Posts Tagged ‘daily.fantasy.sports’

A Tale of Three States

Wednesday, February 3rd, 2016

Hawaii, Indiana, and Mississippi are three states where daily fantasy sports (DFS) is being debated. The three states are representative of what is likely to occur in every state.

Last week, Hawaii Attorney General Doug Chin issued an advisory opinion that DFS was gambling under Hawaii law.

Gambling generally occurs under Hawaii law when a person stakes or risks something of value upon a game of chance or upon any future contingent event not under the person’s control…The technology may have changed, but the vice has not.

On Tuesday, Honolulu (Oahu County) Prosecutor Keith Kaneshiro sent letters to DFS companies FanDuel and DraftKings ordering them to cease and desist offering DFS to Honolulu residents:

Gambling is illegal in Hawaii, and on January 27, 2016, the state Attorney General issued a formal advisory opinion confirming what I have long believed: That daily fantasy sports contests are a form of gambling and violate Hawaii statutes.

It appears DraftKings will leave Hawaii.

Meanwhile, the Mississippi Attorney General also issued an opinion that DFS is illegal in the state. The opinion notes that DFS would be illegal both in a casino (there are casinos in Mississippi) and outside of a casino. Neither DraftKings nor FanDuel has left the Magnolia State.

Today, the Indiana State Senate sent legislation to the Indiana House that would explicitly legalize and regulate DFS. It is unclear whether or not the bill will eventually make it into law.


The wild cards that could both negatively or positively impact DFS are:

  • Will the current federal investigations of DFS in Florida lead to prosecutions?
  • Will New Jersey win the en banc appeal of New Jersey’s legalization of sports betting (the lower court and the Court of Appeals ruled that New Jersey was barred by the Professional and Amateur Sports Protection Act (PASPA))?  A loss by New Jersey could make DFS illegal nationally; one interpretation of PASPA is that it makes all sports betting, including indirect betting such as DFS, illegal (except for the states specifically exempted within the law).  A win by New Jersey might overturn PASPA.
  • Will the lawsuits and appeals filed by DFS companies in New York and Illinois succeed in anything but delaying DFS exits from these states?
  • Will the payment processors leave DFS making the industry financially unable to continue?
  • Will the IRS rule that DFS is or isn’t gambling?
  • Will Congress act on gambling in any manner?
  • Will an anti-gambling candidate become the next President of the United States?

A lot will happen over the next two to three months. Because it’s Tax Season, I won’t be following this as closely as I have been over the last couple of months. A great resource on DFS is the Legal Sports Report.

An observer might ask, what does this all mean? I believe that we will see a dichotomy within the states on how they treat DFS. I believe that about 20 states will explicitly ban DFS, another 20 states will legalize and regulate DFS, while a few states will ignore DFS and let it continue in its current unregulated state. But the wild cards noted above could drive the DFS industry under or make it wildly successful.

Texas Attorney General: DFS Illegal in Texas

Tuesday, January 19th, 2016

Texas’s Attorney General, Ken Paxton, issued an opinion today that says that daily fantasy sports (DFS) is illegal under Texas law. The crux of Mr. Paxton’s argument is,

Under section 47.02 of the Penal Code, a person commits an offense if he or she makes a bet on the partial or final result of a game or contest or on the performance of a participant in a game or contest. Because the outcome of games in daily fantasy sports leagues depends partially on chance, an individual’s payment of a fee to participate in such activities is a bet. Accordingly, a court would likely determine that participation in daily fantasy sports leagues is illegal gambling ‘under section 47.02 of the Penal Code.

Texas is one of several states where any element of chance is enough to make something gambling.

The reactions were predictable. DraftKings and FanDuel stated that Mr. Paxton got the law wrong. “The Attorney General’s prediction is predicated on a fundamental misunderstanding of DFS. We intend to continue to operate openly and transparently in Texas, so that the millions of Texans who are fantasy sports fans can continue to enjoy the contests they love.” FanDuel’s response was similar.

Unfortunately, I suspect that Attorney General Paxton got this right. Raffi Melkonian, an appellate lawyer in Houston who specializes in Fifth Circuit and Texas appellate practice, stated (via Twitter):

I trust his legal view far more than what has been stated by DraftKings and FanDuel.

Of course, none of this should have been a surprise to anyone. As I said almost two years ago,

Unfortunately, many states look at just an element of chance to determine if something is gambling. And there’s no doubt that daily fantasy sports have such an element.

