In a bold move reflective of the changing fiscal landscape in the United States, DraftKings Inc. has announced plans to implement a surcharge for customers in states with high gambling taxes. This decision comes in the wake of Illinois’ recent increase in the tax on sports bets and is seen as a strategic response to protect the company’s bottom line.
DraftKings has reported a significant milestone, marking its first-ever profitable quarter as a public company. With second-quarter revenues hitting $1.1 billion, the company met analysts’ expectations. However, adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) slightly missed the forecast, coming in at $128 million against projections of $133.2 million, according to Bloomberg.
Despite the mixed financial results, DraftKings has adjusted its 2024 revenue outlook upwards to as much as $5.25 billion but has scaled back its adjusted earnings forecast to a maximum of $420 million from the previously expected $540 million. This recalibration follows Illinois’ decision to hike the tax rate on sports wagers to a substantial 40%, up from 15%.
Surcharge Mechanics and Implications
Starting January 1, 2025, DraftKings will introduce a “gaming tax surcharge” on customers’ net winnings in states where the tax rate exceeds 20% and where multiple operators are present. This includes New York, Pennsylvania, Vermont, and now Illinois. The surcharge, which will vary by state, aims to offset the increased tax burden and is expected to be a nominal percentage of the net winnings.
“In Illinois, for example, it will amount to a low- to mid-single digit percentage of the Net Winnings a customer would previously have received,” DraftKings explained in a letter to shareholders, cited by Sportico. This measure is poised to enhance the company’s adjusted EBITDA from 2025 onwards, leveraging the new surcharge.
The announcement arrives at a time when DraftKings is experiencing robust user engagement, with monthly unique payers climbing to 3.1 million—a significant increase from the prior estimates of 2.6 million. This surge is partly attributed to new promotions that have exceeded expectations in attracting new customers.
Moreover, the sports betting giant continues to evolve its platform, having recently incorporated the Jackpocket online lottery app and announcing a substantial $1 billion stock repurchase plan. These moves are indicative of DraftKings’ aggressive strategy to consolidate its market position despite the fluctuating tax landscape.
As state legislatures continue to adjust their tax frameworks, companies like DraftKings are finding innovative ways to maintain profitability and shareholder value. The surcharge is a direct response to these fiscal pressures, reflecting a broader trend in the online betting and gaming industry toward finding sustainable solutions to state-imposed challenges.
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