DraftKings to introduce “surcharge” on players’ winnings to offset tax burden

DraftKings has drawn the ire of sports bettors on X, formerly Twitter, for unveiling plans to roll out a “gaming tax surcharge” in four states from 1 January 2025.

While announcing its Q2 earnings, the Nasdaq-listed operator revealed that customers in New York, Illinois, Pennsylvania and Vermont will pay a “fairly nominal” charge on net winnings.

No precise figures were provided in the letter to investors, yet management said the cut of net winnings in Illinois would be “a low to mid-single digit percentage” and that it would “ensure an operational effective tax rate of approximately 20%”.

A graphic of DraftKings’ mobile app in the presentation illustrated how the surcharge would be applied, with an example of a $10 bet at evens paying $20 including stake, with $0.32 raked from the payout under the surcharge.

In this instance, the Boston-based operator took 1.6% of the money owed to the player from the wager.

In explaining the rationale behind the controversial decision, DraftKings pointed to the recent tax hike on gross gambling revenue (GGR) in Illinois as being the driving force as the company said the surcharge was “the right thing to do”.

In May, Illinois announced the introduction of a progressive tax regime of between 20% and 40% on GGR from sports betting, replacing the flat rate of 15%.

With the new rate pegged to GGR generated, DraftKings, along with FanDuel, look set to be saddled with a 40% tax burden in The Prairie State.

The company revealed in its Q2 results presentation that it expects Illinois’ graduated tax to have a $50m impact on its adjusted EBITDA for full-year 2024.

The company said it would roll out the tax surcharge in any state with a tax rate above 20% that has multiple sports betting operators.

New York, Pennsylvania and Vermont tax online sports betting at 51%, 36% and 31%, respectively.

DraftKings will absorb taxes up to 20%, “so customers will only be impacted above this level,” the firm said, while warning that there is a possibility that other states could follow Illinois’ lead.

In the shareholder letter signed by CEO Jason Robins and CFO Alan Ellingson, the pair wrote: “We now must consider the prospect that some states may choose to tax the industry at a rate that is in excess of what we can absorb while still generating a reasonable profit margin and remaining competitive against the pervasive illegal market that pays no taxes at all.”

The operator said its 2025 adjusted EBITDA guidance of $900m to $1bn could be boosted by “additional upside potential” from the gaming tax surcharge.

The firm said it will release further details on full-year 2025 guidance as part of its next earnings release.

In a note published by Regulus Partners, the analyst firm suggested the surcharge was a way to lose market share, damage a brand and undermine credibility “in one easy step”.

Regulus Partners added: “There is only one sensible thing for the DaftKings [sic] 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.”

The news triggered a backlash on X as some questioned whether the move could backfire for DraftKings, while others pondered if rivals could follow suit with their own surcharges in states with burdensome tax frameworks.

A well-known gambler who goes by the name Captain Jack Andrews on X posted: “DraftKings will be adding a surcharge to subtracted from your net winnings to pay for their tax on gambling revenue. The money they make from losing bets. Wow. Just wow.”

Another user described the move as “idiotic”, while a few people suggested DraftKings could have instead increased the ‘vig’ or subtly applied extra margin to same game parlays.

Professional sports bettor Rufus Peabody said the optics of this decision might not go down well with recreational bettors despite this cohort not typically being especially price sensitive.

He posted: “This is fascinating to me. Rec[reactional] bettors are remarkably price inelastic; price just doesn’t matter to them.

“Yet the way this surcharge is framed makes people care. Endowment effect perhaps. Money taken away feels different from just betting into a higher hold.”

Meanwhile, EPSN journalist David Purdum ran a poll on X in which he asked: “If your preferred sportsbook begins charging a tax surcharge, even just a tiny percentage of winning bets, will you continue to bet there?”

The result was emphatic, as almost 80% of the more than 3,330 respondents saying they wouldn’t continue to use that sports betting operator.

DraftKings is set to explain more about the surcharge during the investor call later today.

DraftKings shares slumped to $32.66 in after-hours trading, with the company’s stock having fallen 4% during Thursday trading.