Another state where DFS is of dubious legality is Florida. An Assistant Attorney General in Vermont, John Treadwell, stated that “Daily fantasy sports violate Vermont’s gambling laws.” Adding in Illinois and New York and the picture of DFS in the US is mostly cloudy with a chance of rain.

Update on the Future of Daily Fantasy Sports

Thursday, November 19th, 2015

So far, I’ve been accurate on my predictions. Back in February 2014 I wrote,

Unfortunately, many states look at just an element of chance to determine if something is gambling. And there’s no doubt that daily fantasy sports have such an element. The problem is that these sites are starting to bring in large dollars. That attracts attention, and some state attorney general is going to wonder the same thing that I am. He or she will conclude that the Duck Test applies and that these are gambling sites in violation of his or her state’s laws. [emphasis in original]

Last month I wrote,

I expect DFS to follow two different paths in the majority of states. Some states will simply declare it as gambling, making it effectively illegal in those states. Other states will tacitly declare it as gambling but allow regulation of the activity. There will be a minority of states that allow DFS to continue as an unregulated activity. Where one month ago you could play DFS in 45 of the 50 states, that number is down to 42 to 44 states (depending on the DFS site). I expect that number to continue to fall.

Events have moved faster than I thought they would. The New York Attorney General declared DFS to be gambling, and has asked a court for an injunction. One of the two major sites, FanDuel, has stopped offering contests for New Yorkers. The hearing will be next Wednesday. The Massachusetts Attorney General has proposed regulations.

As for New York, I think FanDuel is operating far wiser than DraftKings. DraftKings is still allowing New York residents to play on the site. Given that there is a non-zero chance that the company will find it outself ordered to stop, and that operating in violation of state law would be a predicate offense for possible federal charges, I think DraftKings is making the wrong decision. (I will point out again that I am not an attorney, and nothing I’m writing should be construed as legal advice.) If you ask me the most likely result of the New York Attorney General’s action, it’s that the sites will find themselves enjoined from serving New York customers. This isn’t a certainty, but if you’re going to place a bet on the results that’s the favored side.

I still think we will end up with a dichotomy within the states. States that are notoriously anti-gambling or have constitutional provisions against gambling (including much of the South: Texas, Florida, and Tennessee; Utah, and Hawaii) will ban DFS, either by Attorney General rulings or by court actions. Other states will regulate DFS. Some states will order the DFS companies to shut down until regulations are in place. A very small number of states will just ignore the issue, and leave DFS in an unregulated state.

DFS proponents need to remember that a regulator’s first instinct when confronted with something new is to ban it. Add that to the fact that DFS is legal by way of a loophole (in the view of regulators) and you get a strong inclination for them to end DFS.

That’s the most likely outcome. However, there is still the chance that DFS could end completely. There are federal investigations of the sites which could, if indictments result, end the industry.

This is a fascinating story–and the greed of the sites has sped up the story line. It was inevitable that DFS would attract scrutiny. The pace of that scrutiny sped up because the sites went overboard in their advertising and had very poor visuals. We’ll all be able to see the future of this product unfold in the next few weeks.

DFS Gets the Boot in New York

Tuesday, November 10th, 2015

New York State’s Attorney General, Eric Schneiderman, sent a letter to DraftKings and Fan Duel ordering them to cease offering their Daily Fantasy Sports (DFS) wagers games to New Yorkers. According to both ABC and ESPN, Attorney General Schneiderman sent a letter to both companies calling contest entries “wagers.”

“Our review concludes that DraftKings’/FanDuel’s operations constitute illegal gambling under New York law,” Schneiderman wrote in the letter, obtained by ESPN’s David Purdum and Darren Rovell, and ABC News.

The two sites are apparently going to fight this action.

“Fantasy sports is a game of skill and legal under New York State law,” FanDuel said in a statement. “This is a politician telling hundreds of thousands of New Yorkers they are not allowed to play a game they love and share with friends, family, coworkers and players across the country. The game has been played — legally — in New York for years and years, but after the Attorney General realized he could now get himself some press coverage, he decided a game that has been around for a long, long time is suddenly now not legal.”

DraftKings said they will look at legal options. (UPDATE: After I first posted this, there is a report that DraftKings will fight this.)

Let me state something that should be obvious to anyone who partakes in DFS: It’s gambling. Sure, it’s skillful gambling, but as I wrote in February 2014 it meets the criteria of what gambling is. And it is quite likely that FanDuel will be proven wrong under New York law.

