DraftKings, a leading mobile betting company, has announced plans to implement a gaming surcharge on winning bets in states with high sports betting tax rates. The move is aimed at boosting the company’s profits and comes as DraftKings reported its first profitable quarter as a public company. The states that will be affected by the surcharge include Illinois, New York, Pennsylvania, and Vermont, all of which have tax rates above 20%. DraftKings CEO Jason Robins explained that the decision was influenced by other industries that have similar taxes, such as hotels and taxis.
The announcement by DraftKings follows concerns about tax hikes in the gaming industry, which had previously put pressure on the company’s stock and other betting companies like FanDuel. In May, Illinois approved a tax hike on sports betting revenue, leading to fears of increased tax rates for companies in the sector. For example, New York and New Hampshire currently maintain 51% tax rates on sports betting companies.
In a letter to shareholders, Robins assured that the new surcharge would be nominal for customers, using the example of a low- to mid-single-digit percentage of net winnings for Illinois. He also expressed hope that the implementation of the tax would make states reconsider their tax rates, as it could hinder investments in product development and customer experience. Robins acknowledged that there may be some customers who are unhappy with the surcharge and decide to drop off, but the company is not including the new tax in its guidance.
While DraftKings raised its revenue guidance for the year, it lowered its adjusted EBITDA guidance for 2024. The company reported a profit for the second quarter, with net income of $63.8 million compared to a net loss of $77.3 million in the same period last year. Revenue also increased by 26% to $1.1 billion, driven primarily by customer engagement, expansion into new jurisdictions, and the acquisition of lottery app Jackpocket.
Despite the tax increase in Illinois next year, Robins remains optimistic about the company’s performance. He stated that even without any benefit from the fee, DraftKings expects to see $900 million to $1 billion in adjusted EBITDA next year. Currently, more than 30 states allow some form of sports wagering, with many permitting mobile and online betting. DraftKings operates in 25 states for mobile sports betting and is live in 5 states for iGaming.
In addition to the gaming surcharge announcement, DraftKings also revealed its first-ever $1 billion share repurchase program. The company’s market cap is approximately $14 billion. This move demonstrates DraftKings’ confidence in its future growth and financial performance.
Overall, DraftKings’ decision to implement a gaming surcharge highlights the challenges faced by the industry due to high tax rates in certain states. While the surcharge may lead to some customer attrition, DraftKings remains optimistic about its future prospects and expects continued growth in revenue and adjusted EBITDA. As the sports betting market continues to expand across the United States, it will be interesting to see how other operators respond to the issue of high tax rates and whether they follow in DraftKings’ footsteps.
