DraftKings’ (NASDAQ: DKNG) recent announcement of an additional fee on winning sports wagers in four states may produce as much as $270 million in extra gross gaming revenue, based on an estimate by Eilers & Krejcik Gaming (EKG). 

The gaming firm announced last week it will begin applying a minor fee on winning sports bets in Illinois, New York, Pennsylvania, and Vermont to reduce its effective tax rate in those high-tax regions. The plan is set to take effect on January 1, 2025. DraftKings informed investors that the surcharge might enhance earnings before interest, taxes, depreciation, and amortization (EBITDA) for 2025. The operator's EBITDA projection of $900 million to $1 billion for the upcoming year does not account for any possible advantages from the surcharge.

"Surcharges would be lowest in Pennsylvania (1.0% surcharge, $9 million surcharge revenue) and highest in New York (6.6% / $209 million). The New York surcharge reflects the gap between the state’s 51% GGR tax and DraftKings’ target 20% rate,” noted EKG.

The research company noted that its $270 million projection does not account for the effect of bettors departing DraftKings due to the tax, but it stated that if this estimate is correct, it might increase the operator's gross gaming revenue (GGR) market share by 150 basis points, raising it to 34%. 

FanDuel 'Massive Domino' 

After DraftKings' announcement, Rush Street Interactive (NYSE: RSI) stated it will not take similar action, while ESPN Bet parent company Penn Entertainment (NASDAQ: PENN) mentioned it is keeping an eye on the developments. Prior to the announcement, BetMGM and Caesars Entertainment (NASDAQ: CZR) released financial updates, with both not revealing a comparable initiative. 

This leaves Flutter Entertainment (NYSE: FLUT), the parent company of FanDuel and DraftKings’ primary rival, as the “massive domino” according to EKG. The company will announce its second-quarter results on August 13. Analysts, investors, and possibly DraftKings are anticipating whether FanDuel will adopt a comparable tax reduction approach. 

“If FanDuel does not follow suit, and if states chafe at the potential for lost tax revenue, we believe DraftKings management will face considerable pressure from policymakers, investors, and media to drop the idea,” added EKG.

The research company indicated that if FanDuel implements a surcharge in the four states mentioned earlier, it may achieve a revenue gain of $358 million. 

DraftKings Surcharge Hazards Might Exceed Benefits 

Following the announcement of the surcharge, DraftKings has faced heavy criticism on sports betting social media, with bettors and industry analysts claiming that the action is merely a tactic to make customers cover part of the operator’s tax expenses in Illinois, New York, Pennsylvania, and Vermont. 

Some have claimed that DraftKings and its competitors were aware of New York's hefty sports betting taxes (51%) before entering the market. In a recent interview, CEO Jason Robins may have further damaged the already negative perception of the surcharge decision by referring to cost-sensitive bettors as lower-value customers. Thus, DraftKings might encounter greater risks than advantages as a result of the plan. 

“At first glance, we think the risks (e.g., player attrition, reputational damage, states not buying the idea that surcharge revenue is tax-free) appear to outweigh rewards (e.g., increased profits),” concluded EKG.