The IRS looks to place taxes on Daily Fantasy Sports

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08/27/2020
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The IRS looks to place taxes on Daily Fantasy Sports

Not content with the millions raked in from a tax on sportsbooks gaming, the Internal Revenue Service (IRS) is looking to get its fingers into the lucrative Daily Fantasy Sports (DFS) pie.

DFS companies like FanDuel and DraftKings must pay federal excise tax on their entry fees, the U.S IRS has decided, according to an internal memo that could cause a major shakeup in the industry.

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An IRS Chief Counsel Memorandum released recently states that the DFS companies must pay tax on every single wager – in the case of DFS, the entry fee – that they accept, in addition to an annual occupational tax on each person accepting those wagers. Those taking wagers will also be required to register with the IRS. A $50 occupational tax ($500 in states where it is not legal) could potentially be owed for individuals receiving the entry fee “wagers.” Significantly, on the Friday afternoon of the announcement, DraftKings shares fell upon its release.

Only A Memo Now, But Watch This Space

Relax, but stay aware. It is yet not clear if this memo will be followed up by actions against DFS operators like FanDuel and DraftKings, however, the requirement could yet be determined to be considered to be retroactive if the IRS decides to enforce the issue to the letter of the law.

If it were applied in that way, DraftKings and FanDuel could well be forced to make back payments of millions of dollars coming from in from DFS based on the existing federal excise tax placed on sports wagers of 0.25%.

To date, neither of the two largest DFS operators offering have decide to pass comment on the controversial matter. Under the heading of “Office of Chief Counsel Internal Revenue Service Memorandum,” was dated July 23, however, not posted officially until August 10. The document was penned by IRS Associate Chief Counsel for ‘Passthroughs & Special Industries’, Holly Porter, with the moot subject line “Daily Fantasy Sports and the Excise Taxes on Wagering.”

Interesting Timing for the IRS

The move from the IRS comes immediately after a watchdog group produced a report showing that the IRS spends millions on their employees to audit returns with little to show for it. More than 47% of those audits produced no income for the IRS. Is it coincidence, or is the IRS searching for more certain and easier ways to collect revenue streams?

Another possible coincidence sees the proposed DFS tax from the IRS coming as two Congress members attempt to revoke the federal excise tax placed on legal sports wagers. Representatives Guy Reschenthaler and Dina Titus, the two co-chairs of the Congressional Gaming Caucus presented a bill in late July that is looking to put an end to the Federal Sports Wagering 0.25% tax. Remember, that is a tax that was originally added officially 50 years ago with the intention to discourage illegal gambling, and could now be considered to be outdated since the lifting of Federal sports wagering restrictions on the states by the U.S. Supreme Court in May 2018.

On the other hand, the bill to revoke the Federal excise duty on sports wagering could possibly have been the catalyst for the IRS to make its controversial move on DFS taxes.

It is so controversial as for the past ten years, DFS have been operating in the United States without being considered gambling. In fact, the Unlawful Internet Gambling Enforcement Act exempted DFS from being considered gambling, as it was officially deemed to be a game of skill.

If it is indeed more than a memo, expect a significant legal battle as Kate C. Lowenhar-Fisher, a Nevada-based gaming attorney at Dickinson Wright PLLC implies;

“This is one of the most significant events in the evolution of sports betting in the United States that has happened in a long time”

Watch this space as the story continues to unfold.

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