The US Internal Revenue Service (IRS) has recently reasserted its position that daily fantasy sports (DFS) are a form of gambling and DFS companies should be viewed and taxed as gambling operators.
In a recent memo, the IRS has addressed fantasy sports and whether these should be treated as a gambling activity for the second time in four months.
The agency’s recently published memo concludes that:
The amount paid by a daily fantasy sports player to participate in a daily fantasy sports contest constitutes an amount paid for a wagering transaction under Section 165 (d) [of the Internal Revenue Code].
The IRS’ position specifically affects DFS giants DraftKings and FanDuel. The agency moving forward with its plan to treat the two companies as gambling operators would cost them millions of dollars in annual excise taxes.
The recent IRS memo reaffirms a similar memo published by the agency in July. That earlier opinion was criticized by DraftKings CEO Jason Robins who said at the time that it was “deeply flawed” and that there had not been a firm federal position on whether DFS play constitutes gambling or not.
A Game of Skill or a Game of Chance
At present, each individual state around the US decides how to treat fantasy sports. Many of the states treat the activity as a game of skill. For instance, the Illinois Supreme Court ruled earlier this year that fantasy sports are a game whose outcome is dominated by skill and not by chance and therefore do not constitute gambling.
The ruling was issued in relation to a lawsuit filed by a FanDuel customer who sought to recover his bet on an NBA competition hosted by the operator in 2016 under Illinois’ Loss Recovery Act from 1819.
The recent IRS memo signals that the agency could soon start charging a 0.25% wager tax on each fee paid to participate in DFS contents. According to Baird Fogel, a partner at law firm Morgan Lewis & Bockius LLP, the tax would almost certainly be passed down to customers.
Mr. Fogel went on to say that while neither IRS’ July memo, nor its recent one are binding in court, it would be very difficult to defeat the agency’s position on DFS contests, and that the fact that this position is at the federal level makes things even worse for the fantasy sports industry and DFS operators such as DraftKings and FanDuel.
R. Stanton Doge, Chief Legal Officer at DraftKings, said that the company’s position that fantasy sports are not a form of gambling and contest entry fees should not be treated and taxed as wagers has been “confirmed by state legislatures and courts throughout the country.”
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