DraftKings Reverses Course On Winning Bets Surcharge

Less than two weeks after DraftKings announced it planned to impose a surcharge on winning bets for wagers placed in New York, Illinois, Pennsylvania, and Vermont starting in January, the mobile sports betting titan announced Tuesday it is standing down.

DraftKings Statement on Gaming Tax Surcharge pic.twitter.com/cucbsQJIVD

— DraftKings News (@DraftKingsNews) August 13, 2024

The surcharge, announced by CEO Jason Robins on Aug. 1 as part of a letter to shareholders discussing quarterly performance, was met with stinging blowback on social media. Perhaps more importantly to DraftKings, one major sportsbook after another had either no immediate plans to follow DraftKings’ lead or outright rejected the idea. FanDuel announced Tuesday during its quarterly earning call that it would not impose a similar surcharge.

Why DraftKings Wanted the Surcharge in the First Place

If your preferred sportsbook begins charging a tax surcharge, even just a tiny percentage of winning bets, will you continue to bet there?

— David Payne Purdum (@DavidPurdum) August 1, 2024

Robins presented the surcharge as a way for DraftKings to claw back revenue in states with tax rates above 20%. The Massachusetts-based company, which pays 20% on mobile revenue in its home state, never announced a specific rate for any of the four states it targeted, but it was believed it would be a percentage in the low-to-mid single digits depending on both tax rate and the ability to deduct promotional credits.

The DraftKings CEO also opined transparency about the surcharge would potentially mitigate criticism, likening the surcharge to those found in the taxi and hotel industries. After social media took its whacks, however, financial analysts lined up for their say. Some stated the surcharge would provide a path for other operators to grab market share, others noted it would be “an expensive gamble” if other mobile sportsbooks did not follow suit.

That turned out to be the case. Rush Street Interactive, which operates BetRivers, said it would not impose a surcharge and even spent the immediate weekend after Robins’ announcement marketing off it. PENN Entertainment CEO Jay Snowden, whose company operates ESPN BET, said it had no plans to follow DraftKings during last week’s quarterly earnings call but did not rule out the possibility.

But like most everything that revolves around sports betting in the United States, it took the sports betting marketplace leader FanDuel saying it had no plans for a surcharge during its quarterly earnings call Tuesday to further isolate Robins and DraftKings before the proposal was rescinded. As alternate means of generating more revenue to offset those high-state tax rates, DraftKings could lessen promotional offers, increase the vig on betting lines, or more aggressively market their parlay and same game parlay offerings since those wager types deliver substantially higher holds than single-event betting.

Beyond the 51% tax rate in New York that leads the nation, the new progressive tax in Illinois that took effect July 1 also likely will impact DraftKings’ bottom line.

Based on its Fiscal Year 2024 numbers in Illinois, DraftKings would have paid taxes at the highest tier of 40% on $179.2 million of its $379.2 million in adjusted gross revenue. Its tax bill of $56.9 million for FY 2024 using its 2024 winnings would have skyrocketed to nearly $132.7 million. Based on the timeline of when Robins and DraftKings wanted to implement the surcharge on Jan. 1, DraftKings likely would have been at or close to the $200 million in AGR threshold that would trigger the maximum 40% rate.