Home – Taxes Increasingly Part of Fantasy Sports Debate

Taxes Increasingly Part of Fantasy Sports Debate

 Trying to determine the nationwide outlook for the daily fantasy sports industry is about as easy as picking which hitters in tomorrow’s baseball games will hit home runs. 


In April, Tennessee became the third state to legalize daily fantasy sports, which allow players to draft teams of real-world professional – and in some cases, amateur – athletes and put those players’ real-life stats up against those of other drafted teams in the game. Mississippi and Colorado are expected to shortly follow suit. But the last few weeks also saw two other states – Idaho and Alabama – join the list of those trying to bar the games.


For policymakers, the question so far has predominantly been whether the games amount to gambling. That’s a decision predicated on whether they amount to games of chance, in which case they are gambling, or games of skill, because players can improve their chances of winning by knowing more about the real-world players than their opponents. But new questions are starting to emerge, notably around taxation and whether the games should exclude statistics generated by college or other amateur athletes.


The legislation (SB 2109) passed by Tennessee and signed into law last month by Gov. Bill Haslam (R) is on the vanguard of the tax debate. The Volunteer State will tax the revenue that companies like New York-based DraftKings and Boston-based FanDuel, the two main players in the multi-billion dollar industry, bring in from the state’s residents.


“You can’t tax something if it’s not legal, and states right now are mostly [debating], ‘What is this? Is it legal?’” said Max Behlke, who tracks tax issues for the National Conference of State Legislatures. “This wasn’t on anybody’s radar until about September of last year. During our fall meeting, lawmakers were still asking what this was.... I think next year, now that they have their heads wrapped around it, I think we’re going to see a whole array of taxes or fees.”


The stakes are huge. As the text of the Tennessee legislation noted, “with more than 50 million Americans playing fantasy sports, today’s sports fans spend as much time predicting the performance of professional athletes as Wall Street investors spend predicting stocks and bonds.”


There is so far no clear trend line. Haslam’s signature allowed the Volunteer State to join Indiana, where a law legalizing the games goes into effect in July, and Virginia, which in March became the first state in the nation to specifically legalize and regulate the games.

Mississippi will likely soon join them. Lawmakers in that state have passed and sent to Gov. Phil Bryant (R) legislation that legalizes the games for now, though the measure sunsets and calls for a study to decide whether to keep them legal. And last Monday, Colorado lawmakers sent to Gov. John Hickenlooper (D) a bill allowing the games there.


Legalization bills also abound in several states, including California, where the Assembly easily passed a bill earlier this year to legalize DFS games. The measure includes provisions for licensing fees, but no tax. The bill is currently awaiting action in the Senate.


New York is considering several bills to allow DFS, but it’s not clear whether the measures will pass before the Legislature’s June adjournment. DraftKings and FanDuel have been targeted in an investigation by Attorney General Eric Schneiderman (D) and currently aren’t operating in the state. Pennsylvania lawmakers are waiting on a report later this spring from the Pennsylvania Gaming Control Board before deciding whether to move forward on the issue. The Minnesota House has endorsed a bill (HF 2426) that would declare fantasy sports legal. The measure is considered likely to also pass in the Senate, and Gov. Mark Dayton (D) has reportedly said he views the bill favorably. And in Missouri, a bill (HB 1941) that has cleared the House is expected to also gain Senate approval.


Meanwhile, Idaho and Alabama joined more than 10 states which have declared the games to be illegal. In early May, both FanDuel and DraftKings said they would pull out of those states.  


“Idaho defines gambling, in part, as risking money or other things of value for gain that is contingent in whole or part upon chance or the outcome of an event, including a sporting event,” Idaho Attorney General Lawrence Wasden (R) said in a statement. “My concern is that the daily fantasy sports offerings my office reviewed require participants to risk money for a cash prize contingent upon individual athletes’ collective performances in various future sporting events. As I see it, this falls within Idaho’s definition of gambling.”


