatory and outside of Kentucky’s authority.

Kalshi, Polymarket, Crypto.com, and Robinhood make up the coalition suing the state.

Can Kentucky Enforce the Tax?

The majority of Kentucky lawmakers supported adding a tax for prediction markets, but the move is largely symbolic. That’s due to the Commodity Futures Trading Commission, which currently regulates the industry. It has fought hard to stop states from imposing regulations on prediction operators, taking several to court. 

As a result, the state would be hard-pressed actually to collect any taxes from the prediction industry. While it could take them to court for failing to pay, current US law would likely result in those lawsuits failing.

The lack of regulatory authority has prevented other states from enacting similar taxes, prompting the coalition to take action.

Kentucky Provides Test for the CFTC

The CFTC has been filing lawsuits against states that have attempted to regulate prediction markets over the last two months. However, all of the markets have attorneys general who are Democrats. This partisan enforcement has drawn criticism but has done little to slow the growing opposition from both red and blue states.

Kentucky is unique in that it has a Democrat serving as Governor, but Attorney General Russell Coleman is a Republican. As a result, the regulator would need to name Coleman in a lawsuit against the state. That would be a dangerous move as the country prepares for a critical midterm election this fall.

However, Kentucky is only the latest state with a Republican AG to take action, joining Iowa, Montana, Ohio, Tennessee, and Utah. With more states likely to join that list, there is reason to wonder how much longer the CFTC will be willing to limit its defense of the industry. 

Coalition’s Strategy Could Backfire

The prediction industry has accused many states of discriminating against it, but that argument is harder to make in Kentucky.

The new tax for operators was passed as part of a much larger bill aimed at fighting problem gambling. It included several new regulations for sportsbooks and is projected to lead to a drop in tax revenue. That sacrifice shows lawmakers' growing concerns over the spread of gambling addiction, which is an issue capturing more public attention.

While Kentucky isn’t adding additional regulations for prediction markets, the new tax would help fund crucial programs aimed at helping bettors struggling with addiction. 

According to polls, many Americans worry about the prediction industry’s impact on problem gambling. This has led operators to shift their stance to address these concerns, but it has yet to make an impact. As a result, many may view the coalition's lawsuit as another rejection of responsible gambling, further damaging the industry’s reputation among residents nationwide.