Back in 2015, I asked and answered the question on whether the DFS sites were liable for the excise tax on wagering. I came to the conclusion they were. In late July, the IRS came to the same conclusion: DFS sites are liable for this tax.
The IRS legal opinion (which cannot be cited, but does give the IRS’s reasoning) notes that clearly DFS entry fees are wagers, and that DFS events are wagering pools. The opinion cites Tschetschot v. Commissioner and also notes the dictionary definition of a wager.
The IRS opinion notes some obvious realities about skill and chance in DFS:
DFS participants may be educated on the sports games, players, expected weather conditions, and other factors. Regardless of how educated a DFS participant is, their chosen player(s) may perform poorly that day, become injured, not play in a given game, or be affected by uncontrollable circumstances such as weather and officiating. The existence of chance indicates that DFS contests are distinguishable from the type of contest described in Rev. Rul. 57-521. We conclude that the “skill” involved in selecting fantasy players is similar to the skill involved in selecting winners of individual professional sports games, horse races, or other traditional sports gambling activities.
The DFS tax rate is 0.25% on legal (authorized) wagers and 2% on any non-authorized wagers. If a DFS site operates only in states that authorized the wagers, they’ll owe 0.25% of the wagers collected; otherwise, they will owe 2%.
There’s a corollary to this that I’ve mentioned on several occasions. If DFS is a wagering activity for one aspect of tax law, it almost certainly it is for other aspects of tax law. The DFS sites have been issuing Form 1099-MISC’s as “skill contests.” It’s quite likely that DFS games are gambling and that W-2Gs should be issued instead of 1099-MISC’s.
Finally, I should point out that this legal opinion is just the IRS’s opinion. A DFS site, if audited on this issue, could appeal the decision into the courts. It’s possible, of course, a court could rule differently than the IRS legal opinion (though I doubt it).
Tags: DFS