The Internal Revenue Service has decided that DraftKings DKNG, -6.97% and other daily fantasy sports companies should pay a federal excise tax on daily fantasy sports (DFS) contests. The tax will apply to entry fees for daily fantasy games, and could have a huge impact on the gaming industry.
As detailed in the IRS memo, the excise tax, a .25% federal tax, would apply to DFS games, but not traditional season-long fantasy competitions. The total amount bet on daily fantasy was $3.2 billion in 2018, which would correspond to $8 million in taxes. The federal excise tax would be paid by the gaming operators, not individual players.
During Friday’s earnings call, DraftKings CEO Jason Robins said the memo from the IRS is “deeply flawed in its analysis.”
DraftKings Inc. shares fell 7% in early Friday trading, after the company posted a bigger-than-expected loss for the second quarter, but sales beat estimates.
Outside of statements made during Friday’s earnings call, DraftKings did not wish to further comment on the IRS memo.
Jason Ader, a well-known gambling industry expert and CEO of SpringOwl Asset Management, says the move by the federal government shouldn’t be concerning for DraftKings.
“It’s a small amount, its annoying,” Ader told MarketWatch. “It’s not the end of the world, it’s not catastrophic.”
The IRS has already applied the excise tax to sports betting. Nevada, which was the only state to offer legal sports wagering before the 2018 PASPA ruling from the Supreme Court, paid the tax for years. States that have recently engaged in legalized sports gambling like New Jersey and Pennsylvania also pay the tax.
The IRS is treating daily fantasy contest entries like traditional sports “wagers,” according to the memo.
The full IRS memo, which was written on July 23, was recently made public.
Without sports for much of the summer due to the coronavirus pandemic, DraftKings was forced to get creative. With the MLB, NBA and Olympics all postponed, DraftKings pivoted to offering table tennis, Korean baseball, and eSports events as ways to fill the vacuum.
DraftKings would not disclose specifics as to how much money has been wagered on Esports, but Esports betting is up 19% year over year.
While those competitions are less popular, DraftKings wrote in its Q2 earnings presentation that the COVID-19 pandemic is “driving great response rates to advertising.”
The company claims it is not expecting any impact to its long-term plans from COVID-19.
Shares have gained 237% year to date, while the S&P 500 SPX SPX, +0.09% , has gained 4.4%.
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