Illinois Appeals Injunction Blocking Prediction Market Licensing and Tax

The State of Illinois filed its appeal on October 30 against the injunction blocking its licensing and tax powers over sports event contracts. The case brings the debate over state oversight of swap transactions subject to federal regulation before the Seventh Circuit Court of Appeals. The appeal targets a ruling that Judge Martha Pacold of the U.S. District Court for the Northern District of Illinois signed the same day.

State officials want the preliminary injunction reversed and vacated. The appeal was filed against interim relief granted in related cases involving the federal government, Coinbase, and Kalshi. It challenges interim protection, not a final decision on the merits.

In her October 2 opinion, Pacold said Kalshi's underlying contracts, based on the winner of sports finals, are likely swaps under the Commodity Exchange Act. The judge stressed that a contract having financial, economic, or commercial consequences is not enough, and that those consequences must be concrete and significant. Coinbase also said a bet on the color of a sports drink poured over a coach lacked the necessary economic consequences, and that this limit was accepted at the hearing.

According to Pacold, Illinois's licensing conditions set rules on customers' age and location, eligible sporting events, and the data sources used to settle contracts. The judge found that these requirements interfere with the operation of the federally regulated market and add conflicting demands. Compliance would force Kalshi to create a separate market only for Illinois customers, and non-compliance would carry criminal penalties. The judge also found that private plaintiffs face hard-to-repair harm, since they could face business shutdowns or repeated penalties, and that compensation lawsuits cannot provide protection because of Illinois's sovereign immunity.

The parties agreed in a joint filing on October 8 that the licensing bar also removes the precondition for collecting taxes from licensees subject to the tax provisions. Under the law, a licensee pays a 1.75 percent exchange transaction tax on the first five million dollars in a fiscal year, and a 3.5 percent tax on every transaction above that threshold. The threshold applies per licensee and on a fiscal year basis. Pacold asked the parties to file a joint status report by November 12 on how the underlying case will proceed.