In light of recent high tax rates that have been implemented in select states, DraftKings announced it will collect a surcharge from sports bettors, including those in Pennsylvania, starting on Jan. 1, 2025. DraftKings chose the Keystone State, along with New York, Illinois and Vermont because of tax rates that are at or exceeding 20% in those states.
DraftKings Sportsbook PA divulged an explanation for the surcharge in its second-quarter earnings presentation. The operator claims it must stay competitive against illegal gambling markets that do not pay taxes.
The company is believed to be first operator to essentially tax the winnings of a bettor, which is certainly a controversial move.
It is not clear, yet, if DraftKings’ tax on gambling winnings will apply to its Pennsylvania online casino, as well. So far, DK only mentioned the tax applying to sports betting.
Robins: Tax is transparent and nominal and combats illegal market
On Friday morning’s earnings call, DraftKings CEO Jason Robins (above) further explained why the operator is instituting the tax.
“Obviously, some people might just react negatively to the idea of being charged at all, but it’s really fairly nominal,” Robins said. “And it makes a huge difference in our ability to make a reasonable margin and also, more importantly, to compete with the illegal market which pays no taxes and has the ability to invest 100% of their revenue into product and other things.
“For us, this is to be competitive with the illegal market and invest properly in product and customer experience in a state that has a very high tax rate. We feel it’s an important step that consumers will ultimately understand and if they feel the product and experience is better they’d rather pay for that rather than somewhere else that maybe doesn’t have a strong product.”
DraftKings will pay taxes up to 20% and the winning bettor is on the hook for the rest
The way the tax will work is DraftKings will pay the gambling tax up to 20% and the winning bettor will pay the taxes above that rate in states with a tax rate greater than 20%. In Pennsylvania, sports betting is taxed at 36%. That means winning sports bettors will be on the hook for a surcharge of 16% if they bet with DraftKings.
“We definitely thought through a lot of different ways of doing it,” Robbins said. “And… some better idea comes along and we’re open to it. I think the important thing is that if you look at the way it’s typically done in other industries — whether it be hotel taxes or even the sales tax that you pay when you buy something at the store, taxis you know you name it — it’s typically line-itemed out separately, and usually 100% passed along to the consumer.
“In this case, we’re obviously subsidizing a chunk of it. We just thought that was most in line with how it’s typically done versus trying to obfuscate it, which isn’t consistent with our commitment to be transparent to our customers and be very customer-friendly.
“I know there’s maybe benefit to hiding it because maybe people don’t notice, but I think over the long term, customers appreciate transparency and even if they don’t love that their state implemented a high tax and some of that is being passed along, I think they prefer that to not knowing if it was buried in the pricing or something else.”
For now, it’s full steam ahead on the DK tax
Robins said he doesn’t see a reason DraftKings won’t go ahead with the plan, but DK will listen to customer feedback prior to launching the surcharge in January.
“I don’t think there would be any reason that we wouldn’t implement it, but obviously, we’re paying close attention to customer feedback and you know, if we hear anything that makes us change our mind, we’ll certainly let you know,” Robins said.
“What we are doing is we’re launching in four states, so we’ll certainly see the impact there. And obviously, you know, it won’t be a perfect AB test. But I think that we have enough comparable data from other states and enough of an understanding of what we would expect from consumer behavior that I think we have a pretty clean read on the impact.”
DK tax is partly an attempt to dissuade other states from raising taxes
Robins said the surcharge is, partly, a response to states raising gambling taxes.
“There’s certainly an element there that entered into our thinking,” Robins said. “When you have illegal operators paying zero tax, that’s pretty tough to compete with at any level, but when it starts getting higher than 20%, it just becomes untenable.
“So I do think that in absence of doing something like this, why wouldn’t more states consider it if it’s not getting passed on to their customers and they are not hearing from their constituents?
“I do think this is something that may make some states reconsider because now there may be hearing more from their citizens that they don’t like it… But certainly we will continue to advocate for taxes that allow us to compete more with the illegal market and I’m hopeful and I believe most states do see the vast majority of states around the country have tax rates of 20% or under. It’s just a handful that don’t.”
Further details on DraftKings’ PA gambling surcharge
Pennsylvania, for some time, had the highest sports betting tax rate in the nation at 36%. That was before New York topped it by issuing a 51% rate upon launching its online sports betting market in January 2022.
Those high rates has triggered DraftKings to take some of the money won by bettors to pay the tax.
DraftKings referenced that this remedy is not needed in states with lower tax jurisdictions. However, this method has been done in Germany. The company explained in a letter to shareholders, written by Robins and CFO Alan Ellingson:
“We are planning to implement a gaming tax surcharge on a customer’s net winnings in any state with a tax rate above 20% that has multiple sports betting operators. The surcharge will be fairly nominal to the customer.
“We plan to implement the surcharge in the four states that have multiple sports betting operators and tax rates above 20% starting January 1, 2025. DraftKings will still absorb taxes up to 20%, so customers will only be impacted above this level.”
In a Q2 2024 investors presentation, DraftKings laid out the following the following points:
- Integrating seamlessly onto existing online sports betting app
- Gambling tax surcharge only applies to winning bets
- Treated as a separate transaction when paying out customer winnings
- Ensuring transparency by identifying the gambling tax surcharge directly in the bet slip
This is a calculated risk for DraftKings that could potentially put sports bettors up in arms, to put it generously — especially if other operators do not follow suit. DraftKings competitors that do not impose similar taxes on winnings would have a competitive advantage over DK in those markets.
Why DraftKings is taxing its bettors
Only Pennsylvania had a tax rate of above 20% when PA online sportsbooks went live in 2018. The New York legislature took a step further in instituting a 51% rate to operators.
Vermont became the latest state to implement a 20% tax. However, Illinois raised its flat rate of 15% up to a new structure that requires DraftKings and FanDuel to pay up to 40%. The system is as follows, according to PlayIllinois:
- 20% on the first $30 million in adjusted gross revenue (AGR).
- 25% on AGR between $30-50 million.
- 30% on AGR between $50 million and $100 million.
- 35% on AGR above $100 million up to $200 million.
- 40% tax on AGR above $200 million.
In the shareholder letter, DraftKings referenced Illinois’ structure change as a reason for implementing the new tax:
“We now must consider the prospect that some states may choose to tax the industry at a rate that is in excess of what we can absorb while still generating a reasonable profit margin and remaining competitive against the pervasive illegal market that pays no taxes at all.”
This will certainly raise some eyebrows in the sports betting industry. Only time will tell to see how it’ll play out.
