The Internal Revenue Service has put forth a more harsh tax requirement on daily fantasy sports. Indeed, the recent ruling by the IRS says that DFS, such as FanDuel and DraftKings are now required to pay a federal excise tax on entry fees.
This is a move that can move an industry on its head, if not dealt with carefully. Meaning it will require these companies to pay large amounts of money if they have not been paying and are questioned by the IRS.
This move could potentially be a business destroying option for many. The DFS industry as a whole generated roughly $3.2 billion with entry fees and nearly $330 million in total revenue back in 2018.
According to DraftKings CEO Jason Robins, he believes they are in a position to fight against this. Claiming DFS is not wagering is a bold move and they have the arguments to back it up. Legal Side of Things Way back in 2007, a famous court case of Humphrey vs Viacom argued that entry fees for all fantasy sports were outside of the definitions of bets or wagers.
This case however was geared towards the traditional season long fantasy gaming. This court ruling was brought back up and could potentially help the case of the likes of DraftKings and FanDuel.
The Tax On DFS
The new memo from the IRS states they consider entry fees meet the definition of wagering under the tax code. The amount of taxes that will be owed will differ for each state, because it will depend upon whether or not the wagers are legal in that state.
All legal sports wagers are subject to 0.25 percent on the amount that is wagered and then an annual occupational tax of $50 for each person that is accepting those wagers. Any illegal wagers are also subject to an excise tax of 2 percent of the amount that is wagered.
Finally, the annual occupational tax will increase to $500 per person that is accepting the wagers.
Cannot Evade the Tax
The IRS also states in the memo that companies cannot get out of paying that tax. Even though a state might have decided that DFS is a game of skill rather than gambling, this does not change anything when it comes tax time.
This potential bill is going to be huge for companies that have not paid. This could be well up into millions of dollars here for some.
The recent memo from the IRS has DFS tore up right now. As such, no one wants to be slapped with taxes that are up in millions of dollars. There is not a timetable yet with if or when anyone can overturn this memo.
DFS operator DraftKings believes they have a strong case against it and would like to fight it. Many believe that the analysis the IRS had on DFS is deeply flawed with the belief that it is a game of wagering. By taking a look at the 2007 court case of Humphrey vs Viacom we can see that it has already been addressed once before.
Depending on how much money each operator owes, you might see a lot of them struggling to get by. This could in turn hurt their customers if they happen to somehow increase costs on their sites. Of course, the industry does not want to hurt their customers or reputation in any shape or form.