The IRS, in an internal July 23 memo made public on August 7, 7, issued new instructions following a major shot over the bow at daily fantasy sports (DFS) operators DraftKings and FanDuel.
The memo, which these companies do not mention, concludes that entry fees for DFS matches count as wagers, and thus fall under the existing excise tax on sports laws. The tax is 0.25% of the amount of a bet, as for DFS companies, a fee for registration fee. In 2018, for example, the DFS sector brought in $ 3.2 billion in fees (that is, “dealing”, not revenue), which would mean $ 8 million in IRS action tax – significant for a sector in that year alone generated $ 335 million in revenue.
DraftKings and FanDuel have not paid these taxes before, and have long held that their fantasy games – in which users create a fantasy lineup of real athletes and win money based on how the athletes perform – do not qualify as gambling games.
The companies will likely fight the IRS decision in court, a scenario that would unite the two business rivals who worked together through 2015 and 2016, as they fought several state attorneys in general to argue that their matches “games of skill ”instead of chance. They will make the same argument for the IRS, DraftKings CEO Jason Robins made clear Friday morning on Yahoo Finance Live.
“This is not the first time there has been a training process to help explain the skill-based nature of our games and why DFS enrollment costs differ from wagers,” Robins said. “We believe that it will become clear at the beginning of that education process. This is a problem that has already been considered by dozens and dozens of state legislators and courts in recent years. And almost unanimously, they have come to the conclusion that DFS is clearly not betting, it is clearly skill-based … We look forward to the opportunity to make that argument. “
A FanDuel spokesman said: “We are aware of the problem and look forward to working with the IRS.”
Christopher Eubanks of the United States brings the ball back against John Isner of the United States during the final day of the DraftKings All-American Team Cup on July 5, 2020 in Atlanta, Georgia. (Photo by Carmen Mandato / Getty Images)
The companies will not challenge the IRS not only because they do not want to pay the taxes, but also because they have to challenge it on a reputational basis: agreeing to pay the taxes can amount to a concession that they accept unauthorized wagers, which opens up the companies for additional legal fines.
If the IRS dominates, it would cost the two companies tens of millions of dollars – especially if a tax court rules that the decision is retroactive to application.
It’s unclear why exactly the IRS guidance is coming out now, when FanDuel has been in business since 2009, and DraftKings since 2012. Back in 2015, as ESPN reported, a former assistant U.S. attorney sent the IRS a letter about his beliefs that DFS companies “are clearly engaged in betting or betting for purposes of the action tax for betting.”
DraftKings went public in April by merging with a SPAC (company specials acquisition company), and FanDuel sold in 2018 to Paddy Power BetFair, which was renamed Flutter Entertainment last year. Both companies are still profitable, although DraftKings has $ 1.2 billion in cash on its balance sheet.
DraftKings reported its Q2 revenue on Friday, and although the loss of $ 161 million was less than expected, its adjusted revenue hit $ 75 million expectations, even after a quarter in which most sports did not play. Both DraftKings and FanDuel have spent heavily on TV commercials in July once sports return, and both are anxiously awaiting the NFL season, the time when they sign up the most new users each year. If the NFL season falls through due to COVID-19, Robins says it will have a “short-term impact on our revenue.”
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readDanwrite.“data-reactid =” 43 “>Daniel Roberts is an Editor-in-Chief at Yahoo Finance and is closely involved in sports business. Follow him on Twitter at @readDanwrite.
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