Daily Fantasy Sports Contests Subject to Federal Taxes, Says IRS
A Chief Counsel Memorandum recently issued by the Internal Revenue Service says that sports contests like FanDuel and DraftKings must pay federal excise taxes on the companies’ entry fees on wagers, plus an annual occupational tax on those accepting the wagers. This would call for a major make-over of the daily fantasy sports companies.
Kate C. Lowenhar-Fisher, a Nevada-based gaming attorney at Dickinson Wright PLLC, summed it up: “This is one of the most significant events in the evolution of sports betting in the United States that has happened in a long time.” Tax attorneys and other experts weighing in on this change agree.
These Taxes Could Ruin the Industry
Although not binding in court, the memo indicates the IRS’s position in audits. Considering that in 2018 the industry made $3.2 billion in entry fees and approximately $335 million in total proceeds, if fantasy sports companies have not been ponying up and the IRS challenges them, they could wind up owing millions. In some jurisdictions, the tax amounts could be “potentially business-destroying,” Ms. Lowenhar-Fisher said.
It’s hard to say exactly how the memo applies. DraftKings CEO Jason Robins addressed the memo on Friday, saying it is “deeply flawed in its analysis. Our position continues to be, which we believe has been reaffirmed through state legislatures and courts throughout the country, that DFS is not wagering.” Nonetheless, DraftKings shares closed Friday at $33.91, down nearly 6%.
FanDuel didn’t comment on the implications of the memo, saying it is aware of the issue and looks forward to working with the IRS.
Different Tax Outcomes
In daily fantasy sports, online games that charge an entry fee, players compete for cash prizes based on how the professional athletes of their choice play. The IRS memo says the entry fees are wagers, as defined by the tax code, and that the amount of the excise tax differs only on whether the wagers are legal or illegal in the states where they’re placed.
Legal sports wagers are subject to a tax of 0.25% on the amount wagered and an annual occupational tax of $50 for each person accepting wagers; illegal wagers are subject to an excise tax of 2% on the amount wagered and the annual occupational tax increases to $500 per person accepting wagers. Ms. Lowenhar-Fisher said it’s important that it’s the wagers that are taxed, not the money they make. “A 2% tax on handle [Handle is the amount of money accepted in wagers] can roughly equate to like a 20% tax on revenue,” she said. She added that companies could face late payment penalties for taxes they haven’t paid, which other tax attorneys have also pointed out.
Are IRS Definitions Final?
Daniel Wallach of Wallach Legal LLC, gaming attorney, said the memorandum contradicts a prior court ruling from the U.S. District Court for the District of New Jersey, with which fantasy sports companies can challenge the IRS. The court’s 2007 ruling in Humphrey v. Viacom was that entry fees for fantasy sports didn’t fit the definition of a bet or a wager.
However, the IRS memo says companies can’t avoid paying the tax, even if a state believes daily fantasy sports are games of skill, not gambling, and that the states call them games of skill in order to decriminalize the wagers under state law. The potential tax debt will be high for those who haven’t paid their gaming taxes. “You’re talking about lots of zeros in liability,” said Marc W. Dunbar, a shareholder at Florida-based law firm Dean Mead. Indeed, tax evasion does not come cheap.
If you have questions about federal excise taxes on daily fantasy sports, contact one of our qualified tax attorneys to assist you at 1-866-829-8295 or submit an online message to our contact page.