The nation’s top sports betting operators, FanDuel and DraftKings, both recently unveiled 50-cent surcharges on wagers placed in Illinois.
The measures are a direct response to the state hiking its tax rates from 20% to 40%, depending on the operator’s revenue count, plus 25-cents to 50-cents per wager. That means a bettor wagering $10 now needs to win at least 3% more of their bets at -110 odds just to turn a profit.
The addition of the surcharges sets the stage for a potential industry-changing showdown with lawmakers in Illinois and other high-tax states across the country.
Sudden and unexpected change
Less than a year ago, Illinois sportsbooks paid a 15% tax on their revenue. The jump to 20% to 40%, which went into effect on July 1, 2024, resulted in the state claiming $276 million in tax funding from just FanDuel and DraftKings.
Retroactively applying a $.25-50 per-bet tax would’ve generated an additional $159 million from its two leading operators.
FanDuel CEO Peter Jackson shared his frustration with Illinois after the surcharge was announced.
“It is important to recognize that there is an optimal level for gaming tax rates that enables operators to provide the best experience for customers, maximize market growth, and maximize revenue for states over time. We are disappointed that the Illinois transaction fee will disproportionately impact lower wagering.”
The immediate result is the waning viability of a legal sports betting marketplace. It’s estimated that no more than 5% of sports bettors break even or achieve profitability, and their margin of error just shrunk.
Competing sportsbooks also have a decision to make regarding their approach to the new tax system. The $.25 per-bet tax only rises to $.50 after 20 million wagers have been accepted, meaning that smaller sportsbooks could try to implement a $.25 surcharge or avoid the surcharge entirely.
The cost of prioritizing customer acquisition would be paying significantly more in year-end taxes.
States, sportsbooks to follow?
As sportsbooks attempt to maintain profitability, they could treat surcharges in Illinois as a test run for other markets with punishing tax standards.
New York, New Hampshire, and Rhode Island all enforce a 51% revenue tax on legal sportsbooks, well above the national average of 10% to 20%. Pennsylvania maintains a 36% tax rate, only slightly below the upper end of Illinois’ 40%.
Last August, DraftKings announced that it planned to introduce a small surcharge on winning wagers in states with multiple sportsbooks and a tax rate greater than 20%. It walked that back after a public outcry, but the thought was already planted in the minds of the company’s decision-makers.
FanDuel and DraftKings have promised that their surcharges would disappear if Illinois removes its per-bet tax. However, they could still create the same effect by worsening their odds even after the surcharge is removed.
That means that customers in high-tax states could be subject to worse betting odds in place of a surcharge.
Although this is all speculative, it is in the spirit of the latest developments in the industry.
Companies also already lowered their odds from where they once were. Prop betting lines are no longer uniformly set at the -110/-110 middle ground, and companies have shifted toward promoting parlay bets instead of straight wagers due to their higher hold percentage.