Absolutely not legal. In the original script it's made abundantly clear that 'Anthony' (AKA Tony the stereotypical Italian restaurant owner) is an unlicensed bookmaker taking illicit bets. Since he's incapable of covering four-to-one odds on a $65K bet, it's probably fair to say that this is a sideline for him, note that although he takes the bet, he goes straight over the street to Howard's usual illicit bookmaker to lay it off.
INT. BORATTA’S RESTAURANT - EARLY EVENING: HOWARD strolls into the restaurant. ANTHONY, an impeccably groomed Italian, mid 40’s, sits at a corner table quietly enjoying a steak. He looks up.
...
HOWARD: I want the Knicks money-line, wanna do that with the over on Amare’s
points plus rebounds, the Thunder to cover, King’s 2nd quarter, and
the under on the Blazers/Heat, but I want to buy half a point.
ANTHONY: That’s like 4 to 1...
HOWARD: Yeah.
ANTHONY: Too much trouble. You gotta spread a bet like that out over more
books.
As to why someone would go to an unlicensed bookie, the attraction is that they're not paying the relevant taxes, will happily lend large sums of money without credit checks and will take bets that other, legitimate bookmaking establishments would not.