When DraftKings, in early August, rolled out its plan to essentially tax winners in states with a tax rate above 20%, reaction was overwhelming negative.

Since then, Rush Street Interactive CEO Richard Schwartz said his company won’t follow suit. And Penn Interactive’s Jay Snowden said during the company’s earnings call said that the idea was “interesting” and “unexpected”. He didn’t completely close the door on it, but the company has no plans to tax winners in the near future.

DraftKings says it will impose the surcharge beginning 1 January 2025.

DraftKings is the second-biggest US operator by market share. The only company ahead of it is FanDuel, which declined to comment on the topic. FanDuel’s parent company, Flutter, is set to release second-quarter earnings Tuesday. The expectation is that executives will address the issue in some fashion on the earnings call.

“Had it not been for DraftKings offering New Hampshire 51% in 2019, we wouldn’t be here”

“It’s interesting that this is coming from the company that started these high tax rates,” an industry source who did not want to be named told iGB. “Had it not been for DraftKings offering New Hampshire 51% in 2019, we wouldn’t be here. That 51% cannot be nuanced in other legislatures and states. Lawmakers just see the number and that’s what they want.”

And therein lies the problem, say political consultants and others in the gambling industry. There are several big states – California, Texas and Georgia in particular that have not yet legalised. In 2023, when Texas lawmakers debated legal wagering, the tax rate in the proposal was 10%, and licensing fees were $500,000 compared to $1m or more in Illinois, Pennsylvania and New York.

During a committee hearing, one lawmaker pointed to New York’s 51% and essentially said“Why not us?”

It all started in New Hampshire

The answer is complicated. And DraftKings may well have opened Pandora’s Box when it pitched that 51% rate in New Hampshire in exchange for a monopoly. Often overlooked is another key piece of the pitch – the 51% tax drops to 21% if the state allows competition.

New York lawmakers and regulators referred to NH when setting their own wagering framework. The state opened a Request for Proposals for operators and four companies – Caesars, PointsBet, WynnBet, Rush Street and Resorts World – proposed a 65% rate in exchange for exclusivity. They collectively offered the 51% rate in a competitive market. New York’s bidding system for licensing encouraged operators to offer a higher ratein exchange for higher scores.

New York appears to be sort of a vanity project or loss leader for every operator. None wanted to be left out of the biggest legal wagering state, but few are turning a profit.

“From a business dynamic, we don’t enter a state unless it makes sense,” a gaming political consultant told iGB. “They [big operators] just threw up their hands and said, ‘ok we’ll be there’.

“Because of those actions [in NH and NY]we are going to pass the buck onto the consumer. But I don’t feel like you have the ability to go back and change the equation after the fact.”

There is some irony to the conversation – two states so far have gone back to “change the equation”.

In 2023, Ohio Governor Mike DeWine pushed through a doubling of the betting tax in Ohio. And Governor JB Pritzker this summer spearheaded an increase in Illinois.

Taxes and nuance behind them all over map

There are four states that tax operators 50% or more. In three of those states – Delaware (50%), New Hampshire (51%) and Rhode Island (51%) – the operator has a monopoly.

In all three states, wagering is regulated by the state lottery. New York and Pennsylvania (36%) have the highest tax rates in competitive-market states. The effective tax rate in any state may be significantly different, depending on whether promotional deductions are permitted.

Illinois lawmakers in June raised that state’s tax rate to a sliding scale and most operators will be taxed at 25% or higher. Vermont, another state where operators pitched tax rates through bids, allowed operators to pitch rates between 20%-51%. Only those pitching 51% got the most number of points available. DraftKings and Fanatics both bid 31% and FanDuel bid 33%.

DraftKings said its surcharge will apply to bettors in Illinois, New York, Pennsylvania and Vermont.

Four other states charge operators a 20% tax rate on either gross gaming revenue (GGR) or adjusted gross revenue (AGR).

Odds aren’t worse in high-tax states

Conceptually, the industry source said, why shouldn’t gambling operators tax consumers for using the product? After all, we pay taxes at the grocery store or to utility companies.

“What other industry do you know that doesn’t pass its taxes onto consumers?” the industry source asked. “So this is not a new idea.”

But it is, as Snowden said, “unexpected”. As one US state after another legalised, starting in 2018, there was much conversation about tax rates and how in higher-tax states, operators might offer less attractive odds. But that never materialised because, sources say, the technology to alter odds state by state is complex.

Which brings us back to the DraftKings proposed surcharge.

“What other industry do you know that doesn’t pass its taxes onto consumers?”

“In the state of Nebraska, as part of the tax package, one of the things they are going to go tax is lobbying and consulting services,” industry consultant Brendan Bussmann told iGB. “So if you have $10,000 a month, it is taxed. If you are a lobbyist, are you going to absorb that cost or pass it on to the end user? If you have a bad tax situation, which in some cases [the industry] walked ourselves into, then you have to find a way to increase odds or figure out how to increase revenue.”

Jason Robins has faith

DraftKings’ co-founder Jason Robins believes that consumers like his platform so much, they will tolerate the tax. But the issue is bigger than consumers in four states – it’s really about tax rates and what happens now.

“If there’s as much pushback from the consumers as there has been in the media or X world, then maybe from a political perspective, then you get consumers involved in the tax fight,” the industry source said. “Maybe this is something that will ignite people in New York to go to their legislators and say, ‘51 is too much’. The need and necessity for lower tax rates – does it work? I don’t know, it’s never been done.”

It didn’t work in Illinois. When Pritzker proposed the tax increase, the Sports Betting Alliance (SBA) rallied 60,000 voters to tell lawmakers they didn’t want it. The legislature ultimately passed higher taxes than Pritzker proposed.

Proposed surcharge could be used as leverage

The political consultant suggested that maybe the industry can use the proposed surcharge as an argument for a more reasonable tax rate in non-legal states. It’s likely too late for operators to collectively decline to launch in high-tax states – that could be considered collusion – but if DraftKings imposes the tax on consumers, it could be a cautionary tale for legislatures.

“I think I would just use this as leverage for other states by saying that they would tax the consumer,” the political consultant said. “I feel like they need a win – no state’s legalised [this year]. Now they can say to a legislature, ‘If you go above 20% we’ll have to tax’” consumers.

There is some question as to whether that sort of threat would hold water with lawmakers. After all, operators themselves essentially set the New York tax. And when Illinois lawmakers proposed their new sliding tax scale that more than doubles the tax for companies like DraftKings and FanDuel, the SBA suggested its companies would pull out of the state if the tax passed.

The new tax structure went into effect on 1 July. All three companies are still operating in Illinois.

“It’s very apparent over a month and half after Illinois raised the tax that the promise of leaving was not delivered,” Bussmann, principal at B Global said. “You can’t say you’re going to pull the nuclear option. They’re the boy that cried wolf.”

The question is, is DraftKings crying wolf again?