From a customer satisfaction standpoint, DraftKings’ newly announced plan to tax winning bettors in states with higher tax rates is sure to turn off even the most casual bettors. Even so, it’s not unheard of for a company to sacrifice a little brand equity for extra dough.
As DraftKings may very well know, however, this plan isn’t exactly that. Because it doesn’t seem to make sense from a business standpoint either. Unless other sportsbook operators in those states plan to follow suit, DraftKings is daring its customers to go elsewhere.
The sportsbook shouldn’t be surprised if that’s what they actually do.
DraftKings announced Friday a plan to tax U.S. bettors a surcharge for winning bets in states with tax rates above 20% for operators. Not including New Hampshire, where DraftKings has little competition, those states are New York, Vermont, Pennsylvania and Illinois. The first three have a tax rate of 51%, and Illinois passed a spending plan in June to tax betting operators on a scale up to 40%.
Rather than pay up, DraftKings is asking its customers to help foot the bill.
Re: DraftKings surcharge will be passed on to customers. Will be implemented in the four states with above 20% tax starting Jan 1.
Will be "fairly nominal" to the customer but creates potential EBITDA upside.
Sounds like a bad idea. $DKNG pic.twitter.com/ApbC0nyqJC
— Matthew Waters (@ByMatthewWaters) August 1, 2024
“We decided that the best course of action is to do what really every other industry [does] — whether it’s hotels, taxis — whatever else you buy generally has some kind of tax,” DraftKings CEO and co-founder Jason Robins told CNBC.
As an example of what it might look like, he said “if you made a $10 bet to win $20, you would pay like 30 cents.”
Here’s a look at how that could look in the DraftKings app in states where the surcharge will be added on Jan. 1, 2025.
This is what the DraftKings surcharge might look like beginning January 2025.
Will be applied to net winnings in Illinois, New York, Pennsylvania and Vermont to lower DraftKings’ effective tax to 20% in those states. pic.twitter.com/DSbafHdowc
— Sam McQuillan (@sam_mcquill) August 1, 2024
As the example shows, the tax won’t be a percentage that accounts for a large chunk of a bettor’s earnings. Particularly bettors with smaller bankrolls, which is probably the majority of people. Even still, nobody wants sportsbooks dipping into the money they make the few times they actually win something, especially after already paying a vig on the front end.
Would bettors be willing to sacrifice a little tax money in exchange for the product DraftKings can offer over some of the lesser competitors in the field with worse products? Sure. But there is almost certainly a limit to that. Especially when so many other top options exist.
The online operators in Illinois include BetMGM, BetRivers, Caesars, FanDuel, ESPN Bet, Fanatics and Circa. Unless the best of them plan to also tax bettors, DraftKings customers won’t likely stick around for a tax. Because they don’t have to.
That’s why it’ll be pivotal to follow what happens next. Rush Street Interactive, which operates BetRivers, already announced it won’t be joining DraftKings in taxing bettors. If other sportsbooks decide to also stand down, this may end up as a massive misstep for one of the leaders in the betting industry.
