DraftKings announces plans to introduce a surcharge on customer winnings in several US states. The company, having just earned $1 billion in the second quarter with a 26% revenue increase, explains that this decision is due to high tax rates.
Passing the Tax Burden to Bettors
In New York, Illinois, Pennsylvania, and Vermont, starting from January 2025, winning customers will need to pay a surcharge. These states share common characteristics of having tax rates over 20% and multiple operators.
In New York, the gross revenue of nine licensed operators is taxed over 50%. Pennsylvania has a tax rate of 36%, while Illinois ranges between 20% and 40%.
DraftKings CEO Jason Robins (as pictured) states: "As you know, many revenue-based taxes ultimately get passed on to consumers. While this practice has not been adopted in low-tax areas of the online gambling industry, it is applied in high-tax areas like Germany."
Robins adds: "We plan to implement a gaming tax surcharge on net winnings for customers in any state where the tax rate exceeds 20% and where there are multiple sports betting operators. This surcharge is relatively insignificant for customers. DraftKings will still absorb up to 20% of the tax burden, so customers will only be affected beyond this level."
The Best Solution?
DraftKings' CEO believes that other solutions to high tax rates are considered less "transparent." For example, they could have reduced the odds, Robins explains, but decided against this measure. Other short-term cost-saving options include reducing marketing and advertising expenditures.
A Failed Bet
Critics believe this decision is a failed bet. Passing the tax burden to bettors has indeed angered many stakeholders. If competitors do not follow suit and implement similar surcharges, DraftKings could lose a significant number of customers. Rush Street Interactive became the first operator to announce on August 5th that it has "no plans" to implement the surcharge.
Strategy consulting firm Regulus Partners reacts: "In our view, calling this 'brave' is merely euphemistic; the brand may already be damaged. DraftKings' board now has only one wise choice—to publicly abandon this policy, apologize, and move forward, while privately exploring why such a self-damaging policy was publicly announced."
"Customers are Willing to Pay for a Strong Product"
CEO Jason Robins explains: "Clearly, some people might react negatively to the idea of being charged, but this surcharge is relatively small and significantly helps us earn a reasonable profit and more importantly, compete with tax-free markets."