The problem is that New York and many other states look at whether there’s an element of chance. Sure, skill predominates but there’s no way to honestly state there’s not an element of chance in DFS.

New York is definitely not going to be the last state where DFS gets the boot. I suspect Florida (where an Attorney General opinion makes legal DFS dubious at best) and Texas (where the politicians think gambling is a huge sin) are additional states in deep trouble.

What should DFS players do if they want to continue enjoying DFS? You should call your state representatives now. State legislators do listen to the public. And state legislators can absolutely influence what other elected politicians (e.g. state Attorney Generals) do.

Additionally, DFS players should consider keeping only the amount of money they need on the sites. The New York Attorney General statement used the words “criminal activity” to describe DFS. While I am hopeful that the DFS sites use segregated trust accounts, neither DraftKings nor FanDuel has confirmed that they do. It’s better safe than sorry, and that’s a good course of action today. (UPDATE: With the news that DraftKings will (apparently) fight this action, I now strongly advise that individuals keep just the minimum amount necessary on each site. I suspect that criminal charges are in the near future, and seizure of bank accounts is now a real possibility. The New York Attorney General will look at DraftKings’ continuing to operate in New York State as a slap in the face.)

DFS is in deep trouble, and the most likely outcome is a regime very similar to the current state of online poker in the United States–four to six states where DFS is legal. This doesn’t have to be how it winds up, but the arrogance of how the companies have been perceived to act (and are continuing to act) along with how gambling is traditionally regulated in the US makes that the most probable result.

UPDATE #2: Here is a link to a New York Times article that includes the letters to FanDuel and DraftKings. (Link to FanDuel letter; link to DraftKings letter. Note that the letters have basically identical content.) These letters warn that if the two sites do not cease operations, they will be subject to prosecution under various New York statutes. If these sites continue to operate in the face of the New York Attorney General notice, things are likely to get very ugly very fast.

The Wagering Excise Tax and DFS

Tuesday, October 20th, 2015

I’m focusing on the tax aspects of daily fantasy sports (DFS) this week. It’s beneficial for DFS participants for the activity to be considered gambling. For political reasons (“gambling is a sin”) and regulatory reasons (gambling is regulated, skill contests are not), the DFS sites want to be considered skill games sites. There’s another reason that DFS sites don’t want to be considered gambling: the wagering excise tax.

The wagering excise tax is either a 0.25% or 2% tax on bets made on certain activities. It falls on wagers on sports events or contests, wagers placed in a wagering pool that involves a sports event or contest (if the pool is conducted for profit), and lotteries conducted for a profit. The tax is on the gross amount of wagers received, not the amount someone might win. Would this tax apply to DFS if DFS is considered gambling?

We can look at the Tax Code and the regulations promulgated under the Code to determine this. A wagering pool conducted for profit includes any method or scheme for the distribution of prizes to one or more winning bettors based on the outcome of a sports event, a contest, or a combination or series of such events or contests, if the wagering pool is managed and conducted for the purpose of making a profit. (Regulations 44.4421-1(c)(1) and 44.4421-1(c)(2)) DFS clearly meets the definition of a wagering pool.

So what’s a contest? Regulation 44.4421-1(c)(3) states that includes any type of competition involving speed, skill, endurance, popularity, politics, strength, appearance, etc., such as a general or primary election, the outcome of a nomination convention, a dance marathon, a log rolling, wood-chopping, weight-lifting, corn-husking, beauty contest, etc. Clearly, a weekend of NFL games (or anything else that DFS contests/bets are based on) would qualify.

You may have noticed there are two different tax rates (0.25% and 2%). The 0.25% tax rate applies on any wager authorized under the law of the state in which accepted (IRC § 4401(a)(1)), otherwise the tax rate is 2% (IRC § 4401(a)(2)).

It’s pretty clear to objective observers that DFS is a form of wagering (aka gambling). If that conclusion is accurate, the DFS sites will owe the wagering excise tax.

The Future of DFS

Sunday, October 18th, 2015

If you watch any sports television, you’ve almost certainly seen commercials for the two leading daily fantasy sports (DFS) sites, DraftKings and FanDuel. Last week the Nevada Gaming Control Board announced that DFS is gambling under Nevada law. The Nevada Attorney General’s office released a 17-page review of DFS that thoroughly explained the reasoning. What does this mean for the future of DFS in both Nevada and the US?

