DraftKings dropped a bit of a bomb as it made its earnings presentation this week, one that will directly affect New York bettors beginning January 1, 2025.
Starting in the new year, NY sports betting users can expect to see an additional line on their bet slips when they win wagers: a surcharge that represents a percentage of your winnings paid back to DraftKings.
Jason Robins, co-founder and CEO of DraftKings, called the surcharge “a reasonable solution for high tax states,” which obviously includes New York and its 51% rate. Robins also called the surcharge “a nominal amount” paid by bettors.
“Obviously, some people might just react negatively to the idea of being charged at all,” Robins said during Friday’s earnings call. “But it’s really fairly nominal and it makes a huge difference in our ability to make a reasonable margin and also more importantly to compete with the illegal market, which pays no taxes and has the ability to invest 100% of their revenue into product and other things.
“So for us to be able to be competitive with the illegal market and invest properly in product and customer experience in a state that has a very high tax rate, we feel this is an important step that consumers will ultimately understand. And if they feel the product and experience is better, then they’d rather pay for that than somewhere else that maybe doesn’t have as stronger product.”
Expect to pay some of your winnings to DraftKings in 2025
As the company detailed in its latest earnings presentation, DraftKings Sportsbook NY will implement the surcharge on January 1, 2025, “to ensure an operational effective tax rate of approximately 20%.”
Essentially, the surcharge is a way for DraftKings to supplement the amount it pays the state in tax revenue. DraftKings emphasized in its earnings presentation that the surcharge only applies to winning bets. Customers will see the surcharge on their bet slips when they place wagers.
“So the way we calculated it is, we set the amount such that we are targeting DraftKings covering 20% of gross revenue and taxes,” Robins explained. “And so basically, the way to think of it is, any tax rate that’s higher than 20%, we would be paying up to the 20%, and then the remaining would be … the fee is designed to offset. So in a state like New York, where the tax rate is 51%, that’s a large number.”
Robins also spoke to the potential of this surcharge affecting overall handle at DraftKings.
“Obviously, the big question is, do we see any deterioration in handle and top line as a result? But you can do the math and see it would take quite a bit, because if you think about 51% versus 20%, that’s 60% of the taxes that we’re paying in New York. And you could do the math on that from all the public reports. It’s a big number.
“So, you need to see a substantial decline in handle to get to a point where you were fully cannibalizing that. And obviously, if we saw that, we would reconsider our plan. But I think there’s quite a bit of cushion there.”
Could DraftKings invest more in promotions, marketing now?
Robins noted that “there wouldn’t be any reason” DraftKings would heel-turn on its surcharge strategy. He added, though, that “obviously we’re paying close attention to customer feedback. And if we hear anything that makes us change our mind, we’ll certainly let you know.”
The DraftKings CEO provided a little detail behind the decision to implement the surcharge, citing how other industries have executed similar strategies, such as hotel taxes and sales taxes.
“So, we just thought that was most sort of in line with how it’s typically done versus trying to obfuscate it, which also isn’t consistent with our commitment to be transparent to our customers and be very customer friendly in everything we do,” Robins continued.
Robins pointed out that, because of the high tax rate in New York, sportsbooks “have pulled back heavily” on promotions and marketing. While that may serve the needs of some operators, DraftKings is going a different route. By implementing the surcharge, he said, “it allows us to make the investments in product and promotions and marketing and all the other things that should continue to create long term growth.”
Could this be the new norm for NY sportsbooks
For years, even before online sports betting went live in January 2022, operators have decried the sky-high tax rate in the Empire State.
In 2023, DraftKings and FanDuel representatives told New York lawmakers that the 51% tax rate was so punitive that NY sportsbooks may have to offer worse odds to stay afloat.
But as Assemblyman Troy Mackey said during the National Council of Legislators from Gaming States earlier this month, the state won’t be lowering it anytime soon.
During Friday’s earnings call, Robins was asked if DraftKings’ surcharge could be mimicked by other sportsbooks.
“I think every company has to do what’s best for their own business,” Robins said. “I think we believe this is what’s best for us. And I would imagine that if that’s our calculus, then others would come to the same conclusion.
“But we really don’t know and we’ll have to see. And, obviously, there might be other ways, too, that – other ideas for how to implement something like this that might be better than what we came up with. We thought through this quite a bit, but you never know. So we do have some time between now and January 1st, and we’ll see what happens.”
