DraftKings drops customer surcharge plan after competitors refuse to follow suit

Garance Limouzy August 14, 2024

DraftKings announced on 13 August that it would no longer proceed with its controversial plan to impose a surcharge on customer winnings in US states with high wagering taxes. The decision followed announcements from Flutter Entertainment, the parent company of FanDuel, Rush Street Interactive, Penn Entertainment, and other competitors, stating that they had no intention of implementing a similar charge.

The plan, originally announced on 2 August, 2024, by DraftKings CEO Jason Robins, aimed to offset high state tax rates by passing some of the burden onto customers. The surcharge would have been applied starting in January 2025 in jurisdictions with tax rates above 30%, such as New York, Pennsylvania, Illinois, and Vermont. Robins suggested that the surcharge would be “nominal” and necessary to maintain competitiveness in these markets.

Competitors’ reactions

However, the reaction from both the industry and customers was largely negative. Moreover, the surcharge announcement came shortly after the company reported a 26% revenue growth for Q2 2024.

The plan’s success depended heavily on whether other major operators followed suit. If DraftKings proceeded with the surcharge alone, it risked alienating customers who might migrate to competitors offering similar services without additional fees.

Early indications showed resistance, with competitors like Rush Street Interactive and Penn Entertainment publicly rejecting the idea of a similar surcharge. The tipping point came when Peter Jackson, CEO of Flutter Entertainment, announced that FanDuel would not implement a surcharge, opting instead to reduce promotional spending to manage the costs associated with high taxes.

“We always listen to our customers, and after hearing their feedback, we have decided not to move forward with the gaming tax surcharge,” DraftKings stated in its reversal announcement.

DraftKings’ role in high tax rates

In 2019, DraftKings agreed to a 51% tax rate in New Hampshire to secure a monopoly in the state. This short-sighted decision had a ripple effect that ultimately impacted operators nationwide. The high tax rate in New Hampshire became a reference point for other states, including New York, where lawmakers imposed similarly high tax rates, citing the New Hampshire and DraftKings precedent. Many commentators have pointed out the irony of the situation, as the company is now claiming to struggle with these rates.

Maintaining competitiveness

Peter Jackson, CEO of Flutter Entertainment, explained that FanDuel would pursue an alternative approach. Rather than surcharging customers, Flutter intends to cut promotional and marketing expenses. He declared: “We think that moderating the levels of generosity and reducing local marketing is the best customer option, and we have no plans to introduce a surcharge for winners.”

DraftKings CEO Jason Robins considered other strategies to manage the high taxes, but deemed them less “transparent.” For instance, they could have lessened the odds, explained Robins, a measure they decided against.