DraftKings (NASDAQ: DKNG) recently announced a surcharge on winning sports bets in four states, a move that could generate up to $270 million in added gross gaming revenue according to an estimate by Eilers & Krejcik Gaming (EKG). The gaming company will implement a small levy on winning sports wagers in Illinois, New York, Pennsylvania, and Vermont, aiming to lower its effective tax rate in these high-tax jurisdictions. The plan is set to go into effect on January 1, 2025. DraftKings informed investors that this surcharge could be accretive to 2025 earnings before interest, taxes, depreciation, and amortization (EBITDA). The operator’s EBITDA forecast for next year, which stands between $900 million to $1 billion, does not include potential benefits from the surcharge.
The surcharges will be the lowest in Pennsylvania, with a 1.0% surcharge generating approximately $9 million in revenue, and highest in New York, with a 6.6% surcharge expected to bring in $209 million. The New York surcharge reflects the disparity between the state’s 51% gross gaming revenue (GGR) tax and DraftKings’ target rate of 20%, according to EKG.
EKG’s estimate of $270 million does not account for the potential departure of bettors from DraftKings due to the levy. However, if the forecast holds true, it could add 150 basis points to the operator’s GGR market share, increasing it to 34%.
Since DraftKings’ announcement, Rush Street Interactive (NYSE: RSI) has declared it will not follow suit, and ESPN Bet parent Penn Entertainment (NASDAQ: PENN) is also monitoring the situation closely. Neither BetMGM nor Caesars Entertainment (NASDAQ: CZR) has announced similar plans in their recent financial updates.
FanDuel parent Flutter Entertainment (NYSE: FLUT), DraftKings’ primary competitor, is viewed by EKG as the pivotal player in this scenario. With FanDuel set to report second-quarter results on August 13, industry analysts, investors, and perhaps DraftKings itself are eager to see if it will adopt a comparable tax mitigation strategy.
EKG suggests that if FanDuel does not implement a similar surcharge and if states resist the potential loss of tax revenue, DraftKings may face substantial pressure from policymakers, investors, and the media to abandon the initiative. Conversely, if FanDuel does implement a surcharge in the same states, it stands to gain an estimated $358 million in revenue.
Since announcing the surcharge, DraftKings has faced significant backlash on sports wagering social media platforms, with both bettors and industry observers criticizing the move as an attempt to make clients shoulder some of the operator’s tax burdens in the four states. Critics argue that DraftKings and its competitors were aware of New York’s high sports betting taxes (51%) upon entering the market. Further compounding negative perceptions, CEO Jason Robins recently referred to cost-sensitive bettors as lower-value customers, adding to the controversy surrounding the surcharge decision.
EKG concluded that, at first glance, the risks associated with the surcharge—such as player attrition, reputational damage, and states rejecting the claim that surcharge revenue is tax-free—seem to outweigh the potential rewards, including increased profits.
