DraftKings has indicated that in may challenge the IRS ruling that would require it to pay an excise … [+]
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Tax season is officially upon us. Yesterday was the deadline for companies to file W-2 and 1099-NEC forms. Certified public accountants are now in overdrive to get tax returns ready. And, for daily fantasy sports business, this means it is finally time to address the new, sticky question of how to respond to the Internal Revenue Service’s general advice memoranda that, for the first time, calls for DFS companies to pay a .25% to 2.00% “excise tax” on entry fees as a form of “wager” under Internal Revenue Code §§ 4401 and 4411.
While any IRS general advice memorandum enjoys only a low level of legal deference (often referred to as the Skidmore deference), simply not paying the wagering tax on 2020 returns places daily fantasy sports operators at risk of finding themselves in litigation with the IRS—a result that may be costly in its own right. In addition, the prospect of such litigation should raise scrutiny if these companies seek to merge, go public, or accept new financing in the coming year.
The underlying position taken by the IRS, of course, is not without reasonable criticism. For example, while the IRS purports that daily fantasy sports should be treated like sports gambling because it believes these contests involve more skill than chance, other decisionmakers have analyzed this issue and reached just the opposite conclusion. For example, on April 16, 2020, the Illinois Supreme Court in Dew-Becker v. Wu held that daily fantasy sports games involved predominantly skill under Illinois gaming law—a decision that cites to and quotes this author’s own scholarly work.
It remains to be seen how daily fantasy sports operators will choose to respond to the IRS memoranda that opine DFS companies must pay the wagering tax as games of chance when filing their 2020 tax returns. Although one of the large daily fantasy sports operators, DraftKings, has indicated an intent to legally challenge the IRS’s ruling rather than pay the tax, DraftKings has a reputation of being especially litigious with government agencies.
In any event, federal tax season has never been so interesting for those who follow, operate, or invest in daily fantasy sports businesses. It also, for the first time, brings tax legal issues to the forefront of questions involving the future revenue potential of DFS,
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Marc Edelman (Marc@MarcEdelman.com) is a Professor of Law at Baruch College’s Zicklin School of Business and the founder of Edelman Law. He is the author of many scholarly legal articles on fantasy sports, including the Indiana Law Journal article “Regulating Fantasy Sports.” Nothing contained herein should be considered legal advice.