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DraftKings has announced plans to implement a surcharge on customer winnings to offset the impact of high tax rates in several U.S. states, including New York, Illinois and Pennsylvania.
CEO Jason Robins said on an earnings call on Friday (August 2) that the company will begin implementing the surcharge in January 2025 in states with multiple operators and a tax rate of more than 20 percent, which also includes Vermont.
Robins did not provide full details on how the surcharge would be implemented, but the company indicated in an investor presentation that the surcharge would “ensure an operational tax rate of approximately 20 percent”.
The company provided an example where a player was surcharged 32 cents on a $10 winning bet at even money odds.
“Obviously, some people might just react negatively to the idea of being charged at all,” Robins told analysts and investors on a conference call following the publication of DraftKings' second-quarter results.
“But it's really fairly nominal and it makes a huge difference in our ability to make a reasonable margin and also more importantly to compete with the illegal market, which pays no taxes and has the ability to invest 100 percent of their revenue into product and other things.”
New York taxes operators at 51 percent of gross revenues, through a high-tax model that was implemented following a competitive bidding process in which nine operators ultimately agreed to pay the high rate to gain access to the coveted market.
Illinois enacted a new graduated tax structure earlier this year that will see operators taxed between 20 and 40 percent on revenues. Pennsylvania boasts a 36 percent rate, although unlike the other two key states it allows operators to fully deduct promotional play from taxable revenues, which has typically seen the effective tax rate reduced to between 20 and 25 percent.
One immediate area of focus will be whether competitors, including chief rival FanDuel, follow suit with their own surcharge plans or use the opportunity to offer more favorable pricing to one of the two runaway U.S. market leaders.
“I think every company has to do what's best for their own business,” Robins said when asked about how he expected competitors to proceed. “I think we believe this is what's best for us, and I would imagine that if that's our calculus, then others would come to the same conclusion.”
Robins said that DraftKings preferred what he deemed the more “transparent” fee approach to other solutions to help make up the tax, such as lessened odds, or cutbacks to marketing in such key states.
“I think part of the idea is to do this in place of that, so we can continue to invest in the state,” Robins said. “New York is a great example where all companies, including DraftKings, have pulled back heavily on promotions and in-state marketing investment.”
“That’s fine, that’s one way of doing it, but another way is to say, 'Look, I'm going to adjust so that we're effectively at a 20 percent tax rate, which is in line with a lot of other states, and I'm going to invest at the level that I would invest in a 20 percent tax rate state'.”
Some analysts were critical, or at least skeptical, of the move, with UK-based Regulus Partners calling the planned surcharge “how to lose market share, damage a brand, and undermine credibility in one easy step”.
Regulus also said that DraftKings is deploying the surcharge in key markets where it cannot afford to lose share, and there was no reason for competitors to follow suit.
“To suggest this is brave is a euphemism, in our view, and the brand is already likely to be suffering damage,” the consultancy firm wrote. “There is only one sensible thing for the DraftKings board to do now — publicly dump the policy, say sorry, and move on, while privately enquiring how on earth such a self-defeating policy could be publicly announced.”
Barry Jonas, an analyst with Truist Securities, called the surcharge plan “a gamble in itself” and indicated that its success would largely depend on how competitors, as well as other states, respond to it.
“FanDuel’s reaction will likely determine on how successful this initiative will be,” he said. “Other competitors may use this as an attempt to take market share, and this will test the DraftKings product superiority thesis.
“One risk is this surcharge could embolden more states to follow Illinois and raise taxes, though we could also see the illegal market benefitting which could actually be a deterrent to higher taxes.”
