DraftKings imposes Illinois levy
Following the example of FanDuel this week, DraftKings says it will levy a US$0.50 surcharge on bets placed in the Illinois. In-person wagers will be exempt from the fee, which begins on 1 September.
The move constituted pushback against the Illinois legislature’s imposition of a tax on handle. Yearly wagers in the amount of 20 million or fewer are subject to 25% taxation. Handle above that threshold will be levied at 50%.
“We’re disappointed Illinois policymakers have chosen to more than triple our tax rate over the past two years,” DraftKings CEO Jason Robins said in a statement. The company said it would repeal the fee if the Legislature backed down from the tax hike.
Robins also expressed dismay for the industry as a whole. “We’re very concerned about what this will do to the legal, regulated industry,” he said. “Illinois continues to fuel the rapidly growing illegal industry, which pays no taxes or fees and provides none of the consumer protections that regulated operators offer.”
Jefferies Equity Research analyst David Katz seconded DraftKings’ move. “Given the structure of the tax, a surcharge is the most direct cost offset,” he wrote in a 13 June investor note.
Katz continued, “All else equal, the move would likely be a modest positive for the shares, though this was widely expected, and therefore mostly priced in.” DraftKings shares were trading at $37.98 apiece at the time of his report.
“Given that the two largest operators in the state have enacted an identical response, we view follow-on responses from smaller operators as likely,” Katz predicted.
Although few other operators in Illinois take more than 20 million bets per year, they would not feel the brunt of the tax increase. But Katz did not expect them to discriminate when it came to service charges. He wrote that “we believe that most operators will likely seek to offset the tax, rather than attempt to under-cut DraftKings and [FanDuel] by offering surcharge-free bets.”
On the plus side, Katz resumed, the service charges would likely bring in more than the tax increase took out. However, it “could stifle handle growth,” he warned.
Katz foresaw at least US$5 million more in net revenue for each of the two operators from the new imposts. This was because the US$0.50 surcharge would fall upon wagers only taxed at 25%, as well as ones dunned at 50%.
The analyst predicted a 100% pass-through to cash flow for the newfound revenue, “given that there are no incremental expenses associated with the move. In theory, the transaction fee should act as a small headwind to handle growth in the state. However, this incremental EBITDA will, in our view, mostly offset any potential handle loss from the transaction fee.”
Katz concluded that Illinois was an outlier. “It has been our view that Illinois would be the most aggressive in tax increases, given its history with land-based gaming for the past 25 years,” he penned.
That being said, Katz conceded that tax increases in other states were happening or about to do so. Still, he felt, Illinois’ tax bump would be the biggest and most aggressive. “Bottom line is that we do not believe Illinois increases the likelihood or magnitude of increases elsewhere,” he finished.
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David McKee is an award-winning journalist who has three decades of experience covering the gaming industry.
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