DraftKings to tax winning bets in high-rate states in a bid to boost profit

Mobile betting powerhouse DraftKings is planning a tax on consumers in states with the highest sports betting tax rates, as the company looks to boost profit.

The company announced Thursday that starting next year, it will implement a gaming surcharge on winning bets in states with multiple betting operators and where the tax rate is above 20%. That includes Illinois, New York, Pennsylvania and Vermont.

“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.

The announcement came as the sports betting operator released its second-quarter earnings, which marked the company’s first-ever profitable quarter as a public company. DraftKings reported revenue of $1.1 billion, roughly in line with consensus estimates, according to LSEG.

Fears of tax hikes in gaming pressured DraftKings stock and other betting companies such as FanDuel back in May, when Illinois approved a tax hike on sports betting revenue. The sliding tax rates impose 40% levies on companies with the largest adjusted gross revenue. New York and New Hampshire each maintain 51% tax rates on sports betting companies.

In a letter to shareholders Thursday, Robins said the new surcharge will be nominal for the customer. In Illinois, for example, it will amount to a low- to mid-single-digit percentage of net winnings.

“If you made a $10 bet to win $20, you would pay like 30 cents,” Robins said, citing an example.

DraftKings is believed to be the first U.S. operator to implement a tax on the winnings of a bettor. Robins said he weighed it heavily and hopes it causes states to think twice about the tax rate.

“I do think that if states start to realize that above a certain level, we can’t invest in our product and customer experience in the way that we need to … it might make them think differently about it,” he added.

He is also considering customers’ response. “We’re not going to hide it,” Robins said. “Obviously, we could see some customers drop off, and player betting activity, if they don’t like it.”

Robins says DraftKings is not including the new tax in its guidance.

The company raised revenue guidance to a range of $5.05 billion to $5.25 billion from previous guidance in the range of $4.80 billion to $5 billion. The updated guidance equates to 38% to 43% year-over-year growth.

But the sports betting giant lowered its 2024 adjusted EBITDA guidance to between $340 million and $420 million, down from previous guidance of $460 million to $540 million.

The company reported a profit during the second quarter for the first time, posting net income for the three-month period that ended June 30 of $63.8 million, or 10 cents per share, compared to a net loss of $77.3 million, or 17 cents per share, a year earlier. 

Analysts surveyed by LSEG expected a per-share loss of 1 cent for the period.

Revenue rose to $1.1 billion, up 26% from $874.9 million a year earlier. The company said the revenue increase was driven primarily by continued healthy customer engagement, expansion into new jurisdictions and the acquisition of lottery app Jackpocket.

“The overperformance that we are seeing with customer acquisition, the launch of Washington D.C., our expectation for Jackpocket to deliver positive EBITDA next year as well as underlying trends with our existing customers and our performance on the handle side, all should offset the Illinois tax increase next year,” Robins said on the company’s earnings call. “So even if we don’t get any benefit from the fee, we will see still $900 million to $1 billion in adjusted EBITDA next year.”

More than 30 states now allow some form of sports wagering, and many of them permit mobile and online betting. DraftKings is live with mobile sports betting in 25 states and Washington, D.C. The company’s iGaming division is live in five states.

The company said so far this year, 10 more jurisdictions have either introduced legislation to legalize mobile sports betting or introduced a bill that may result in a mobile sports betting referendum during an upcoming election.

DraftKings also announced its first ever $1 billion share repurchase program. The company has a market cap of about $14 billion.