First, none of this should have been a surprise. In February 2014 I wrote,

Unfortunately, many states look at just an element of chance to determine if something is gambling. And there’s no doubt that daily fantasy sports have such an element. The problem is that these sites are starting to bring in large dollars. That attracts attention, and some state attorney general is going to wonder the same thing that I am. He or she will conclude that the Duck Test applies and that these are gambling sites in violation of his or her state’s laws. [emphasis in original]

Nevada is not going to be the only state that concludes that DFS is gambling. The head of the Michigan Gaming Control Board has publicly stated that DFS is gambling. Other states will conclude that under their laws that DFS is gambling and either needs a license or should be banned from the state. Nevada may have been the first state to draw this conclusion but it will not be the last.

The problem is how regulators look at something new. Generally, the view of a regulator is that if it hasn’t been made expressly legal under the law that it should be (and is, in their view) illegal. The mindset of most regulators will start with a “DFS is illegal” view. In my first job I learned that perception of reality is far more important than the reality itself. This does not bode well for DFS.

Meanwhile, there’s a federal grand jury investigation of DFS that’s ongoing in Tampa, Florida. This has caused some operators to pull out of Florida. While the DFS sites have proclaimed that the UIGEA (the Unlawful Internet Gambling Enforcement Act of 2006) made DFS legal, the analysis of the Nevada Attorney General puts a stake in that argument. DFS is exempted from the UIGEA but not from other federal and state laws related to gambling.

There’s also a huge risk for DFS from the IRS. What if the IRS concludes that DFS is gambling and that instead of issuing Form 1099-MISC’s to winners they should issue Form W-2Gs? This would be a national conclusion, and give a prima facie case that DFS is gambling. And this could easily happen.

There’s also reality: the duck test. If it looks like a duck, walks like a duck and quacks like a duck, then it just might be a duck. Many DFS participants view it as gambling. Apparently the executives at DraftKings share that view (see the Nevada Attorney General’s report). In the United States gambling is regulated at the state level (along with the federal level). Unless authorized by a state, most gambling in that state is illegal. DFS has not been authorized by any state. (The Massachusetts Attorney General recently stated that DFS was legal in that state. However, it has not been expressly authorized.)

So where does that leave DFS? Someone I know said, “In like 25 years when everyone with any power will have grown up with the Internet, will things be different?” That’s easy to answer: Yes. But we have to live in today’s world, not what it will be in 2040. I expect DFS to follow two different paths in the majority of states. Some states will simply declare it as gambling, making it effectively illegal in those states. Other states will tacitly declare it as gambling but allow regulation of the activity. There will be a minority of states that allow DFS to continue as an unregulated activity. Where one month ago you could play DFS in 45 of the 50 states, that number is down to 42 to 44 states (depending on the DFS site). I expect that number to continue to fall.

Could federal regulation happen? Certainly, but not out of this Congress in the next year. This isn’t a major issue for either party, and 2016 is an election year. Additionally, it’s possible that the next Speaker of the House will be Jason Chaffetz (R-Utah); he’s definitely not pro-gambling. There’s a better chance of the IRS budget being increased (and that has just about a 0% chance of happening) than pro-gambling (or pro-DFS) legislation passing Congress.

Overall, I’m painting a bleak future for DFS in the United States. Maybe I’ll be proven wrong, but the signs are there. Perhaps it was P.T. Barnum who said, “All publicity is good publicity.” (Like the duck test quote, this, too, has been attributed to many individuals.) The advertising and publicity have helped DFS short-term profits. The current publicity has not, though, helped DFS’s future.

Taxes and Daily Fantasy Sports: The Duck Test

Sunday, February 23rd, 2014

If it looks like a duck, walks like a duck and quacks like a duck, then it just may be a duck.

So said someone (this quote has been attributed to Walter Reuther among others), and it’s one of those cliches that have an impact in taxes. When something has the elements that make it look like something, generally the Tax Code will make it into that something.

Why am I bringing this up? Because of the popularity of daily fantasy sports sites. These sites allow contests based on the outcome of a day’s games in a sports league. For example, you can take various players in today’s NBA games and play against others who select their own players. Should your ‘team’ do better than your opponents’ teams, you win the contest.

The sites consider themselves to be skill games and contests and not gambling. They issue Form 1099-MISC’s to the winners, and put the income on line 3 (“Other Income”). They do not issue Form W-2G’s (“Gambling Winnings”) to their winners. For individuals who partake in these contests, how should they treat the income?

