Daily Fantasy Sports subject to federal tax

Cvetanka Cvetanovska | Published 17 Aug 2020, 11:36 a.m.

Daily Fantasy Sports providers like FanDuel and DraftKings must pay a federal excise tax on their entry fees. This decision made by the IRS in the previous week could cause a significant disruption in the industry.

In the IRS Memorandum, it has been stated that these companies must pay taxes on every entry they’ll accept, as well as an annual occupational tax on each person accepting those wagers. Those must also register with the IRS.

An initiative that might change the game

Experts related and working in this industry agree that this can quickly become the most significant event in the evolution of US sports betting. This move might face fantasy sports companies with millions of dollars in taxes if they haven’t been continuously paying. In some US jurisdictions, this tax bill could potentially close businesses.

FanDuel and DraftKings have no comment so far regarding the IRS’s memo. However, DraftKings CEO Jason Robins said the notice is non-binding and believes the decision is a result of the flawed analysis. Based on past arguments that fantasy sports are a game of skill in federal and state cases of legislation, Robins believes his company is in a good position. As a reminder, daily fantasy sports were absolved from the Unlawful Gambling Enforcement Act, declaring it as a game of skill. 

The memo comes right after members of the Congress attempt to repeal the federal excise tax on legal sports bets. The co-chairs of the Gaming Caucus D.Titus and G.Reschenthaler introduced a bill in July, calling an and to the 0.25% tax. Currently, DF sports are available in nearly every state, with many legalising it or having entered in the legalisation process.

This niche generated approximately $3.2 billion in entry fees. In the current situation, the memo is not obligatory in court, but clearly emphasises the importance of audits.

Robins said that the position of DraftKings at this point had been reaffirmed through state legislatures and courts throughout the country that DFS is not wagering. He believes that the argument at the federal level is compelling at this point and that they won’t face additional challenges.

FanDuel declined to comment on the financial implications of the memo. However, they said they are aware of the challenge and look forward to work with the IRS.

Taxation Challenges

Daily Fantasy Sports are online games that let fans compete for cash prizes in exchange for an entry fee. This is based on the performance of the athletes they selected in their fantasy line up. The memo states the IRS considers the entry fees to meet the definition of a wager under the tax code. The amount of federal excise tax owed will differ based on whether the bets are legal in the states in which they are accepted, according to the IRS.

Legal sports wagers are subject to an excise tax of 0.25% on the amount wagered and an annual occupational tax of $50 for each person accepting bets. Illegal wagers, on the other hand, are subject to an excise tax of 2% on the amount wagered. The annual occupational tax increases to  $500 per person. It is advised that fee should apply to the wagers themselves, as opposed to revenue.

The outcome of this initiative will largely depend on whether Congress takes up the legislation that would get rid of the excise tax. Businesses that pay the fee must also provide an annual  $50 per-employee tax on those working in sportsbooks. 

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