IRS Memo Says Excise Tax Applies To Daily Fantasy Sports
The federal excise tax on sports betting should apply to daily fantasy sports, according to a recent memo posted by the Internal Revenue Service.
Although it is unclear if any action will be taken by the IRS against daily fantasy operators like DraftKings and FanDuel, if the memo leads to enforcement it could result in millions in taxes on DFS entry fees. The federal excise tax on sports wagers is 0.25%.
The two biggest DFS operators, Fanduel and DraftKings, had no comment on the IRS internal memoThursday. But DraftKings CEO Jason Robins in an earnings call Friday said the memo is non-binding, adding that the company believes the memo is "deeply flawed in its analysis." Based on arguments that it’s a game of skill in federal and state cases and legislation, Robins said he believes the company’s position is the correct one.
Under the heading of “Office of Chief Counsel Internal Revenue Service Memorandum,” the document was dated July 23 and posted Aug. 10. It was written by Holly Porter, IRS associate chief counsel for Passthroughs & Special Industries, with the subject line “Daily Fantasy Sports and the Excise Taxes on Wagering.”
The memo comes as two members of Congress are attempting to repeal the federal excise tax on legal sports bets. Reps. Dina Titus (D-Nevada) and Guy Reschenthaler (R-Pennsylvania), who are co-chairs of the Congressional Gaming Caucus, introduced a bipartisan bill in July calling for an end to the 0.25% tax.
The excise tax has been in place for more than 50 years to discourage illegal gambling. DFS games have been online for more than 10 years and had not been considered gambling. In fact, daily fantasy sports were exempted from the Unlawful Internet Gambling Enforcement Act, which said they are a game of skill.
DFS games are available in nearly every state, with many either legalizing it or having legislation in the works to legalize it.
The Crux Of The IRS Memo
The memo addressed the following issues and reached the following conclusions:
1. Whether an organization involved in the operation of daily fantasy sports (DFS or DFS operator) is liable for the excise tax on wagers under IRC § 4401.
Conclusion: A DFS operator is liable for the excise tax on wagers under IRC § 4401.
2. Whether a DFS operator is liable for the occupational excise tax imposed under IRC § 4411 and is required to register under IRC § 4412.
Conclusion: A DFS operator is liable for the occupational excise tax under IRC § 4411 and is required to register under IRC § 4412.
3. If the answer to issues 1 and 2 are yes, whether the DFS operator is liable for the excise tax on wagers and the occupational excise tax at the authorized or unauthorized rate described in IRC §§ 4401(a) and 4411(a) and (b).
Conclusion: The rate of tax IRC § 4401(a) imposes on wagers accepted by a DFS operator depends on whether the wager is accepted in a state in which the wager is authorized. The rate of occupational tax IRC § 4411 imposes on a DFS operator depends on whether the DFS operator accepts only state authorized wagers under IRC § 4401(a)(1).
The memo also says if the wagers are deemed unauthorized (depending on state law), the excise tax conceivably could be 2%.
What Does It Mean To DFS
It likely depends on what the IRS does with the internal memo. Daily fantasy sports has always looked at UIGEA as the guide for the legality of the games.
It also could depend on whether Congress takes up the legislation that would get rid of the excise tax. Businesses that pay the excise tax must also pay an annual $50 per-employee tax on those working in sportsbooks. That is the occupational excise tax that the memo referenced.
Either way, it’s clear the IRS has taken notice of daily fantasy sports.
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