First, it’s income and must be included on the tax return. All income is taxable unless Congress exempts it; Congress hasn’t exempted daily fantasy sports income. So it must be included on your tax return no matter if you receive a Form 1099 or not.

Let’s say you play three contests, win $2,000 and never lose. You receive a 1099 noting $2,000 of “Other Income.” In this simple case, just include the income as “Other Income” on your tax return (line 21, Form 1040). No mater what the flavor of Other Income is you’ve included it.

Let’s say you make a living playing daily fantasy sports sites. You win $250,000 from various sites, and have $50,000 of losses. With that kind of income you are probably a professional fantasy sports player and should include the income and associated business expenses on a Schedule C. It sure looks like you’re in the profession of daily fantasy sports player–the first instance of the Duck Test.

Now let’s consider Jane. She plays daily fantasy sports occasionally. She receives a 1099-MISC noting her $30,000 of wins. She also has $20,000 of daily fantasy sports losses. For the sake of discussion, we’ll assume she has records proving those losses. Can she take those losses?

If you were to ask the daily fantasy sports sites, they would say no. They operate under the sweepstakes/skill game laws; there is no such thing as losses with skill games.

However, we’re concerned with Jane’s taxes, not a daily fantasy sports site’s taxes. A fundamental principal of US taxation is to look at the activity itself to determine what it is no matter what it calls itself. Ah yes, another instance of the Duck Test.

The tax laws on wagering (aka gambling) are different. You are allowed to take wagering (gambling) losses up to the amount of your winnings (§165(d) of the Tax Code). So we need to determine if daily fantasy sports are a wagering activity.

This is more difficult than you might think; wagering isn’t defined in the Tax Code. However, there are plenty of IRS and Tax Court rulings on this, and all say basically the same thing. For something to be gambling, three elements must be present:
1. A prize;
2. Chance; and
3. Consideration.

Clearly daily fantasy sports have elements 1 and 3. There’s a prize and there’s a cost to enter each event. Is there chance?

Gambling does not have to be 100% chance to be considered gambling. For example, poker is considered gambling under US tax law yet there’s plenty of skill involved with it. (Indeed, I’d argue that skill predominates over luck; however, there’s absolutely an element of luck in poker.) Let’s look at what’s involved with a daily fantasy sports contest. You generally select a team to play in a day’s events. Let’s say you selected Carlos Boozer and Shane Battier for today’s NBA daily fantasy sports contest. Those players scored 8 and 3 points, respectively. On the other hand, had you selected Taj Gibson and Chris Bosh you would have done far better; they scored 20 and 28 points. Yet before a single game who know what each player will score? If you had selected NBA star Lebron James you would normally do quite well; however, he didn’t play today.

There sure looks to me to be at least some elements of chance involved with who you select. While Carlos Boozer averages 14.8 points a game, he had only 8 today. On the other hand, Taj Gibson had 20 while he averages 12.9. Is that skill (that is, against the opponent they faced those players would play differently than their average) or is it luck? It’s probably some of each.

So daily fantasy sports have at least some element of luck. Then from a tax standpoint they sure look to be a form of wagering activity. There’s a prize, chance, and consideration. The Duck Test again: If it looks like a duck, walks like a duck and quacks like a duck, it might just be a duck.

So can players on daily fantasy sports sites treat their play like gambling? That’s something worth discussing with your tax professional if you partake in daily fantasy sports.


There’s a corollary to this: Do daily fantasy sports sites violate various gambling laws? (I am not an attorney and the following is just my speculation and not legal advice.) While the Unlawful Internet Gambling Enforcement Act (UIGEA) provides a carve-out for fantasy sports, there are numerous other gambling laws. Additionally, most states have laws on gambling. The daily fantasy sports sites all state they’re legal but I suspect that they probably violate various laws, mostly on the state level.

I looked at two sites. The first stated that the US government and most states consider fantasy sports to be a game of skill (this site doesn’t allow residents of AZ, IA, LA, MT, and WA to play). The second site used basically the same language and prohibits players from the same five states.

Unfortunately, many states look at just an element of chance to determine if something is gambling. And there’s no doubt that daily fantasy sports have such an element. The problem is that these sites are starting to bring in large dollars. That attracts attention, and some state attorney general is going to wonder the same thing that I am. He or she will conclude that the Duck Test applies and that these are gambling sites in violation of his or her state’s laws.