Alabama Attorney General Luther Strange (R) reached the same conclusion. He barred daily fantasy sports sites from operating in the Heart of Dixie in early April.


“There is, of course, a measure of skill involved in creating a fantasy roster. But in the end, contestants have no control over the performance of the players on their rosters,” Strange’s office said in a news release.

Tennessee’s attorney general, Herbert Slatery (R), had also believed that DFS constituted illegal gambling, but the legislation signed by Haslam on April 28 makes Slatery’s opinion moot.


While Tennessee is the first state to pass a tax on DFS companies (Virginia and Indiana don’t tax operators based on revenue, but require $50,000 flat licensing fees from the companies), it is not likely to be the last. Iowa is considering legislation with a tax on entry fees, and New York is considering a bill including a 15 percent tax. Legislation in Illinois could come with a “privilege tax” as high as 22.5 percent.  


Illinois Attorney General Lisa Madigan (D) issued an opinion early in the year declaring the games illegal (which has been challenged in an ongoing court case), but state legislators are considering legislation, supported by the industry, that would legalize, tax and regulate them. The Fantasy Trade Association says two million Illinois residents play daily fantasy sports. The Illinois bill has fees for DFS companies based on revenue, and imposes a “privilege tax” of up to 22.5 percent of revenue for the biggest companies.


The tax issue is also on the table in New Jersey, where lawmakers are considering legislation that would regulate the games and place a “registration fee” of 9.25 percent of daily gross revenue on DFS providers.


Michael Suleiman, spokesperson for New Jersey bill sponsor Sen. Jim Whelan, a Democrat who represents Atlantic City, said it made sense to tax the companies the same as casinos. But Whelan’s bill (SB 1927) wasn’t aimed at raising revenue but at making sure players aren’t cheated. The fairness issue drew the spotlight last year after a DraftKings employee won a fantasy football game on FanDuel, leading some to question whether staff had inside information. The New Jersey bill, for example, limits what insiders can win.


“This is very much a consumer protection bill,” Suleiman said. The New Jersey bill remains in the committee process.


Several states are also weighing whether to bar amateur sports stats from being part of fantasy games, said Behlke’s colleague at NCSL, Jake Lestock, who has been tracking the daily fantasy sports debate.


“That’s another thing most states are going to have to be looking into,” Lestock said. “Indiana was the first state to make it illegal to do contests on amateur sports, most likely because the NCAA is based there.”  


Whelan’s bill in New Jersey specifically allows college sports to be included. Massachusetts Attorney General Maura Healey (D),a former Harvard basketball player who played professionally overseas and is a member of the New England Basketball Hall of Fame, has drafted regulations for the games in the Bay State that prohibit using college or other amateur sports. The new Colorado law also prevents student sports from being used in fantasy sports games online.


A group called the Student Sports Protection Alliance, which counts the NCAA as a backer, has been lobbying against allowing fantasy sports using student sports statistics.


At the moment, the issue is mostly one for smaller DFS companies. DraftKings and FanDuel both voluntarily stopped offering games involving college sports back in March, after months of discussions with the NCAA. Both FanDuel and DraftKings have generally been on board with state laws calling for regulation. They are even working with lawmakers in various states on regulations, and have praised consumer protection bills - including the Tennessee bill with the tax provision, though without specifically mentioning the tax.


“The legislature has passed strong, but smart regulations ensuring the more than one million fantasy players in Tennessee benefit from important consumer protections and can continue to play fantasy sports,” FanDuel said in a statement. The industry also is supporting the Illinois legislation, which includes a tax.


Meanwhile, Congress is now getting into the action after months of leaving the issue to the states. According to a statement, the House Subcommittee on Commerce, Manufacturing, and Trade, chaired by Texas Rep. Michael C. Burgess (R), has scheduled an informational hearing to get the committee familiar with state actions so far, and determine whether there may be a federal role.  


Whether Congress acts remains to be seen, but it is a safe bet that states aren’t waiting around to see if they do. 

-- By SNCJ Correspondent Dave Royse