As Sales Drop, Tennessee Lottery Retailers Could Face A New 5% Tax

With the recent decline in lottery sales and growing concern over how that drop will affect education funding in the state, a pair of lawmakers in Tennessee are taking a novel approach to extract more tax dollars from existing lottery sales.

However, the approach could hurt brick-and-mortar businesses.

State Sen. Ken Yager and Rep. Kelly Keisling have each filed bills in their respective chambers that would enact a county-level tax on lottery retailers equal to 5% of each ticket sold. The bills call it the “county entertainment tax” and it would be levied “for the exercise of the privilege of engaging in the business of selling lottery tickets or shares in this state.”

And this next sentence is arguably the most important in the legislation:

“This tax is in addition to all other taxes imposed on a lottery retailer.”

Yager’s bill — Senate Bill 762 — was assigned to the Senate State and Local Government Committee on Feb. 12. Keisling’s bill — House Bill 51 — currently sits with the Departments & Agencies Subcommittee, where it’s been since Jan. 28.

How a 6.5% commission becomes 1.5%

There are roughly 5,000 lottery retailers in Tennessee. They get to keep a 6.5% commission on lottery ticket sales.

Do the math: A 6.5% commission …

… minus a 5% tax on lottery ticket sales …

… equals a 1.5% commission at the end of the day.

So, let’s play it out: A retailer sells $500,000 in lottery tickets in 2025. It earns a $32,500 commission. However, if either of the bills in question pass, that retailer would also have to pay an extra 5% tax — equaling $25,000 — that it wouldn’t otherwise have had to pay.

And just like that, the net earning of $32,500 shrinks to $7,500.

As the bills mention, this new 5% tax wouldn’t replace any current tax. Lottery retailers would still be subject to all current taxes they pay, such as a business tax of 6.5% (and the 6.5% commission must be included in the gross sales for that tax, by the way).

Beyond the 6.5% commission, the Tennessee Lottery offers retailers a 1% cashing bonus on Cash 3 and Cash 4 games, as well as top ticket-selling bonuses that range from $5,000 to $50,000.

What would the new 5% tax fund?

From the 5% county entertainment tax, 2% would go to the Tennessee Department of Revenue. The remaining 3% would be split between local schools and the local county or municipality where the retailer is located.

In Fiscal Year 2023, the Tennessee Lottery reported a record-breaking $2.1 billion in sales. (However, things have taken a turn for the worse since then. More on that later.) That led to a total of $137 million in commissions and bonuses earned by lottery retailers.

If the 5% county entertainment tax was in place in FY23, it would have totaled $105 million, with 2% ($42 million) going to the state department of revenue and the other 3% ($63 million) going to local schools and county governments.

Yes, that money could make a real difference

Currently, proceeds from the Tennessee Lottery go to education in the state — mainly toward 13 different scholarships, grants, and programs. For example: The Tennessee Lottery projects $1.89-1.97 billion in proceeds in Fiscal Year 2026, and of that, up to $504 million would go toward these education and after-school programs.

However, online sports betting has eaten into lottery sales (a major reason why the state just quietly launched an iLottery) and revenue is expected to be $40 million lower than initial projections for this current fiscal year.

“For the last several years, we’ve entertained a lot of bills that would be financed with lottery dollars,” Rep. Charlie Baum, chair of the House Higher Education Subcommittee, said during a January presentation from the Tennessee Lottery focused on revenue shortfalls. “We’ve kind of tried to hold the line on spending those dollars, but that’s when those dollars were available, and this year’s going to be a little different in that those dollars really aren’t available.”

At the same time, there is a growing debate in the state as to whether lawmakers are currently using money from the lottery scholarship fund in the best way. Rep. Steve Cohen wrote an op-ed for the Commercial Appeal in late January arguing that lawmakers are “poaching from the lottery scholarship programs for shiny, new projects.”

Tennessee consistently ranks in the bottom 20% of the country in terms of funding for its schools. In 2021, for example, funding per student in Tennessee was $4,000 lower than the national average. U.S. World and News Reports ranked Tennessee as the 31st-best state for quality of education in its 2024 Best States Rankings report.

No, this is not common

This type of tax would be rare in the U.S., if not one of a kind.

Other states require other unique payments from lottery retailers, but not like an extra 5% tax.

In states such as California, lottery retailers are required to obtain a surety bond (essentially, insurance that will guarantee the retailer’s obligations as a licensed retailer), and those can cost around $1,000 per year.

Beyond that, most lottery retailers in the U.S. are subject to the different taxes related to running a business in their respective state.

You can be sure retailer associations, such as the National Association of Convenience Stores or even a state-level organization, such as the Tennessee Grocers and Convenience Stores Association, will oppose these bills. We haven’t seen any type of public statements or reactions yet, though.