When a Free Bet Is Tax-Deductible, the State’s Take Shrinks

In some U.S. markets, the line that separates what the house wins from what the state taxes is not just an accounting formality; it is written directly into the law, and its size is governed by caps and timers that some bettors may not see.

What Goes Into the “Adjusted” Receipts Line

The deduction appears on state reporting forms under names such as “free play wagered” or “promotional credits redeemed.” In Michigan, the monthly revenue-report form published by the Gaming Control Board lists a line called “Adjusted Gross Sports Betting Receipts.” Under the board’s definition, that sum equals gross sports betting receipts minus the monetary value of free play wagered. The state’s tax-form instructions describe free play as belonging to the wagering base and require operators to report the dollar figure as a positive number, making the subtraction explicit.

The same concept appears in Colorado, where the Office of the State Auditor’s sports-betting request for proposals notes that free-bet exclusions were built into the original rules and later phased out by legislative action. Until mid-2026, a sportsbook can deduct the face value of promotional wagers; the remainder becomes the taxable base. Without the deduction, a dollar of gross win produces a dollar of adjusted revenue. With it, the taxable figure can be materially smaller.

How State Laws Cap, Phase Down and Ban the Deduction

States have tightened the deduction in markedly different ways. Missouri’s statute permits a deduction for the costs of free play or promotional credits but caps the deductible amount at 25 percent of cash and cash equivalents received in a calendar month. Arizona’s SB1617 writes a sunset into the law: the deduction is allowed only during the first five years after 15 April 2021, and the percentage of gross wagering receipts that can be excluded drops on a fixed schedule—20 percent in years one and two, 15 percent in year three, 10 percent in years four and five, and zero thereafter.

Connecticut takes a similar approach based on sports-wagering win/loss. According to the state’s Open Data portal, the promotional deduction from October 2021 through September 2022 was limited to the lesser of 25 percent of win/loss or actual promotional credits wagered. That ceiling fell to 20 percent the following year and to 15 percent afterwards.

Massachusetts knitted the deduction to monthly handle. A December 2022 presentation by the Massachusetts Gaming Commission outlined a tiered cap that started at 2.5 percent of handle on 1 January 2023 and steps down every one or two years—2.25 percent from July 2024, 2 percent from July 2025 and 1.75 percent from July 2026 onward.

Virginia took the most abrupt route. A budget amendment to the state’s sports-betting framework prohibits a permit holder from excluding bonuses or promotions from adjusted gross revenue after the first 12 months of activity. New York, described in a analysis, bars the deduction entirely from the start: sportsbooks cannot subtract promotional wagers from gross gaming revenue at any point.

Where the Subtraction Appears in Monthly Reports

The mechanics are most visible in Michigan’s tax-form structure. The commercial-operator version of the monthly internet sports betting tax return calls for “total wagers received,” “winnings paid,” “free play redeemed,” and a series of deduction lines that feed into adjusted gross sports betting receipts. The same form that operators download and file with the Department of Treasury prints the free-play deduction as a separate entry, making it impossible to miss. Other states publish similarly detailed monthly data; the item is not buried in a footnote but sits on the face of the return that determines the state’s share.

Because free play is tallied as part of the wagering total, the deduction has an outsized effect in months when sportsbooks spend heavily on customer-acquisition bonuses. The adjusted-receipts line can be far smaller than handle-based projections would suggest—sometimes close to zero, which is why statutory caps exist to guarantee at least a minimum taxable floor.

Why a Cap or Sunset Changes the Tax Base Over Time

Phase-down schedules and hard cut-offs mean the deductible share shrinks even if an operator’s promotional spending remains steady. Arizona’s formula will reduce the allowable percentage from 20 to 15 to 10, then to nothing in year six. Connecticut’s diminishing cap works the same way. Massachusetts’ handle-based ceiling drops by a quarter-point every one or two years, mechanically pushing more revenue into the taxable column.

Colorado’s accelerated timeline illustrates how quickly the arithmetic can shift. After the 2025 changes, no deduction applies to bets placed from July 2026 onward, and total elimination takes effect in fiscal year 2027. For a state that originally allowed the exclusion, the swing in taxable revenue from a single legislative session can be substantial.

The practical result is that gross-wagering figures reported in a market’s first years cannot be naively extrapolated. A cap that holds the deduction to 25 percent of cash receipts, as Missouri does, sets a floor that shields the tax base from the most aggressive promotional campaigns. A sunset such as Arizona’s eventually removes the deduction altogether. Analysts who rely on early adjusted-revenue numbers to build long-term forecasts are building on a base that the law itself is designed to change.

Virginia’s experience after the 12-month grace period shows the same dynamic in reverse: once the deduction window shut, the taxable base became the gross figure by operation of statute, and the reports no longer contained a promotional-credit subtraction. The legal mechanism is what does the work.

When the deduction line disappears, the taxable base jumps. Colorado’s July 2026 cutoff will remove the subtraction from every bet placed that month, and the adjusted-receipts number will become the gross number for all periods thereafter. That is the entire story—a mechanical reset written into the statute, not a change in betting behaviour.