DraftKings to Tax Winning Bets in Select Markets

DraftKings sports bettors in select states will soon earn a little less on their winning wagers.

In a wildly controversial decision, America’s second-largest sports betting provider laid out its plan to charge a “gaming tax surcharge” on winning bets in four of the most successful legal sports betting states in the nation.

Starting Jan. 1, 2025, bettors in New York, Illinois, Pennsylvania, and Vermont will be charged what DraftKings brass has called a “fairly nominal” surcharge on all sports bet winnings. It is expected that tax will fall somewhere between 3% and 5%.

The announcement preceded the company’s Friday Q2 earnings call and has been tied to the ongoing fight against what has been deemed high tax rates in the broad and expanding U.S. legal sports betting market.

Bettors in the four states affected have come out strongly against such a tax on winnings. The surcharge is widely seen as a way to supplement the company’s tax commitments in the states in which it operates by taxing the individual bettor.

DraftKings' tax burden is essentially about to be passed on to its loyal customer base – and there is concern over whether the rest of the best sports betting apps will follow suit.

What's best for the business

So far, DraftKings has only targeted states with a 20% tax on revenues for the best sports betting apps. New York has a 51% tax, Pennsylvania is at 36%, Illinois doubled its tax rate this year to between 20% and 40% depending on revenue totals, and Vermont levies a 31% tax on sports betting revenues.

The gap between states with regard to taxation on sports betting is an issue but one that is seen to have a solution according to DraftKings CEO Jason Robins.

"There is a solution here," Robins said. "As you know, many revenue-based taxes are passed along to the consumer. The online gaming industry has not pursued this approach in lower tax jurisdictions, but it has in higher tax jurisdictions such as Germany.”

DraftKings, along with the announcement attempted to quell any illusions of any adverse on bettors in the affected states. The company provided an example about the effects in which a $10 bet to win $20 would result in a 32-cent surcharge for the bettor.

What is certainly an unwelcome fee for bettors may prove to be a benefit for competing sportsbooks in the American market.

“I think every company has to do what’s best for their own business,” said Robins. "I think we believe this is what’s best for us. And I would imagine that, you know, if that’s our calculus, then others would come to the same conclusion."

He added: “My guess is that it’s going to work better because it allows us to make the investments in product and promotions and marketing and all the other things that should continue to create long-term growth.”

The forthcoming surcharge shouldn't impact the DraftKings promo code offers.

Increasing its bottom line

DraftKings' rationale for rolling out a new tax on bettors is to improve its balance sheet, and specifically its adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization).

According to the company, "we believe additional upside potential exists for DraftKings’ Adjusted EBITDA in 2025 and beyond from this gaming tax surcharge.”

Opposition to the surcharge has been predictably fierce.

Gadoon Kyrollos, a well-known professional sports bettor, called the idea “insane”, while Captain Jack Andrews, another well-respected pro, could only say: “Wow. Just wow.”

Starting a trend?

The bigger question might be whether the DraftKings decision kicks off a trend in which the rest of the country's best sports betting sites will do the same in hopes of mitigating their own tax burdens. Not only will other sportsbooks possibly follow the lead of DraftKings, but other states may be added to the list of affected DraftKings jurisdictions.

Massachusetts and Ohio, for example, with their 20% tax rates, could quickly follow as states with a winning bet surcharge.

Sportsbook loyalty, on which DraftKings and No. 1 rival FanDuel have become reliant, will be put to the test with the announcement of the impending tax on player winnings. If players stay with DraftKings despite the new fees, other sportsbooks are certain to follow its lead and impose a surcharge on winnings.