IRS to include daily fantasy sports in sports betting taxation
US tax agency applies 0.25% federal excise tax to fantasy contests in landmark ruling for sector
The US internal revenue service (IRS) has issued guidance stipulating that daily fantasy sports contests be subject to a federal excise tax of 0.25% in a landmark move for the sector.
The tax, which previously only applied to sports wagering, will apply to entry fees paid by individuals entering daily fantasy sports contests.
The 10-page memo, authored by IRS associate chief counsel Holly Porter, examined whether these operators were liable under existing internal revenue code 4401 (the code on sports betting taxation).
In the past operators have said that fantasy contests are a skill game and as such do not constitute gambling as described under the Unlawful Internet Gambling Enforcement Act (UIEGEA) and associated state laws.
However, the IRS has said the level of skill involved in daily fantasy sports contests is immaterial in determining whether any taxes are owed.
“A DFS operator may try to differentiate taxable wagers from non-taxable entry fees into skill-based contests,” the IRS memo explains.
“In state courts and state legislature discussions of DFS, the issue of DFS’s legality within each state typically turns on whether DFS is a game of skill or a game of chance (that is, gambling) under the state’s laws.
“While these state rules are helpful context, the statutory language in IRC §§ 4401 and 4421 does not differentiate whether an activity involves skill, chance, or some combination of the two.
“Most importantly, whether DFS is a game of skill for state gambling statute purposes is not relevant for determining whether DFS is wagering for federal excise tax purposes,” the IRS adds.
DraftKings CEO Jason Robins has dismissed the guidance as “deeply flawed” and “non-binding.” He said the DFS giant has been fighting the cause for years.
“This was a memo that has no force of law, is non-binding, and, you know, our view is it is deeply flawed in its analysis and our position continues to be that DFS is not wagering. We believe this has been reaffirmed by state legislatures and courts throughout the country,” Robins said.
The IRS has also raised the question of whether taxes should be paid on so-called ‘unauthorized’ wagers, i.e. where a DFS entry fee has been paid in a state which operates under skill gaming definitions, but which doesn’t operate legal sports betting.
Unauthorized wagers collected would be subject to a higher tax rate of 2%, with the DFS operator being liable to pay this taxation amount on any wager/entry fee taken.