There’s one key part missed in coverage of the DraftKings IRS memo. This is not a legal document, this is legal advice. The July 23 memo, which just got released in late August, involves one IRS lawyer giving his perspective to another when asked. No, this doesn’t immediately cause any type of law to go into effect. No, gamers won’t face an extra tax on their winnings if they visit a casino in any part of the U.S. this week. The memo itself makes this very clear. On the first page of the 10-page document, it says “This Generic Legal Advice Memorandum responds to your request for assistance. This advice may not be used or cited as precedent.”
A precedent is a legal ruling or decision that can be used as an authority in deciding cases. The writer says his words can’t be used in a court of law. Basically, this is the equivalent of one colleague asking another for advice. The memo’s writer details how he would approach the argument, but makes it clear this is in no way a legal ruling. In a somewhat bizarre fashion, however, most of the coverage around this issue went the opposite way. Now that we know how one IRS lawyer feels about the case, there’s a fear changes have already taken place or will very soon. Even on the DraftKings quarterly earnings call, reporters asked how the company would handle changes this week and how much would retroactive payments be. All of that is a bit premature at this point.
What Exactly is The IRS’ Argument?
The IRS claims DraftKings and FanDuel should be paying the government more money. That’s the main point behind all of this. Several years ago during an audit, the IRS raised questions about taxes paid from fantasy sports. IRS officials argue that any entry fees paid in fantasy sports contests are wagers and should fall under a 0.25 percent sports betting excise tax. In the memo, the IRS argues “daily fantasy sports” or DFS is different from traditional fantasy content.
“[An] important distinction between traditional fantasy and DFS is the treatment of the entry fee associated with each,” the memo states. “Although participants in both types of fantasy sports typically pay a fee to participate, this pool of money is generally given entirely to the winner or winners of the traditional fantasy league. In contrast, in DFS, a portion of the fees collected is not paid out to the winner or winners, but is retained by the DFS operator.”
This, the IRS claims, pushes DraftKings and FanDuel into gambling territory. As a result, they believe the companies owe money.
“[Internal Revenue Code] 4401 generally imposes a percentage tax on every wager,” the memo says. “The tax is imposed on the person who is engaged in the business of accepting wagers, and the percentage amount depends on whether the wager is authorized by the state in which it is accepted, or whether the wager is unauthorized.”
DraftKings and FanDuel both reject that argument, saying fantasy sports is not gambling. That set off an ongoing fight. The IRS files an argument through their attorneys and the two companies respond. And on and on it goes.
There’s No Court Order For DraftKings
Now to be clear, the legal fight continues on this. No courts have weighed in with a final decision. That’s why DraftKings officials basically responded with a shrug when asked about the memo. They’ve been here many times before.
“This was a memo that has no force of law and is non-binding,” said DraftKings CEO Jason Park, talking to reporters during the quarterly earnings call. “In our view, it’s deeply flawed in its analysis. Our position continues to be that [fantasy sports] is not wagering.”
For anyone wondering why the companies keep fighting, it’s worth pointing out this wouldn’t be a cheap tax. In fact, each company would owe an estimated $20 to $30 million each year, plus a retroactive penalty. Even for companies like this, it wouldn’t be cheap.
Park pointed to the debates held by different states on the subject. He argued the legislatures supported his claim that daily fantasy sports isn’t gambling.
“We believe arguments at the federal level are strong and many courts and legislatures have affirmed that,” Park said. “[This is] going to continue to be an ongoing process.”