Surcharge to Affect DraftKings Winning Clients in Four States

Several US states announced plans to increase sports betting taxes this year. This resulted in concerns from betting operators who are offering their services in a highly competitive market. Despite the competition, DraftKings and FanDuel so far retain dominance across the country, holding a significant part of the market share.

Still, the high tax rates in several states caused DraftKings to consider the implementation of a surcharge on customers’ net winnings. The plan was disclosed in a letter to shareholders released Thursday. The announcement comes ahead of DraftKings’ second quarter results which are expected to be released Friday, August 2, 2024.

In the letter, signed by DraftKings’ co-founder and CEO, Jason D. Robins, the company referred to the surcharge as a “solution” that seeks to address high tax rates in several states. “There is a solution here. As you know, many revenue-based taxes are passed along to the consumer,” wrote Robins.

He explained that generally, the gaming sector hasn’t considered such an approach in jurisdictions with low tax rates with the only exception being Germany due to its high taxes. However, Robins added that DraftKings is considering implementing a gaming tax surcharge applicable on the net winnings for customers in states where the tax rate exceeds 20%. Another condition for this surcharge to be applied is for the state to have “multiple sports betting operators.”

Winning Bettors in Four States May Be Affected

Currently, the highest sports betting tax rate out of any state in the country applies in New York. Licensed sportsbooks in the state are subject to a 51% tax.

On the other hand, the tax rate in Pennsylvania is also quite high at 36%, while earlier this year, Illinois approved a new tax betting law. Per that law, the highest tax rate for Illinois sportsbooks that meet certain criteria would be 40%.

Another state where the betting tax is more than 30% is Vermont. Licensed sportsbooks in the state are subject to a 33% tax.

The aforementioned states are likely going to be affected by DraftKings’ planned surcharge on customers’ net winnings. Still, Robins explained that DraftKings will “absorb taxes up to 20%, so customers will only be impacted above this level.” As an example, the exec said that in Illinois, the surcharge will “amount to a low to mid-single digit percentage of the net winnings a customer would previously have received.”

Robins revealed that the company expects 2025 Adjusted EBITDA between $900 million and $1 billion, primarily pushed by the positive momentum and growth in customer acquisition from the second half of this year. He added that “additional upside potential exists” considering the planned tax surcharge.

The planned surcharge is expected to come into effect on January 1, 2025.

Bettors Share Their Concerns Online

Sports bettors and enthusiasts have already shared their concerns online, criticizing DraftKings’ move to cover gambling tax revenue with money from winning customers.

Despite the plans for the surcharge, DraftKings holds a leadership role across many states. It remains to be seen whether or not the company’s biggest rival, FanDuel, may consider such a move or if that will be the case for other players in the sector.