DraftKings Inc. (NASDAQ:DKNG) is making headlines with its recent decision to introduce gambling surcharges on winning bets in states with high tax rates, effective January. The surcharge will apply in states such as Illinois, New York, Pennsylvania, and Vermont, where the tax rate on sports betting exceeds 20%.
DraftKings Co-Founder and CEO Jason Robins discussed the move during the company’s earnings call, acknowledging that while the decision aligns with the company’s strategy, alternative methods might be explored before the January implementation. Robins emphasized that the company is open to reassessing its approach if needed.
State Tax Impacts and Market Reactions
In a shareholder letter, signed by Robins and CFO Alan Ellingson, DraftKings highlighted that New York’s 51% tax rate, implemented in 2021, was a pioneering move at the time, alongside Pennsylvania. However, recent tax rate increases in competitive markets like Illinois—where the rate recently shifted from a flat 15% to a progressive range of 20% to 40%—have prompted DraftKings to consider implementing surcharges.
DraftKings noted that as nearly 40 states and jurisdictions, including Washington D.C. and Puerto Rico, offer legal sports betting, and about 30 states provide online sports betting, the company must adapt to rising tax rates. The surcharge is expected to be a minor cost to customers, with the potential for increased adjusted EBITDA for DraftKings in 2025 and beyond.
Customer and Analyst Reactions
The company’s surcharge proposal has received mixed feedback on X (formerly Twitter). Some users criticized the transparency of passing costs to consumers, questioning its potential impact on market share. Others focused on the broader issue of high state taxes and their effects on consumers.
DraftKings reported a profit of $0.10 per share for the second quarter, reversing a loss from the previous year and surpassing Wall Street’s expectations. The company’s monthly unique player count rose to 3.1 million, reflecting growth in player acquisition and retention, expansion into new markets, and the acquisition of Jackpocket.
Analyst Adjustments and Market Outlook
Macquarie analysts described the surcharge as an “interesting idea” in their report. Analysts have revised their price targets for DraftKings following the earnings results, reflecting optimism about the company’s future growth potential amid a healthy customer acquisition environment.
Robins expressed confidence in continued strong customer acquisition and the potential for a larger U.S. online gaming market than previously anticipated.
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