Casino Watch Focus has reported on the many ongoing issues with one of the newest gambling fads, daily fantasy sports (DFS) betting. After many years of legislators realizing how exactly DFS is actually gambling, many took efforts to ban them. Then, the Supreme Court legalized sports betting, opening the door for states to legalize DFS as they saw fit. Now, the IRS has published its guidelines for the tax liability companies like FanDuel and Draftkings face as a result of their gambling business. Yahoo Finance reports:
he IRS, in a July 23 internal memo made public on Aug. 7, issued new guidance that amounts to a major shot across the bow at daily fantasy sports (DFS) operators DraftKings and FanDuel.
The memo, which does not name those companies, concludes that DFS contest entry fees count as wagers, and thus fall under the existing excise tax on sports betting. The tax is 0.25% of the amount of a wager, or for DFS companies, a contest entry fee. In 2018, as an example, the DFS industry brought in $3.2 billion in fees (that’s “handle,” not revenue), which would have meant $8 million in IRS excise taxes—significant for an industry that only generated $335 million in revenue that year.
The implications of such regulation actually extend beyond the simple tax revenue that companies owe. The money owed will add up sure, but it’s the fact that paying the fees means the industry is stipulating that they are, in fact, gambling operations. Even though it’s rather clear they are, they have long fought this distinction. Their worry here is that acknowledgement in the tax code to being a gambling business will open them up to other gambling regulations that they would rather avoid clearly. Yahoo Finance explains:
The companies will surely fight the IRS decision in court, a scenario that will reunite the two business rivals that worked together through 2015 and 2016 as they fought various state attorneys general to argue that their contests are “games of skill” rather than chance.
The companies won’t challenge the IRS merely because they want to avoid paying the taxes, but also because they have to challenge it on a reputation basis: agreeing to pay the taxes could amount to a concession that they do accept unauthorized wagers, which could open up the companies to additional legal penalties.
Back in 2015, as ESPN reported a former assistant U.S. attorney sent the IRS a letter about his belief that DFS companies “are clearly engaged in betting or wagering for purposes of the wagering excise tax.” If the IRS prevails, it would cost the two companies tens of millions of dollars—especially if a tax court decides the decision applies retroactively.
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