FRANKFORT, Ky. (AP) — A coalition that includes Kalshi, Crypto.com and Polymarket filed a lawsuit Friday challenging Kentucky's first-in-the-nation excise tax on prediction markets.

The Kentucky General Assembly in April enacted a 14.25% tax on prediction market operators' transaction fees, a levy the lawsuit says is discriminatory, unconstitutional and preempted by federal law.

Prediction markets are platforms where customers can buy, sell or trade event contracts — a form of derivative that allow placing trades based on whether real-world events, such as election results or economic indicators, will or won't happen.

The new tax is higher than for Kentucky's “favored incumbent industry,” the lawsuit filed in state court by the Coalition for Fair Markets says, noting a 9.75% tax on wagers at horse tracks.

In a statement using gambling terminology, Kentucky Attorney General Russell Coleman vowed to fight the legal challenge.

“You can bet our Office will defend these statutes and the people of our Commonwealth from out-of-state companies that seek to cancel Kentucky’s sports betting laws," he said. “In any courtroom, the attorneys with the AG’s Office are the odds-on favorite to win.”

The tax disincentivizes the operation of prediction markets in Kentucky, the lawsuit says.

“No State currently levies a State-specific excise tax of any kind on derivatives transactions that take place on a federally designated exchange, let alone the sort of specifically targeted and discriminatory tax that Kentucky has imposed here," it says.

Taxing federally regulated markets “just pushes people toward illegal platforms with no oversight and no protections,” Kalshi said in a statement. "Kalshi is an American company, regulated here at home, and we’re joining the fight for Kentuckians’ access to safe, legal markets.”

Prediction markets have been pushing hard to gain legitimacy among the public and policymakers as a legitimate platform where users can bet on everything from sports to the weather to geopolitical events.

There have been several incidents where traders have used inside information to profit on prediction market platforms. It was recently disclosed that former former Congressman George Santos was under investigation for allegedly illegally betting he wouldn’t attend President Donald Trump’s State of the Union address after initially saying he would. In April, a U.S. Army soldier was charged with using classified information to make a $400,000 profit trading on Polymarket on the timing of the U.S. military operations in Venezuela earlier this year.