Justice Department Reverses Opposition to State-Run Online Lotteries

January 6, 2012

State revenue departments and lottery agencies received an early Christmas present last month when the Justice Department’s Office of Legal Counsel made public a ruling written in Sept. that clarifies its position on online lotteries, basically reversing its previous opposition to them.

From the New York Times:

[T]he Justice Department said that while the new policy “differs from the department’s previous interpretation of the Wire Act, it reflects the department’s position in Congressional testimony at the time the Wire Act was passed in 1961.”

The new policy merely reverses the Justice Department’s longstanding position that all forms of online gambling are illegal in the United States. It does not necessarily pave the way for national rules governing online gambling.

Virginia A. Seitz, an assistant attorney general in the Justice Department’s office of legal counsel, wrote in the opinion that the prohibition in the Wire Act of using interstate communications for gambling applies only to betting on a “sporting event or contest.”

As long as the gambling operator and the customer are within the same state, the opinion says, and the betting activity does not include sporting events, a state’s own laws apply. Another federal law, the Unlawful Internet Gambling Enforcement Act of 2006, made it illegal for financial institutions to process payments for online wagers.

Taken together, the two laws allowed the Justice Department to invoke its authority over interstate communications as a means of blocking all Internet gambling.

Some gambling experts believed that the Justice Department’s position that the Wire Act prevented any Internet gambling conflicted with a federal appeals court decision, and therefore the new opinion simply confirmed what was already law.

But states have been reluctant to rely on the appeals court decision, handed down in 2002 by the United States Court of Appeals for the Fifth Circuit in New Orleans, because, in addition to the Justice Department’s continued crackdown, other federal and state court opinions offered conflicting directions.

The opinion and a separate letter were issued in response to several requests from opposite sides of the issue. One came from Senators Harry Reid and Jon Kyl, who asked the department to clarify its position, hoping that online gambling would still be banned or that Congress would at least have a significant role in regulating it. Another request came from New York and Illinois, looking for clarification on whether the Wire Act of 1961, which prohibits wagers on telecommunications systems that cross state or national border, would prevent them from offering their state-run lotteries online within their own borders.

New York has held off for a few years on activating parts of its online gambling system but will now expand it, and Illinois, where state legislators approved massive road and bridge construction projects in 2009 that included the possibility of funding through an online lottery, plans to offer online games within the next few months.

The opinion seems to open the door for some other types of online gambling in addition to lotteries. Some forms of online gambling have already been approved by the District of Columbia and Nevada, and New Jersey has also been considering legalizing internet wagering.

Lawmakers looking for new ways to bring in tax revenue might see the Dec. 23 ruling as a Christmas gift that will help them fill coffers, but if states expand their government-run cottiers, the effect on their tax system could be more like a lump of coal than a gift. Read more about the problems of state-run lotteries here, and online lotteries here.

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