IRS Memo Could Cost DFS Companies Millions
The U.S. Internal Revenue Service has concluded that entry fees for daily fantasy sports constitute gambling and may be subject to a federal excise tax. If played out, it could cost DraftKings and FanDuel millions of dollars.
On the surface, it doesn’t seem like daily fantasy sports fall under the umbrella of sports betting. After all, the player chooses his team’s makeup based on some skill sets. And the real performances of the athletes determine whether the player wins cash.
But an IRS memo says otherwise, meaning fantasy sports giants FanDuel and DraftKings may have to pay a federal excise tax on entry fees—including back taxes and an annual occupational tax.
“This is one of the most significant events in the evolution of sports betting in the United States,” said Kate C. Lowenhar-Fisher, a Nevada-based gaming attorney at Dickinson Wright PLLC. The taxes due could be “potentially business-destroying” in some jurisdictions, she said.
The industry collected $3.2 billion in entry fees and $335 million in total revenue in 2018. And the memo makes clear, entry fees come under the tax code as wagers.
“Our position continues to be, which we believe has been reaffirmed through state legislatures and courts throughout the country, that DFS is not wagering,” DraftKings CEO Jason Robins said. “We believe that the arguments at the federal level are incredibly strong.”
Legal sports wagers pay an excise tax of 0.25 percent on the amount wagered, along with an occupational tax of $50 for each person accepting those bets. Illegal wagers are subject to an excise tax of 2 percent and an occupational tax of $500.
Gaming attorney Daniel Wallach of Wallach Legal LLC said the memo doesn’t equate with court rulings from the feds in New Jersey. A 2007 ruling said entry fees for fantasy sports fell outside the definition of a bet. But that particular case centered on season-long fantasy games, not daily ones.
Then again, a recent appeals court in New York ruled fantasy sports are an illegal form of gambling.
Should the IRS exercise the memorandum, it will be expensive. “You’re talking about lots of zeros in liability, lots of zeros,” said Marc W. Dunbar, a shareholder at Florida-based law firm Dean Mead.
In related news, in its initial full quarterly report as a public company, DraftKings indicated it had $1.2 billion in cash and no debt. The firm added $800 million during June, the result of an equity offering.
“DraftKings is well-positioned to build upon the growth of the online sports betting and iGaming market in the U.S.,” Robins said in a statement. “As a technology-first organization, we will continue to focus on bringing new and innovative products to market that strengthen our engagement with customers and maintain our competitive differentiation.”
The second quarter saw the launch of sports betting in Colorado and online gaming in Pennsylvania. DraftKings also added sports betting in Illinois and iGaming in West Virginia and is working on Virginia, Tennessee and Michigan.