In a move that has shocked the sports betting industry, DraftKings recently announced plans to tax the winning bets of its customers via a surcharge in states that have a tax rate of more than 20%, including Illinois, New York, Pennsylvania and Vermont. This surcharge would be levied even if the bettor had a net loss counting their other wagers. And the bettor would also still be responsible to pay their other taxes on the winnings, such as income tax.
While directly passing taxes through to consumers may be a better way to make taxes transparent, the reasoning here seems to have been self-serving. Not missing a trick, DraftKings CEO Jason Robins said on an earnings call that this new charge could help the company with its annual adjusted earnings. Or as stated plainly in its shareholder letter, “…we believe additional upside potential exists for DraftKings’ adjusted EBITDA in 2025 and beyond from this gaming tax surcharge.” The timing was convenient too as the company needs to boost its profits as a follow up to its second quarter earnings.
One way or another, consumers always foot the bill for taxes and regulation that increase the cost of doing business. But this is an instance where consumers would see a direct pass-through of state taxes on gambling companies. DraftKings initially placed a big bet that its big competitor FanDuel would follow suit. But that bet did not pay off since FanDuel told its investors they would not be implementing a similar surcharge, even for this exorbitant new tax. So DraftKings reversed course and canceled their surcharge.
Despite their fierce rivalry, DraftKings and FanDuel have often aligned on common interests. They share lawyers, consultants, lobbyists and front-groups who have advanced their mutual goals across the states and in Congress. Given the close relationship between DraftKings and FanDuel, this apparent coordination on tax policies is likely to attract further scrutiny over possible antitrust violations and collusion.
Economist Richard Scheutz points out another troubling aspect of collusion. In markets with few competitors, businesses sometimes follow a price leader’s moves without explicit agreement. While this practice is not necessarily illegal, it’s another potential antitrust concern that could be triggered by this surcharge pricing episode.
When just two companies control so much of a market, they are doomed to attract antitrust scrutiny no matter what moves they make in response to each other. If FanDuel would have followed DraftKings’ lead in implementing tax surcharges, unwanted attention from antitrust regulators could have followed. John Holden, associate professor at Indiana University’s Kelley School of Business, warns, “The consolidation in the industry is a growing concern, and an across-the-board adoption of a winner’s tax would likely draw increased attention.”
Evidence of direct collusion might trigger a more dramatic regulatory and legal response. The Sherman Act, which prohibits activities restricting interstate commerce and competition, would likely apply. Penalties for collusion can include criminal fines reaching into the tens or hundreds of millions of dollars.
DraftKings’ announcement may have been merely a trial balloon—a way to gauge customer and regulator reaction before fully committing to the plan. The overwhelmingly negative response appears to have been enough to pop that balloon.
However, if DraftKings continues to look at ways to impose a surcharge on top of the taxes that individuals already owe, and if competitors follow suit, this could be the beginning of a dangerous trend in the sports betting industry. Such a move would harm consumers and invite scrutiny from regulators eager to conduct oversight in this rapidly growing market.
One thing is clear: consumers and regulators alike must remain vigilant. The integrity of the sports betting market—and the broader principle of consumer protection—hangs in the balance. State and federal authorities should examine the industry dynamics here and also re-examine their own egregious tax burdens to ensure that the odds aren’t stacked against the American consumer.