DraftKings Investors Express Dismay About Surcharge Gambit

A significant majority of DraftKings (NASDAQ: DKNG) shareholders aren’t happy about the gaming company’s plan to tax winning sports bets in Illinois, New York, Pennsylvania, and Vermont.

That’s according to a recent Jefferies Equity Research report, which noted that 60% of surveyed DraftKings investors said they oppose the plan that the operator announced last week in conjunction with its second-quarter earnings report. It could be argued that’s a larger-than-expected disapproval percentage because the company said the small surcharge could be additive to earnings before interest, taxes, depreciation, and amortization (EBITDA).

DraftKings said its 2025 EBITDA forecast of $900 million to $1 billion doesn’t include potential benefits from the tax, which goes into effect in those states on January 1.

In the wake of DraftKings announcing the controversial effort, there’s been ample criticism and opining in sports betting circles. Some experts noted that with Vermont being a small state, and Pennsylvania allowing promotional spending to be deducted from taxes, it’s Illinois and New York that figure most prominently in the surcharge plan. Illinois recently moved to a graduated tax on sports wagering under which the highest revenue operators, such as DraftKings, pay more taxes than lower-grossing rivals. New York’s sports betting tax of 51% is the highest among large states.

Some DraftKings Investors Worried About Rivals’ Responses

Following the DraftKings announcement, industry insiders and investors alike have speculated about whether or not competitors — namely FanDuel — will follow suit. FanDuel parent Flutter Entertainment (NYSE: FLUT) reports second-quarter results on August 13.

FanDuel could market against it and gain more share from new customers, irrespective of whether it leads to more EBITDA, which would be negative for DKNG shares,” wrote Katz.

That’s to say, DraftKings’ rivals could leverage the surcharge against it. To date, only Rush Street Interactive (NYSE: RSI) has publicly said it won’t employ such a scheme, but BetMGM and Caesars Entertainment delivered financial results last week and there was no talk from either of those brands potentially implementing a tax on winning bets in any state.

Some DraftKings shareholders surveyed by Jefferies told the research firm they viewed the surcharge move as hasty and retaliatory, indicating it could come back to bite DraftKings in states such as Illinois and New York that are mulling iGaming legislation.

Dueling Views on DraftKings Surcharge

There are two sides to the surcharge coin, and that was apparent in the Jefferies survey.

Others indicated that the risk is high, unless DKNG’s intelligence suggests more states are likely to raise taxes,” added Katz. “The best case is you offset the tax increase in part, the worst case is you lose more share than you expect and have to reverse the strategy.”

Conversely, shareholders who are on board with the DraftKings decision believe it could be a positive for the industry and boost the operator’s free cash flow. Investors in that camp also believe bettors should be more aware of the tax regimes in their home states. They’ve also reconciled that FanDuel may not immediately follow suit.