The IRS said it intends to impose an excise tax on DFS contest entries, but legal experts believe the industry can delay the implementation due to ambiguities in the law.

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DraftKings CEO Jason Robins argues the IRS’s reasoning behind a new excise tax on the industry is flawed. (Image: Barry Chin/Boston Globe)

Confusion About Whether DFS Contests are Wagers

An IRS memo said that DFS companies must pay a 0.25 federal excise tax on wagers, the same as sports betting operators do. That could amount to more than $10 million annually as the DFS industry grows.

The IRS also intends to levy an annual occupational tax of $50 for each employee that accepts wagers. The numbers increase to an excise tax of 2% and an occupational tax of $500 when DFS operators accept wagers in jurisdictions where the games haven’t been expressly legalized.

Chris Grove, part of the gambling research firm Eilers & Krejcik Gaming, told AboveTheLaw that he expects DraftKings and FanDuel to use ambiguity in the opinion and the cited statute to argue for a delay in the tax’s implementation.

That statute, 26 U.S.C. § 4401, says the 0.25% excise tax shall be imposed on legal wagers, but it’s unclear that DFS bets should be considered a wager under federal law. Attorney Daniel Wallach, an expert in gaming law, noted on Twitter that courts have generally ruled that both sides of a transaction must have a chance to lose money for the transaction to be considered a wager. While that provision is in effect when a person places a bet at a sportsbook, that isn’t the case when a person enters a DFS contest. The operator collects a fee, but the entrant competes against other players – much like with poker.

Material Impact of Excise Tax Unclear

“We believe they will likely be successful in obtaining this delay,” Grove said of DraftKings and FanDuel. “What follows from there is less certain, as the potential impacts range from a nominal settlement to a material impact on each company’s bottom line. Smaller fantasy operators may be even more vulnerable to that potential range of outcomes as they lack the balance sheet and customer values that will insulate DraftKings and FanDuel.”

Experts debate the impact that tax would have on the industry, with one saying it would be simply “annoying” as another argued it will be “significant,” OnlineGambling previously reported.

DraftKings CEO Jason Robins said the IRS’s analysis is deeply flawed.

“Our position continues to be, which we believe has been reaffirmed to state legislators and courts throughout the country, that DFS is not wagering,” he said.