A decision by the IRS to require daily fantasy sports operators to pay a federal excise tax on DFS contests is spurring debate over the future of the industry.

daily fantasy sports legislation DFS
Much to the chagrin of DraftKings and FanDuel, the IRS will implement excise and occupational taxes on the DFS industry. (Image: fox32chicago.com)

DFS Subject to Same Excise Tax as Sports Bets

An IRS memo says the DFS industry will face the same 0.25 federal excise tax as sports betting. Nevada sportsbook operators have paid the same tax for years, and the rule has been implemented in other states that legalized sports betting after the US Supreme Court overturned the federal law prohibiting sports wagers in every state but Nevada in 2018.

MarketWatch noted that players made $3.2 billion in DFS wagers in 2018, which would have yielded $8 million in excise taxes if those had been implemented at that time.

On an earnings call last week, DraftKings CEO Jason Robbins argued the IRS was “deeply flawed in its analysis,” and shouldn’t implement the tax.

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

DFS flourished after the Unlawful Internet Gambling Enforcement Act carved out an exemption for fantasy sports as it reined in the online poker industry. As with poker, DFS battles the stigma that it’s gambling while advocates argue it’s a game of skill.

Industry Observers Debate Impact

Gambling industry expert Jason Ader told MarketWatch the tax should simply be “annoying,” but not create a major negative impact.

“It’s not the end of the world,” he said. “It’s not catastrophic.”

But Kate C. Lowenhar-Fisher, a gaming attorney at Nevada-based Dickinson Wright PLLC, told Bloomberg Tax that the move is significant. She said it’s important that the tax applies to wagers and not revenue, pointing out that a 2% tax on handle can equate to a 20% tax on revenue.

“This is one of the most significant events in the evolution of sports betting in the United States that has happened in a long time,” she said.

In addition to the excise tax, the IRS will levy an annual occupational tax of $50 for each entity that accepts wagers. The numbers increase to an excise tax of 2% percent and an occupational tax of $500 when operators accept wagers in jurisdictions where DFS hasn’t been expressly legalized.