One of my favorite sayings (and I am not the one who came up with it) is “The Tax Code Giveth, The Tax Code Taketh Away.” It’s not fair, but we have to live with it as it is, not how we want it to be. Only Congress can change the Tax Code because it’s law.
Last week, I reported on the IRS releasing a Chief Counsel Memorandum where the IRS concludes that Daily Fantasy Sports (DFS) companies are liable for the Excise Taxes on Wagering. (Back in 2015 I came to the same conclusion as the IRS.) Per published reports, Jason Robins, the Chief Executive Officer of DraftKings, disagrees. The Wall Street Journal notes [pay link]:
“This was a memo that has no force of law, is nonbinding and [in] our view is deeply flawed in its analysis,” Mr. Robins told analysts. “Our position continues to be, which we believe has been reaffirmed through state legislatures and courts throughout the country, that [daily fantasy sports] is not wagering.”
First, state law and state courts do not change federal tax law. A state can call an activity a non-gambling contest but it can still be considered wagering (gambling) under federal law. We have a dual system of taxation in the United States, and state tax law and federal tax law differ in numerous respects.
Second, some states have concluded that DFS is gambling. For example, Nevada did so. Of course, a company executive will put the most positive light on something.
So I’m going to assist Mr. Robins with some information about the Federal Tax Code. Back in 2014, I wrote:
[T]here are plenty of IRS and Tax Court rulings on [what wagering/gambling is], and all say basically the same thing. For something to be gambling, three elements must be present:
1. A prize;
2. Chance; and
3. Consideration.Clearly daily fantasy sports have elements 1 and 3. There’s a prize and there’s a cost to enter each event. Is there chance?
Gambling does not have to be 100% chance to be considered gambling. For example, poker is considered gambling under US tax law yet there’s plenty of skill involved with it. (Indeed, I’d argue that skill predominates over luck; however, there’s absolutely an element of luck in poker.) Let’s look at what’s involved with a daily fantasy sports contest. You generally select a team to play in a day’s events. Let’s say you selected Carlos Boozer and Shane Battier for today’s NBA daily fantasy sports contest. Those players scored 8 and 3 points, respectively. On the other hand, had you selected Taj Gibson and Chris Bosh you would have done far better; they scored 20 and 28 points. Yet before a single game who know what each player will score? If you had selected NBA star Lebron James you would normally do quite well; however, he didn’t play today.
The IRS Chief Counsel memorandum notes that there can be skill and the ‘contest’ can still meet the definition of a wagering activity:
In [Revenue Ruling 57-521], the contest participant’s own skill was the only factor involved in winning the puzzle game and there was no chance element at all. In contrast, DFS participants merely select a lineup for their simulated teams and have no ability to exercise control or influence over the actions of the players participating in the game and who earn the participants their fantasy points. 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.
In my view, and the current state of the Federal Tax Code, it’s quite clear that a DFS contest is a wagering activity. It meets the specifications of wagering. There is consideration, there is a prize, and there is an element of chance (luck). Bluntly, Mr. Robins can educate the world on the skill needed to be a winner in DFS (and he is absolutely correct on the skill needed); however, under the Tax Code this is clearly gambling (wagering). Basically, Mr. Robins’s argument is irrelevant.
The only way this changes is to change the Federal Tax Code. That would require Congress to add a new section to the Tax Code specifically stating that DFS is not a wagering (gambling) activity.
If I were an auditor of a DFS firm, I would be insisting DFS companies either pay the wagering excise taxes or add a reserve for them. To put it in sports terms, the Pittsburgh Pirates have a better chance of winning the 2020 World Series than the DFS companies do of not having to pay the wagering excise taxes.
Tags: daily.fantasy.sports, DFS