FanDuel and DraftKings Save Millions in Taxes With Free Play
FanDuel and DraftKings commonly use free bets, often referred to as free games, to attract new bettors, but some states are paying the price in terms of lost tax revenue.
Hundreds of millions of dollars were left on the table, money some states relied on and promised to voters as sports betting spread as a popular new tax tool across the country. The shortfall had an impact on the funding of the program and forced some states to make up the difference elsewhere. Meanwhile, the industry is hoping the advantage will spread to lawmakers in more states.
“Lawmakers aren’t paying attention yet, but it is happening,” said Brandon Loeschner, chairman of the gaming group at RubinBrown.
Pennsylvania, Colorado, Michigan and Virginia allow all online gaming companies like Fanduel and DraftKings to deduct any income related to free gambling from their taxable income. Whether the business loses money or not, revenue from betting offers like increased odds for one of the football teams to score at least one touchdown, or a $ 500 game with the first deposit. a player, are not taxed.
The online sports betting industry advocates deductions as an essential tool for delivering promotions, which can attract new customers to new markets. He sells them as temporary and somewhat seasonal depending on league schedules and big name sporting events.
Since 2019, betting companies have excluded from their taxes more than $ 336 million related to free bets, almost half of their total revenue in those states, according to VixioGambling Compliance. These deductions even include bets that players lose, while the industry makes an untaxed profit.
“It flies under the radar. It’s in the fine print, ”said Michael Pollock, CEO of Spectrum Gaming Group. “Partly because it’s new, but it’s also because states rushed to jump head first into sports betting based on projections that may not have been realistic. first day.”
Colorado’s water funding dries up
When Colorado lawmakers voted to legalize betting in the state, they predicted it would bring in extra money to help deal with its water scarcity crisis. But in its first full year, gambling taxes only earned the state $ 6.6 million, less than half of what a voting initiative predicted.
State sports betting companies have deducted 62% of their income from what is taxed, thanks to wording in Colorado law that allows them to adjust their tax base for promotional games. This language was adopted after the Coloradans chose to legalize online gambling at the ballot box, which allocated a large portion of the funds to the Water Plan Implementation Cash Fund in order to guard against falling water levels in the Colorado River.
“Voters went to the polls and thought it was going to pay off for their water problem, but that was a complete lie,” said Steve Brubaker, a games lobbyist.
With insufficient sports betting income, Colorado had to use taxpayer money to replenish the fund. On June 24, Governor Jared Polis (D) signed a $ 15 million bailout bill (HB 1260), sending the largest sum of general fund revenue in state history to the program.
“It is just as important to be as clear about what you are taxing as it is about how much you are taxing. For states like Colorado that have promised to spend the money on a water project, it’s all about planning and forecasting, ”said Ulrik Boesen, senior policy analyst at the Tax Foundation. “If you’re calculating with a 10% rate on the books, but your actual rate is more like 4.5 after deductions, it’s impossible to predict. “
Sara Leonard, director of marketing and communications for the Colorado Water Conservation Board, said she hadn’t counted on sports betting revenue to make a dent in the early years, but welcomes the additional $ 15 million.
“We have other sources of funding for the water body, and the sports betting revenues will hopefully begin to provide much more and more permanent funding to meet the water body’s goals at the future, ”she said.
The state checks deductions for free games just as it does for traditional tax deduction companies, said Suzi Karrer, spokesperson for the Colorado Lottery and the Department of Revenue. She said sports betting exceeded some of the initial projections, which varied at the start of betting due to uncertainty over the tax structure.
None of the bill’s original sponsors could be reached for comment.
Sports betting tax policy
The sports betting market is indicated by “handle” (the total amount wagered by users) and “income” or “hold”: the money left to bettors after paying the bets won by users. The federal government manages taxes, while the 30 states that have legalized since the Supreme Court overturned a sports betting ban three years ago, apply their taxes to income.
Colorado, Pennsylvania, Michigan and Virginia stand out as the few that allow sports betting companies to adjust their income by deducting unlimited free games and promotional bets from their tax base. Taxes in the four states represent a much lower proportion of operator revenues compared to the other states.
Allowing uncapped deductions makes these gambling excise taxes work more like gross revenue taxes or income taxes, Boesen said.
“If there’s no cap on the amount of promotional deductions you can take, then it’s no longer an excise tax,” Boesen said. “Because then, technically any operator could eliminate tax liability altogether by simply offering endless amounts of promotions.”
In Pennsylvania, FanDuel can deduct any amount it grants a user in free credit, as well as any user money attached to a promotional bet, whether the sportsbook wins or loses, according to tax manager Adam Robbins. Americans at FanDuel.
“We have widely seen a desire to tie promotions bet to deductions, as opposed to a scheme where you tie the deduction to payouts in one way or another,” Robbins said. “The amount included in the bets ends up being the deduction, so this is basically an individual wash and with some limitations.”
Rushing to join in the fun?
Lawmakers may have overlooked this language in part because of the rush to join the sports betting party, but also because mobile and online betting are still relatively new and the speed at which companies like FanDuel and DraftKings publish promotions has accelerated rapidly as betting is legalized. in more states.
Before the United States Supreme Court overturned the Professional and Amateur Sports Protection Act in 2018, mobile betting was almost all offshore and legal betting was almost all in person. Offshore books do not pay state taxes, and casinos generally do not offer promotions. So there was no reason to allow them to adjust to these things.
“This is something that traditional brick and mortar operators didn’t necessarily have to deal with, with their retail sports betting,” Loeschner said. “Online is bringing this to the fore because a lot of these operators are using free play as a way to attract new players, who come into the market looking for these promotions.”
Extension of benefits on deck
The deductibility of promotions is not only built into the formula in some states, but extends to other states where sports betting is legal.
Arizona, Maryland, Louisiana and Wyoming recently legalized sports betting. All of them will allow businesses to deduct free-to-play revenue. New York, which recently expanded to online gambling, will not allow deductions for free games.
The industry is looking to expand the advantage to increase its tax savings in other states that already have legal sports betting. Lobbyists are currently pushing bills in New Jersey and Illinois to allow deductions.
In Iowa, free play deductibility was passed as part of an expansive revenue bill earlier this month. The state had taxed the industry without allowing the deduction since 2019.
According to a tax note attached to the bill, Iowa will lose $ 25.8 million over the next five years due to the adjustment. None of the bill’s sponsors could be reached for comment.
Loeschner, who is the treasurer of the Fantasy Sports and Gaming Association, is confident governments will begin to consider the growing number of promotions and the deductions they represent.
“My industry absolutely needs to be aware of this problem. Loeschner said. “But overall it’s a good thing, because it’s a sign of how quickly sports betting has grown in such a short time.”
The American Gaming Association, which lobbies on behalf of the industry, declined to comment.