Missouri tax gap threatens sports betting revenue growth

Missouri's prediction market tax gap threatens state sports betting revenue

When Missouri voters approved sports betting in November 2024, the state's budget office ran projections based on a simple assumption: the money wagered on sports outcomes would flow through licensed sportsbooks, get taxed at the statutory rate, and fund whatever the legislature had promised it would fund. That assumption is now structurally broken.

The Missouri Attorney General has sent cease-and-desist letters to prediction market platforms operating in the state. The legal theory behind those letters — that event contracts on sports outcomes are gambling under state law — is doing two things at once. It is attempting to push platforms off Missouri soil, and it is also, inadvertently, making the fiscal problem visible in a way it wasn't before.

Here is the problem the cease-and-desist does not solve: Kalshi is federally regulated. CFTC authorization does not dissolve at state lines, and the Ninth Circuit just reversed a tribal injunction attempt that made a similar structural argument. Missouri's attorney general can send letters. Whether those letters have the force of law against a CFTC-licensed exchange is a question the courts have not settled, and in the current circuit environment, the answer is not obviously yes.

But the tax revenue question runs beneath all of that and gets less attention. Missouri's sportsbooks pay state tax on gross gaming revenue. Kalshi does not — because it isn't a sportsbook, it's an exchange, and exchange transaction fees are not gross gaming revenue under any existing state framework. Every dollar of wagering volume that moves from a DraftKings account to a Kalshi contract is a dollar the state's sports betting tax model never touches. The abc17 reporting on this is accurate, but I think it undersells how durable the gap is.

The consensus read is that this resolves through litigation — either the courts back Missouri's authority and the platforms exit, or they don't and the platforms stay. I don't think that's where this lands. The more likely path is that Missouri ends up with both: platforms that find a legal foothold under federal preemption arguments, and a state tax code with a hole in it that the legislature didn't write and doesn't know how to close. Texas is further along the same road. Connecticut tried the direct-ban approach and is now in federal court. None of these states started from the tax question, and all of them are going to end up there.

The fiscal exposure is not theoretical. Missouri allocated expected sports betting tax revenue before a single legal dollar was wagered. Prediction market volume on NFL games alone this season is running well above what any state revenue model accounted for. That volume is untaxed at the state level everywhere it flows through a federally-licensed exchange, and there is no existing mechanism — not a cease-and-desist, not a state lawsuit — that changes the tax treatment without a federal legislative fix or a Supreme Court ruling that doesn't currently exist.