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States to Tax Fantasy Sports’ Exponential Growth

Desperate for revenue, several states are making a major push to regulate and tax so called “daily fantasy sports,” such as New York’s FanDuel and Boston’s DraftKings.

When Congress passed the 2006 “Unlawful Internet Gambling Enforcement Act,” it made a specific carve-out for fantasy sports as “games of skill” that involve making picks based on studying past performance and future projections, versus “games of chance” that play odds on the rolls of dice or deals of card games.

 

According to an NCP Gambling study for ESPN, there are now about 118 million Americans, or 38% of the population, who admit to betting on sports in 2008. The Fantasy Sports Trade Association reported that in 2015 it had signed up 51.8 million players in the U.S. and Canada.

ESPN estimated that fantasy league play will grow this year by 41 and legally spend $2.6 billion in entry fees. The mountain of cash will fund over $2 billion dollars in prizes paid to fantasy players, and allow for tens of millions in advertising dollars to keep building the market.

ESPN expects by 2020 there will $14.4 billion in paid “entry fees.” It is believed that daily fantasy-sports industry will collect more in entry fees than all the Las Vegas sports books combined.

Private FanDuel is believed to have over a million fee-paying users. and controls about 60 percent of the daily fantasy-sports market. The company raised $88 million in venture capital funding from top private investors, including Comcast Ventures, Shamrock Capital Advisors, NBC Sports Ventures, the National Basketball Association and Kohlberg Kravis Roberts & Co.

About 80 percent of fantasy sports players are male, and 90 percent are Caucasian. They reportedly spend an average of 18 hours a week on their game, and have played for 9.5 years.

Although the viral growth of fantasy sports has attracted a huge desire by progressives to tax the games, the frenzied support of a huge user base has restrained the taxman’s efforts to cash in on the growing honey pot.

But that has changed over the last two weeks after the New York Times’ Joe Drape and Jacqueline Williams started hammering the fact that employees of DraftKing were caught bragging about huge winnings from engaging in a form of alleged “insider trading,” based on access to confidential data from DraftKing clients.

The media drumbeat about the supposedly “crooked” activities of sleazy corporations and their greedy executives quickly generated a dozen class action lawsuits against industry players, and opened the door for states to step in with “protections” and taxes.

The New York Attorney General‘s office announced on October 6 that it had opened an investigation of DraftKings and FanDuel over whether employees from both websites won money on each other’s sites using inside information.

Both DraftKings and FanDuel immediately barred their employees from participating in daily fantasy games, but the Wall Street Journal reported on October 14 that the FBI had launched an investigation against both services for potential fraud, racketeering and criminal negligence.

On October 15, 2015, the Nevada Gaming Control Board ruled that fantasy sports games were a form of “sports wagering,” and DFS services must now obtain the type of sports pool licenses held by casinos or cease serving Nevada customers. The Gaming Board also found that daily fantasy games fell under legal definitions of “gambling.”

The Louisiana Gaming Control Board quickly ruled that DraftKings and FanDuel were allowing daily fantasy sports players based in Louisiana to deposit money into contests, even though Louisiana is officially an “any chance state” that limits all form betting to licensed casinos.

Illinois State Representative Mike Zalewski introduced legislation on October 27 to regulate daily fantasy sports sites that would require players to be at least 18 years old, and force companies to eliminate players that owe child support or have tax liens.

Arizona, Iowa, Montana, and Washington State have all totally outlawed daily fantasy sports participation.

 

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