They triangulate your location using the closest cell phone towers, and get your position that way. The problem with this is that for the 300,000+ people in Jersey City or Hoboken, the strongest cell tower may be located in New York City where internet gaming is illegal, and you get shut out of using the services. Same goes for the people in Camden that may get a signal indicating they are in Philadelphia.
Yes this can be easily defeated by buying a Tracfone and leaving it at a friends house + VPN, but for non tech savvy people this is a huge deal. In Nevada when they implemented this is wasn't really a problem because besides Lake Tahoe, barely any of the population lives right on the border next to a large population center.