Winning sportsbook betslips will include a DraftKings surcharge in four states at the start of 2025.
CEO Jason Robins and CFO Alan Ellingson call the new fee “fairly nominal,” but, essentially, bettors who use DraftKings in New York, Illinois, Pennsylvania, or Vermont will see the surcharge because sports betting is heavily taxed in the states. Robins told shareholders during an Aug. 2 earnings call:
“If you look at the way it’s typically done in other industries, whether it be hotel taxes or even the sales tax that you pay when you buy something at the store — taxis, you name it — it’s typically line-itemed out separately, and usually, it’s 100% passed along to the consumer. In this case, we’re obviously subsidizing a chunk of it.”
The comment confirms that DraftKings will notify bettors of the surcharge in a separate line on the betslip — Robins thinks customers prefer transparency. Until now, sportsbooks in high-tax states posted less favorable odds and cut back on bonuses instead.
The industry already adds vig (vigorish) — or juice — to sportsbook odds. The vig compensates the house for conducting the transaction. That’s why odds are set at -110 for a game with an expected 50/50 outcome: Bettors have to risk $110 to win $100 in an even bet.
DraftKings will pin bettors with a surcharge in states that share two things in common:
- They all tax sportsbook revenue at 20% or more.
- Each state has multiple sports betting operators, which carves into the profits for even a dominant brand like DraftKings.
DraftKings shares were down about 10% Friday, but the overall market was bearish amid an underwhelming jobs report.
Balancing Sportsbook Taxes, State Budgets
Back in 2021, only Pennsylvania sports betting (36%) and New York sports betting (51%) had the double-whammy of a 20%+ tax rate and multiple operators.
“For the next three years, no other states followed suit so there was no major forcing mechanism for DraftKings — or any other company — to address the potential for higher tax rates becoming more widespread,” Robins and Ellingson told investors.
Vermont sports betting debuted on Jan. 11, 2024. FanDuel, DraftKings, and Fanatics Sportsbook face a 20% tax rate in the Green Mountain State’s tiny market.
The Illinois tax hike, a few months later, was likely a tipping point for the DraftKings executives.
Illinois Gov. JB Pritzker signed an Illinois sports betting tax hike to cap the 2024 legislative session. Starting July 1, a tiered sports betting tax system replaced the previous 15% tax rate. It’s now:
- 25% for operators that make less than $50 million in revenue
- 30% for sportsbooks that exceed $50 million but stay under $100 million in revenue
- 35% from $100 million to $200 million
- 40% for operators who clear more than $200 million in revenue.
“Over the past several months, we have seen a shift to tax rates over 20% in certain competitive markets, including a recent significant tax increase in Illinois,” Robins and Ellingson told shareholders.
“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.”
Will DraftKings Surcharge Slow State Tax Hikes?
Robins also thinks the DraftKings surcharge might serve as a deterrent for states considering a sports betting tax increase.
“There’s certainly an element there that entered into our thinking,” he told investors. “… When you have illegal operators paying zero tax, that’s pretty tough to compete with at any level. But, when it starts getting higher than 20%, it just becomes untenable. So I do think that — in the absence of us doing something like this: Why wouldn’t more states consider (a higher tax rate)?”
Robins said DraftKings customers otherwise don’t feel the high tax rate, so lawmakers aren’t hearing from their constituents.
“We haven’t, in New York, done anything differently,” he said. “Nobody in the industry has, so I do think this is something that may make some states reconsider because now they may be hearing more from their citizens that they don’t like it.”
Could the surcharge instead drive customers to competing sports betting apps? Robins said “we really don’t know.”
“I think every company has to do what’s best for their own business,” he said. “We believe this is what’s best for us. I would imagine that — if that’s our calculus — then others would come to the same conclusion.”
He later added:
“People may gripe about it, but I don’t really see behavior change because of it.”
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