Boston-based bookmaker, DraftKings, made headlines on August 1st after announcing its intention to apply a surcharge on winning bets in high-tax US states. The stock began to dip but since retracting its position, the price has rebounded and the episode is all but forgotten by investors.
The Threat
It is no secret that DraftKings CEO, Jason Robins, has little tolerance for high tax states, even railing against the biggest market in the nation, New York, after it imposed a 51% tax on sportsbooks’ revenues. Robins was very clear early on that DraftKings, along with other sportsbooks operating in the Empire State, would have to cut down on promotions and signup bonuses to mitigate New York’s onerous tax levy.
“There’s a lot of levers we can pull, such as cutting back on the rate of promotion and spending less on external marketing. Those are things I would expect everybody in the industry to do because I don’t think anyone’s going to want to run long-term at an unprofitable rate in any state.”
Those were his words even before DraftKings was awarded a license in New York, but he had taken no punitive measures against high-tax states until a month ago when he threatened to impose a 3.2% surcharge on winning bets in states with what he believes are excessive tax rates beginning in 2025. It was a bold shot across the bow of every state with a high tax on sportsbooks’ revenues and to those contemplating an increase.
“We feel it is an important step that consumers will ultimately understand if they feel the product and experience is better, then they’d rather pay for that than somewhere else that maybe doesn’t have as strong a product,” Robins said at the time.
The Aftermath
DraftKings’ controversial surcharge announcement sent shockwaves across the industry, but if the company believed they were going to gain support from their competitors they got an immediate signal from BetRivers’ parent company, Rush Street Interactive (RSI) that they would be going it alone.
RSI CEO Richard Schwartz released a statement saying, “As we put our customers first, it was an easy decision for us (not to impose the surcharge). RSI remains committed to maintaining its leadership position in the industry by continuously prioritizing the needs and preferences of its players.”
But the true test was going to be whether FanDuel would join forces and impose a surcharge or reject DraftKings’ strategy for battling pricey tax rate states. The definitive word came at Flutter Entertainment’s (FanDuel’s parent company) earnings call when they unequivocally announced they would not be imposing a surcharge.
That sent DraftKings stock tumbling to a nine-month low of $29.83 as the future was suddenly uncertain for the industry co-leader. This got Robins and his DraftKings’ C-suite colleagues to rethink their position. And just like that, the announcement came shortly thereafter that DraftKings had abandoned its plans to impose the controversial surcharge.
DraftKings stock has had three weeks to recover and it closed at $34.50 on the Friday before Labor Day. The financial experts believe DraftKings’ brief dalliance with imposing a surcharge will have no lasting deleterious effects on the stock.
Barry Jonas of Truist Securities stated the whole affair will amount to “practically nothing.”
“While they [DraftKings] continue to grow, while they continue to be a market leader, many folks will overlook it. This traditionally is a company that beats and raises fairly consistently,” Jonas said. “While the Twitter gaming mafia may have been absorbed by this, I don’t think the average consumer or investor will remember.”
