After swiftly discarding a strategy to impose taxes on winning bets in states with elevated sports betting taxes, DraftKings (NASDAQ: DKNG) CEO Jason Robins states that the company is exploring alternatives in areas with heavy tax systems.
During the Bank of America's Gaming and Lodging Conference last week, Robins noted that DraftKings users mocked the idea of a minor tax on successful sports wagers made by clients in Illinois, New York, Pennsylvania, and Vermont to address the high taxes in those states.
"Clearly, this was something that our customers — they didn’t like this type of solution,” Robins said at the conference. “Our thinking behind it was, well, we can invest more in promo for you and other things because we’re going to be collecting more upfront. But we got feedback that people didn’t like this particular solution, so we changed it.”
After revealing the surcharge plan on August 1, DraftKings changed its decision in under two weeks since none of its competitors adopted a similar approach. Although the company did not explicitly state that the two events were connected, DraftKings abandoned the surcharge strategy on August 13, the same day that FanDuel's parent company, Flutter Entertainment (NYSE: FLUT), announced its second-quarter results and informed investors that it had no intentions of adopting a similar tax on winning bets approach as its rival.
Robins Seeking Strategies to Deal with Elevated Taxes
Although Robins did not specify particular concepts, he stated that the gaming company he co-founded is exploring ways to more effectively deal with the elevated taxes imposed by certain states on online sports betting.
Among the four states previously mentioned, Illinois and New York present specific challenges for operators. Illinois has recently introduced a graduated tax system that imposes steeper taxes on larger internet sportsbooks like DraftKings and FanDuel compared to their smaller competitors. Meanwhile, New York applies a flat 51% tax on sports betting, which is the highest tax rate among any major state.
“The bottom line is, at some point, I guess it depends on what happens in other states, but I don’t think that in perpetuity, it will make sense for anybody to completely just eat any tax increase that happens anywhere,” said Robins at the conference.
Certain analysts have conjectured that either or both Illinois and New York might enact iGaming legislation next year, which could provide a means for operators like DraftKings to mitigate part of their sports betting tax liability.
Additional Legislative Challenges Facing Gaming Companies
DraftKings shares have risen 5.47% since the beginning of the year – a modest performance compared to certain rivals and overall domestic equity indices. One reason the stock has been sluggish in 2024 is that there’s been minimal noteworthy positive legislative activity.
This year, no major states have approved online sports betting, and the count of states permitting iGaming remains unchanged at six. With under four months remaining in the year, there's slim chance of either situation altering. Nonetheless, DraftKings may experience long-term advantages.
“DKNG’s total addressable market should increase over the next 3-5 years as states legalize sports betting,” noted Zacks Equity Research. “As budget deficits continue to balloon, more states will likely turn to sports betting as a much-needed tax revenue source.”