Nevada authorities have claimed that Kalshi’s acceptance of a tax on its revenue in North Carolina represents “a stunning about-face” and is an admission that states may regulate prediction markets.
Nevada Senior Deputy Attorney General Abigail Pace made the claims in a new filing in the state’s legal battle against Kalshi.
The prediction market operator has taken its case against Nevada gambling regulators to the Ninth Circuit Court of Appeals after a judge ruled against the company. As a result, Nevada became the first state to block Kalshi in March. Since then, Michigan, and more recently Washington state, have forced Kalshi to stop accepting users in their states.
Kalshi Accepts North Carolina Tax
The latest Nevada filing came in response to a Kalshi filing last week. The company said it supported North Carolina’s efforts to tax prediction markets. Lawmakers in the state passed SB257 in July, which includes a 6% tax on revenue generated by prediction market platforms.
Kalshi noted that the bill recognizes the CFTC’s “exclusive federal regulatory authority” over any “prediction market registered and licensed by the [CFTC]”. It added that the tax “does not impose any license, registration, or other regulatory requirements or obligations of any kind on prediction markets.”
North Carolina’s strategy of accepting the CFTC as the regulator of prediction markets while taxing the resulting revenue could provide a blueprint for other states. Kalshi encouraged other states to do the same, which could provide them with tax relief.
“The CFTC’s exclusive jurisdiction prevents states from regulating on-DCM trading, but it does not preclude states from
imposing lawful taxes on revenues from trading on DCMs,” Kalshi’s filing added.
Nevada Rejects Kalshi’s Position
Nevada, however, argues that Kalshi’s acceptance of the North Carolina tax contradicts the company’s position that states have no authority over event contracts.
It says that Kalshi’s attempt to separate taxation from regulation “is purely a formalism—both are forms of regulation by the State.”
It adds, “Kalshi is admitting that a State has the power to regulate its operations in the State—a stunning aboutface, which would mean that (at a minimum) Kalshi cannot evade Nevada’s taxing provisions.”
Nevada currently taxes online sports betting companies at 6.75%, one of the lowest rates in the country. With casino groups being powerful in the state, it is doubtful that they would accept Kalshi being allowed to operate while paying a similar rate.
North Carolina Lawmakers Warn Taxes Will Plummet Under New Law
North Carolina increased the tax rate on sports betting revenue from 18% to 23% last month. Lawmakers warned that taxing prediction markets at just 6% will cause a dramatic decrease in the state’s gambling revenue.
“The revenue that we’ve been getting from sports betting, it’s going to plummet,” Sen. Julie Mayfield said over the prediction market tax. She warned that schools rely on the betting tax to fund athletic programs, which could suffer as a result.
DraftKings and FanDuel account for around 70% of the total wagering in North Carolina. Both operators are moving into prediction markets and may see this as a preferable product to focus on, given the reduced tax rate. The companies both withdrew betting licenses in Nevada to focus on prediction markets.
Market Makers Present Tax Problem
One of the problems for regulators is that the different models of prediction markets make taxing companies more complex. In sports betting, the gambling operator generates revenue directly from wagers, whereas in prediction markets, the company collects only a small percentage of each transaction as fees.
“A sportsbook like DraftKings operates with an 8% to 12% hold, whereas an exchange like Kalshi charges only a 1% to 2% fee per trade,” ParlayX founder Andrew Gonzalez told CasinoBeats in an interview recently. “Because $40 billion in volume yields significantly less exchange revenue, there is far less tax money to go around.”
ParlayX is a product aimed at market makers and for regulators, focusing on these companies could yield more tax dollars. However, states face challenges in separating out the revenue generated within their borders.
“It’s the market makers who hold the risk and margin, which shifts the real regulatory problem to how you regulate those market makers,” Gonzalez added. “That becomes very tricky across state lines. Sportsbooks can ring-fence state operations with separate capital pools, but forcing an exchange model to split liquidity into 50 state-level pools completely breaks it.”
North Carolina Model Could Be Adopted By Other States
While many states are debating the legality of prediction markets and whether sports event contracts should be state-regulated, North Carolina has seen an opportunity to generate additional tax revenue.
“It’s pretty clear that it’s something that seems to be growing in popularity,” said North Carolina Senate President Pro Tempore Phil Berger. The state’s tax is simply recognition that the product is out there.
“Whether it’s something that eventually is going to take over from the sports betting, I don’t know,” he added.
In a similar vein, many companies are not waiting to see what courts ultimately decide. Sports teams in New York have been making deals with prediction market operators despite the state insisting that sports markets are illegal and promoting them is also against the law.
“The teams want to cash in on the monetization opportunity,” Mark Conrad of Fordham University told CasinoBeats when asked why the teams are partnering with companies such as Kalshi and Polymarket.
North Carolina is showing that states can also start to cash in on the prediction market boom. How the Ninth Circuit interprets Kalshi’s acceptance of the state-level tax could be pivotal to the industry’s future.
