DraftKings Is Fighting Higher State Taxes With Its Own Surcharge. That Risks Pushing More Bettors To Offshore Markets.

DraftKingsDKNG has finally hit the jackpot — but not without ruffling a few feathers. The sports betting giant recently reported its first-ever profitable quarter, with revenue of $1.1B and earnings per share of $0.12, beating estimates. The company also announced a controversial “gaming tax surcharge” on winning bets in states with tax rates over 20%.

Surcharge specifics: Starting Jan. 1, DraftKings will implement a surcharge on customers’ net winnings in New York, Pennsylvania, Vermont, and Illinois — states with tax rates exceeding 20%. The surcharge amount will vary by state but is expected to be a “low- to mid-single digit percentage” of net winnings.

• In Illinois, for example, the surcharge will amount to a 3-5% reduction in payouts, effectively moving the odds from +100 to -104.
• DraftKings CEO Jason Robins believes the surcharge will be “fairly nominal” to customers and doesn’t expect significant behavior changes.

Why is DraftKings Adding a Surcharge?

DraftKings justifies the surcharge as a response to the increasing tax rates in certain states, such as Illinois’ recent hike from 15% to a 20-40% range. The company argues that absorbing these higher taxes while remaining competitive against the untaxed illegal market is challenging. DraftKings hopes the surcharge will discourage lawmakers from further raising sports betting taxes.

• DraftKings lowered its 2024 adjusted EBITDA guidance by 24% to $380M, partly due to the Illinois tax increase.
• In Friday’s earnings call, Robins said he thinks other sportsbooks may follow suit, stating, “Every company has to do what’s best for their own business.”

Unintended consequences: While DraftKings is banking on customer loyalty, The Lines reports that the surcharge could backfire if bettors opt for more profitable wagers elsewhere. If other regulated sportsbooks implement similar surcharges, it may inadvertently benefit the offshore market, which already offers better odds due to its untaxed status.

• Nearly 40% of the US sports betting market is wagering illegally, with an estimated $63.8B going to illegal bookies and offshore sites.
• Senators Cortez Masto and Hyde-Smith acknowledged that offshore books often provide better odds because they don’t pay taxes.

Forward-looking: Despite the surcharge controversy, DraftKings remains optimistic about its growth prospects. The company’s monthly average users surged 48% year-over-year to 3.1M, and it closed its $750M acquisition of Jackpocket, an online lottery app. While the company is expected to post a full loss for 2024, it’s forecasting a profit for the following year — a much-welcomed development for investors who have plowed billions to fund a land grab in the sports betting industry.