After more than a year of warning regulators and lawmakers that increasingly high sports betting tax rates weren’t sustainable in the operator’s eyes. DraftKings announced it will be passing some of the tax burden on to customers.
New customer surcharge takes effect Jan. 1
Starting in January 2025, bettors in states with multiple operators and tax rates higher than 20% will now be charged a surcharge on every winning wager. The new measure will impact bettors in Vermont, Pennsylvania, New York and Illinois, a state that recently doubled the sports betting tax rate.
While DraftKings is the first to implement tax mitigation measures in states like New York, which boasts a 51% tax rate, the company expects other to follow suit.
“I think every company has to do what’s best for their own business. I think we believe this is what’s best for us. And I would imagine that, you know, if that’s our calculus, then others would come to the same conclusion,” said DraftKings CEO Jason Robins on the Q2 earnings call.
“People may gripe about it, but I don’t really see behavior change because of it,” Robins said of surcharges in other industries.
In a presentation deck DraftKings showed that a $10 bet to win $20 would result in a 32-cent surcharge. The fee would only be applied on winning bets and will be prominently displayed on the bet slip.
Robins said that, though they would be implementing the surcharge, they did not plan to decrease or adjust marketing and acquisition spending in those markets.
“My guess is that it’s going to work better because 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,” Robins said of the decision.
Robins says DraftKings decision rooted in transparency
Over the past year representatives from DraftKings and Robins himself have warned lawmakers the tax situation was not sustainable, but many had assumed operators would change the price of the vig. Robins said the team opted for the surcharge approach for a couple of different reasons.
“If you look at the way it’s typically done in other industries, whether it be hotel taxes, or even the sales tax that you pay when you buy something at the store, taxis, you name it, it’s typically line itemed out separately and usually 100% passed along to the consumer. In this case, we’re obviously subsidizing a chunk of it,” he noted.
“I know there’s maybe benefit to hiding it because maybe people don’t notice, but I think over the long term customers appreciate transparency. And even if they don’t love that, their state implemented a high tax, and some of that has been passed along. I think they prefer that to not knowing if it was buried in the pricing or something else.”
DraftKings revises EBITDA projections for 2024
The news comes alongside Q2 earnings results where DraftKings bumped up revenue expectations for the year from $4.9 billion to $5.15 billion but cut EBITDA expectations for the year from $500 million to $380 million. The company cited the rising tax rate in Illinois and the unexpected launch in Washington D.C. as some of the reasons for the downgrade.
The company reported Q2 revenues of $1.1 billion, an increase of 26% from last year. Adjusted EBITDA came in at not quite $128 million, which is a 75% bump year over year.
