DraftKings will charge a “gaming tax surcharge" on each winning bet for wagers placed in four states, creating a potentially significant burden on bettors’ bottom lines and igniting fears of a greater industrywide trend.
The undisclosed charge, which DraftKings said will vary by state, will be deducted from each winning bet. In an illustrative example given as part of the company’s second-quarter earnings release Thursday, a winning bettor who won $10 on a $10 bet at +100 odds was charged $0.32.
This would effectively make a winning +100 bet a winning -103 bet. Though it seems minor, veteran sports bettors warn this could have a substantially detrimental impact on a bettor’s long-term bankroll.
The tax also sparked wider concerns this would give other regulated sportsbooks leeway to make similar moves. DraftKings, which along with FanDuel form a de facto US sports betting duopoly, is banking that its customers will be too loyal to switch to other books.
If that assumption holds, it could lead to similar fees from other operators.
More details
The tax will apply to bettors in New York, Illinois, Pennsylvania, and Vermont, the first three of which are among DraftKings’ highest-grossing markets. The rate will be “fairly nominal,” per a DraftKings investor letter, and will amount to a low-to-mid single-digit percentage of a player's net winnings.
New York, which has a nation-leading 51% tax rate on operators’ net wins, will likely suffer the highest tax. Illinois’ rate varies from 20% of operator winnings to 40%, depending on the total amount won by an individual sportsbook.
Pennsylvania has a flat 36% tax rate for all winning mobile bets, the second-highest mark in the country. DraftKings pays 31% of its winnings in Vermont under an unusual structure where rates vary by operator.
Massachusetts and Ohio, at 20%, have the next highest tax rates of competitive markets where DraftKings operates. There was no indication in Thursday’s release these or any other states would be subject to the tax.
The tax is scheduled to take effect Jan. 1, 2025.
In explaining the tax, a DraftKings presentation released Thursday to investors said it will bolster the company’s bottom line. “… we believe additional upside potential exists for DraftKings’ Adjusted EBITDA in 2025 and beyond from this gaming tax surcharge.”
DraftKings appointed former CFO Jason Park as "chief transformation officer" in March. He was replaced by Alan Ellingson, the company's former senior vice president of finance and analytics.
The tax announcement came the same day DraftKings announced it was downgrading its projected AEBITDA (adjusted earnings before interest, taxes, depreciation, and amortization) for fiscal year 2024 from a midpoint of $500m down to $380m.
DraftKings Thursday reaffirmed prior projections of $900m to $1bn in AEBITDA for FY 2025, in part due to the new gaming tax.
Future ramifications
The tax set off online fury about DraftKings’ decision and the industry’s future.
On X, bettors voiced frustrations that each winning bet would suffer a tax. Multiple accounts posted they would stop betting with DraftKings once the tax took effect.
The ENTIRE industry continues to give players ample and solid reasons to keep doin' business with Willie the Weasel, around the corner and in the back of the warehouse, and/or Uncle Joe.
— Rob Miech (@robmiech) August 1, 2024
As is its custom, the rudderless AGA @AmericanGaming will be left speechless #BadActors https://t.co/6XpYEBovM1
Angry bettors and industry stakeholders voiced other concerns this would allow other operators to follow with taxes of their own. MGM and Caesars, which operate the nation’s third-highest and fourth-highest-grossing sportsbooks, respectively, gave no indication of such a move during their earnings calls earlier in the week.
All eyes now shift to the Aug. 13 earnings release for FanDuel's parent company Flutter Entertainment. A similar move by the other half of the national sports betting duopoly could set off even larger ripple effects across the national sports betting industry.
