The US Internal Revenue Service (IRS) has recently reaffirmed its position that Daily Fantasy Sports (DFS) is a form of gambling and DFS companies should be viewed and taxed as gambling operators.
In a recent memo, the IRS has addressed fantasy sports and whether they should be treated as a gambling activity for the second time in four months.
The agency’s recently released memo concludes that:
The amount paid by a daily fantasy sports player to participate in a daily fantasy sports contest constitutes an amount paid for a gambling transaction under Section 165 (d) [del Código de Rentas Internas].
The IRS position specifically affects the DFS giants DraftKings and FanDuel. The agency’s progress with its plan to treat the two companies as gambling operators it would cost millions of dollars in annual special taxes.
The recent IRS memo reaffirms a similar memo released by the agency in July. That earlier view was criticized by DraftKings CEO Jason Robins, who said at the time it was “Deeply flawed” and that there had not been a firm federal position on whether or not the DFS game constitutes a game.
A game of skill or a game of chance
Currently, each state in the US decides how to treat fantasy sports. Many of the states treat the activity as a game of skill. For example, the Illinois Supreme Court ruled earlier this year that fantasy sports is a game whose outcome is mastered by skill and not by chance and, therefore, they do not constitute games of chance.
The ruling was issued in connection with a lawsuit filed by a FanDuel customer seeking to recoup his bet in an NBA competition hosted by the operator in 2016 under the Illinois Loss Recovery Act of 1819.
The recent IRS memo indicates that the agency could soon begin collecting a 0.25% wagering tax on each fee paid to participate in the contents of the DFS. According to Baird Fogel, a partner at the law firm Morgan Lewis & Bockius LLP, the tax will almost certainly pass on to clients.
Mr. Fogel went on to say that while neither the IRS July memorandum, nor the recent one, is binding in court, it would be very difficult defeat the agency’s position in DFS contests, and that the fact that this position is at the federal level makes things worse for the fantasy sports industry and DFS operators like DraftKings and FanDuel.
R. Stanton Doge, Chief Legal Officer for DraftKings, said the company’s position that fantasy sports are not a form of gambling and contest entry fees should not be discussed or taxed, as wagering has been “ confirmed by state legislatures and courts across the country. ”