Prop 27 Clause A Possible ‘Poison Pill’ For Sports Betting Tribal Revenue Share

Written By Matthew Kredell on September 8, 2022

Although proponents claim it never would happen, Proposition 27 contains a clause that could stop sports betting tribal revenue share.

Prop 27 promises to share 15% of tax revenue with tribes that don’t participate in California sports betting. One provision in the online sports betting ballot measure, however, instructs that the money instead goes into the homelessness fund if a court finds the initiative’s waiver of sovereign immunity unenforceable.

A tribal attorney called the clause a “poison pill.”

“If you look at the original version of the initiative, it had a double poison pill, which could have cut out tribes entirely,” Yocha Dehe Winton Nation General Counsel Jeff Butler told PlayCA. “A [qualified gaming entity] could have gone at it without a tribe. They took that out but kept in the poison pill that the 1.5% disappears if found unenforceable.”

Butler refers to the 15% tribal revenue share as 1.5% because it’s 15% of the 10% tax revenue.

A representative of the Yes on 27 campaign counters that the point is moot because there are no grounds for the section to be thrown out.

“Under any scenario, Prop 27 will fund homelessness and help non-gaming tribes,” Yes on 27 spokesperson Nathan Click said.

Prop 27 waiver of sovereign immunity explained

Prop 27 includes three ways for tribes to participate in online sports betting:

  1. Partner with a qualified gaming entity. A QGE is an online sportsbook operator that pays $100 million for a license. It assumes all responsibility and liability for the sports betting operations.
  2. Reach a market access agreement with an online sports betting platform provider. The platform provider pays $10 million for each tribe to which it provides its platform and still assumes all responsibility and liability for sports betting operations. The book, however, operates under the tribal brand.
  3. A tribal applicant pays $10 million for a license and develops its own online sports betting platform.

If a tribe opts for option one or two, proponents contend no tribal sovereign immunity waiver is needed. The State of California can hold the qualified gaming entity or online sports betting operator accountable for payment of taxes and ensuring betting is conducted in a socially responsible manner.

If a tribe chooses to go at online sports betting alone, however, there is no operator to accept responsibility and liability. A tribe must waive sovereign immunity in order to pay taxes and consent to be sued.

Prop 27 proponents say it’s unlikely a tribe picks option 3 given difficulties in creating online sports betting platforms. However, they wanted to give tribes that option.

CA sports betting Prop 27 section in question

Under Section 19750 of Prop 27, language reads:

“In the event that Section 19769 is found by a court of competent jurisdiction to be unenforceable in whole or in part under state or federal law, then the moneys described in subparagraph (A) [the 15% to the Tribal Economic Development Account] shall instead be allocated and transferred by the Controller to the California Solutions to Homelessness and Mental Support Account.”

Section 19769 focuses on jurisdiction over online sports betting being retained by the State of California. It asserts that every tribal operator licensee must waive any right to assert sovereign immunity. It also mandates consent to be sued by the state or division.

Butler asserts that tribal sovereignty is hard fought and highly protected. So tribes would challenge Section 19769 in court. In which case a victory would end the 15% online sports betting tribal revenue share.

“That is going to get challenged,” Butler said. “And if it’s found unenforceable, the revenue share to tribes disappears.”

Why Prop 27 campaign says challenge would fail

Yes on 27 argues Prop 27 creates pathways for tribes to engage in online sports betting outside of tribal lands.

In an effort to provide tribes with every possible option to engage in online sports betting, however, they created one instance where waiving sovereign immunity is needed. This is because tribal sovereignty and state taxation do not easily coexist.

This can be seen in Prop 26. The measure does not require tribes to pay any tax on in-person sports betting at California tribal casinos.

California horse racing venues must pay a 10% tax. And some of the larger tribes behind the initiative have pledged to pay 10% as well. But each tribe participating in sports betting under Prop 26 would individually work out revenue share with the state. It would do so through a compact amendment.

Because Prop 27 doesn’t condition all licenses on a waiver of sovereign immunity, proponents say it will be impossible for a tribe to overcome a motion to dismiss a legal challenge of the 19769 language because there can never be a “coerced” waiver of sovereign immunity. Tribes can choose one of the other two options to do online sports betting or not do it at all.

Butler countered:

“What they’re saying is that because a tribe has to voluntarily give up sovereign immunity, how can a tribe challenge that? That seems like a simple analysis of a complex issue. But then my question is why include the poison pill provision? If they’re right about that, why include it?”

Purpose of clause eliminating tribal revenue share

Butler suggested that Prop 27 backers intentionally included this provision to stop revenue share with tribes.

“I don’t know why they would include a provision that if it’s challenged and found unenforceable, money going to the tribal fund would disappear. Only a very small number of tribes will be able to participate, and then this 1.5% will go to the broader number of tribes. Except it disappears. Again, it’s smoke and mirrors. I think they did their research on the sovereign immunity provision and think there’s a good chance it’s going to get challenged and found unenforceable.”

However, operators wouldn’t benefit from ceasing tribal revenue share. The money would go to the homelessness fund, not back to the operators.

And the Yes on 27 campaign pointed out that language in Section 19790 permits the Legislature to change the disbursement percentage of sports betting revenue if approved by a two-thirds vote. So if a court challenge triggered this clause, the Legislature could reinstate the tribal revenue share.

This still doesn’t explain why the clause is there in the first place. If a tribe isn’t likely to try doing online sports betting on its own anyway and a challenge of the sovereign immunity waiver would fail, why is there an opening to take away tribal revenue share if it succeeds?

The Yes on 27 campaign didn’t respond to multiple attempts to clarify why the language potentially ending tribal revenue share was included.

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