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DraftKings’ plan to implement a customer surcharge adds a new layer to the ongoing concern over rising tax rates in U.S. sports betting, with at least one competitor immediately announcing that it will not follow suit.
The company announced last week that it would enact a surcharge beginning in January 2025 on winning bets in four jurisdictions with multiple operators and a tax rate of more than 20 percent, in hopes of lowering the effective tax rate in New York, Illinois, Pennsylvania and Vermont.
An inevitable question in the upcoming weeks and months is whether DraftKings' competitors will be tempted to follow suit and enact their own surcharge, or whether they will take the opportunity to offer favorable pricing to a market leader such as DraftKings.
Rush Street Interactive became the first operator to take the latter approach, announcing in a statement Monday (August 5) that the company “has no plans” to implement a surcharge.
“As we put our customers first, it was an easy decision for us,” CEO Richard Schwartz said in the statement.
Other companies that will likely be asked to weigh in in the coming days will be those with public earnings calls, including Penn Entertainment, and Flutter Entertainment, owner of the FanDuel brand, which along with DraftKings has dominated the U.S. sports-betting space in terms of market share.
Risks of tax increases have come into sharper focus after Illinois lawmakers approved a new graduated tax structure in June that raised the state’s tax rate from 15 percent to between 20 and 40 percent, with the highest bracket only affecting the highest grossing sportsbooks, which historically has only been FanDuel and DraftKings.
The response from investors was immediate, with those leading operators seeing an immediate hit to their stock price, including a 10 percent drop for DraftKings after the tax increase was enacted, amid concerns that more states would follow Illinois’ lead and increase taxes.
“All of these companies … are running a business with a goal of 20 to 30 percent EBITDA margins, so they kind of created a cost framework that had somewhat of a fixed line-item in there, and that was taxes,” said Chad Beynon, senior equity analyst for Macquarie Group, during a webinar hosted by Vixio GamblingCompliance on the topic of tax increases last week, before DraftKings made its announcement.
“For most of these companies, they've thought about taxes in the 15 to 20 percent range, so clearly, if you do start to see a trend, that means the long-term EBITDA margins of these companies, the terminal values of these companies, the overall valuation of these companies, needs to be discounted, and that's what we saw on day one.”
Scott Ward, a partner with the law firm Orrick, Herrington & Sutcliffe who lobbies on behalf of the Sports Betting Alliance of FanDuel, DraftKings, BetMGM and Fanatics, added that in cases where states revisit and significantly increase existing tax rates, other aspects such as market-access agreements are also affected.
“Those agreements are set based on the economic expectation when the bills passed, and so doubling or tripling the tax rate, like what happened in Illinois, you saw the casinos in East St Louis that were really affected with this talking about how they're going to lose jobs, they're going to lose revenue because those deals either have provisions … that would take this into account or they’re allowed to renegotiate them because of material change in the economics of the state,” Ward said.
DraftKings CEO Jason Robins said the move to implement the surcharge was made at least in part to stem future states from implementing their tax increases.
“I do think that in the absence of us doing something like this, why wouldn't more states consider it?” Robins said. “It's not getting passed to their customers, they're not hearing from their constituents. And we haven't, in New York, done anything differently, or nobody in the industry has.
“So I do think that this is something that may make some states reconsider, because now they may be hearing more from their citizens that they don't like it,” Robins continued.
“I think some states feel like because of where they are and because of the value proposition they bring, that they can have higher costs in certain things and that's not up to us, that's a policy decision that they're going to have to make.
“And, as a business, we have to make the business decision that we have to make accordingly.”
