DraftKings announced last week that it will begin charging players in states with higher sports betting tax rates a surcharge on winnings to compensate for any sportsbook losses from the higher taxes.
Massachusetts is not currently one of the states where that surcharge will be added. But that could change if lawmakers decide to consider an increased tax rate, as they did in late May.
Legislators have already rejected one proposal to increase the Massachusetts sports betting tax rate. Let’s examine the likelihood of a tax rate increase and a DraftKings surcharge in Massachusetts.
Will DraftKings Sportsbook add surcharges in Massachusetts?
DraftKings will begin adding a surcharge to winning bets in states with a tax rate above 20% that feature multiple betting operators. This leaves bettors in four states initially affected:
- Illinois
- New York
- Pennsylvania
- Vermont
The current Massachusetts sports betting tax stands at 15% for Category 1 & 2 licensees and 20% for Category 3. These rates protect Massachusetts players from incurring a surcharge on winnings for the time being. But that could change if the Bay State increases its tax rate, as it has flirted with before. And in that Massachusetts ranked seventh in 2023 in terms of sports betting tax revenue, the state is not likely hungry for an increase.
DraftKings has yet to reveal surcharge specifics
DraftKings Chief Executive Officer and Co-Founder Jason Robins told CNBC that this decision aligns with many other industries, saying:
“We decided that the best course of action is to do what really every other industry [does] — whether it’s hotels, taxis — whatever else you buy generally has some kind of tax.”
Robins claims the impact on players with be negligible, but there has been no clarity on how large this surcharge could be. Robins has been transparent, admitting that DraftKings could lose some players in the process, but specific fee details remain scarce. For now, the only indicator is an example Robins provided:
“If you made a $10 bet to win $20, you would pay like 30 cents.”
DraftKings feels confident about becoming the first United States operator to impose a tax on winnings because of its recent financial success. Its earnings in the second quarter of 2024 grew by 26% year over year which meant DraftKings’ revenue jumped to $1.1 billion. That growth led to DraftKings raising its expectations for the rest of the year and for 2025 and announcing $1 billion in funds to buy back shares from stakeholders.
Robins said that the surcharge on winnings might not even benefit DraftKings. Its financial outlook is good enough, however, for Robins to consider breaking even a win:
“The overperformance that we are seeing with customer acquisition, the launch of Washington D.C., our expectation for Jackpocket to deliver positive EBITDA next year as well as underlying trends with our existing customers and our performance on the handle side, all should offset the Illinois tax increase next year. So even if we don’t get any benefit from the fee, we will see still $900 million to $1 billion in adjusted EBITDA next year.”
So what are the odds Massachusetts raises its sports betting tax rate and pushes this surcharge on players?
Massachusetts lawmakers shot down a sports betting tax increase proposal in May
Massachusetts lawmakers have already shown interest in increasing the mobile sports betting tax rate. Back in May, they initially attempted to raise the tax percentage to 51%. Had it passed, Massachusetts’ tax rate would have tied New York as the highest in the nation.
That proposal, Amendment 828 submitted by Senator John Keenan, did not get far before being killed in the Massachusetts Senate. That being said, other states have also looked into increasing sports betting taxes on operators. Ohio doubled its tax rate from 10% to 20%. At the same time, Illinois and New Jersey are considering their own increases.
As expected, sports betting operators spoke out against any tax hike in Massachusetts. The Sports Betting Alliance — which includes BetMGM, DraftKings, Fanatics Sportsbook, and FanDuel – stood in opposition. The group claims tax hikes would lead to worse odds for bettors and fewer promotions from sportsbooks, which could push players to illegal markets.
Now, if tax increases come in Massachusetts or elsewhere, DraftKings has created a new form of leverage. Sure, the company could stay financially viable despite tax increase. But the cost will be pushed onto the player; not the operator.
