Sue, Ban, or Tax: Three Ways States Are Handling Prediction Markets

The most common state response to prediction-market sports and election contracts has been an administrative cease-and-desist order from a gaming regulator or lottery commission, rather than a lawsuit. New Jersey's Division of Gaming Enforcement, the Nevada Gaming Control Board, the Illinois Gaming Board, and Maryland's Lottery and Gaming Control Commission all issued such orders against Kalshi and other operators within weeks of each other in March and April 2025.

A cease-and-desist order is not self-enforcing against a federally registered operator that disagrees with it. In practice it has tended to trigger one of two things: the operator suing first to block enforcement, as Kalshi did in New Jersey and Nevada, or the state eventually going to court itself to force compliance once an order is ignored.

Some states have skipped straight to litigation, or escalated to it after an ignored cease-and-desist order. Connecticut Attorney General William Tong filed a direct suit against Kalshi on August 26, 2026, seeking a court injunction after the state's December 2025 cease-and-desist order was met with a preemptive federal suit from Kalshi rather than compliance.

Tong framed the case in consumer-protection terms, stating that "sports event contracts are no different than sports betting" and are not shielded from Connecticut's consumer laws by federal registration. New York Attorney General Letitia James took the same escalation further on July 31, 2026, suing Kalshi directly and seeking more than $36 billion in penalties, restitution, and disgorgement, the largest figure attached to any single state action against a prediction-market operator so far.

North Carolina took a different path entirely. Governor Josh Stein signed Senate Bill 257 on July 7, 2026, imposing a 6 percent tax on prediction-market operators' net trading-fee revenue from North Carolina residents, effective January 1, 2027, with no state license or registration required.

The bill formally recognizes the CFTC's "exclusive federal regulatory authority" over prediction markets in state statute, making North Carolina the first state to do so rather than dispute it. The same bill raised the state's sports-betting tax from 18 percent to 23 percent of gross wagering revenue, creating two starkly different tax tiers for products regulators elsewhere are still arguing are functionally the same thing.

Nevada's Deputy Attorney General cited North Carolina's tax in an August 21, 2026 brief to the Ninth Circuit, arguing that Kalshi's willingness to pay a state tax on the same event contracts it calls exclusively federal undercuts its own preemption theory. Nevada called the distinction between regulating a contract and merely taxing its revenue "purely a formalism."

The Ninth Circuit did not need that argument to rule against Kalshi on August 28, but the fact that Nevada raised it at all shows how a single state's revenue-driven legislative choice can end up as litigation ammunition somewhere else entirely, independent of whatever North Carolina itself intended.

At the same moment, Nevada is enforcing its gaming law against Kalshi's sports contracts, Connecticut is suing over the same category of product, and North Carolina is collecting a tax on it without ever contesting whether it is legal. All three postures are simultaneously valid under current law, because no single ruling yet binds every state.

For operators, that means a national regulatory strategy has to be built state by state, weighing whether a given legislature is more likely to negotiate a tax and move on, an attorney general is more likely to litigate directly, or a regulator will issue an order and see whether it gets tested. That pattern is unlikely to resolve until an appellate consensus, or the Supreme Court, settles the underlying swap-definition question nationally.