How state taxes are shaping the U.S. sports betting market

Garance Limouzy September 30, 2024

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How state taxes are shaping the U.S. sports betting market

In 2018, the Supreme Court’s decision in Murphy vs. NCAA granted states the authority to legalise sports betting. Currently, over 30 states allow sports betting, though the regulations and tax structures vary widely across the nation, shaping the industry.

State-level taxation

While most states impose taxes on sports betting revenues, the rates differ substantially. For example, states like New Hampshire, New York, and Rhode Island levy the highest tax rates at 51 percent. In contrast, Nevada and Iowa boast the lowest rates, taxing revenues at just 6.75 percent.

Recent data from the U.S. Census Bureau’s Quarterly Survey of State and Local Tax Revenue (QTAX) revealed that national tax and gross receipts from sports betting for the third quarter of 2023 totalled nearly $506 million, and $571.5 million for the second quarter of 2023, a 20.5 percent increase from the previous year.

New York leading in tax revenue

New York, with its tax rate of 51 percent, the highest in the country, stands out as the top performer in terms of sports betting tax revenue. In the third quarter of 2023, the state generated $188.5 million in tax receipts from sports betting, accounting for nearly 37 percent of the national total. This amount is almost five times higher than that of Indiana, which ranked second with $38.6 million.

Ohio and Illinois followed with $32.9 million and $32.4 million, respectively, while Pennsylvania rounded out the top five with $28.8 million.

Balancing tax rates with profitability

High tax rates have prompted debate among industry operators. DraftKings, a major player in the U.S. sports betting scene, struck a deal in 2019 to pay a 51 percent tax rate in New Hampshire, securing a monopoly in the state. This rate has since been mirrored in other states, including New York. However, it has also resulted in important financial pressure on operators.

In August 2024, DraftKings announced plans to introduce a surcharge on customer winnings in states with tax rates above 30 percent, such as New York and Pennsylvania, to mitigate the financial strain.

DraftKings drops controversial surcharge

Following backlash, the company reversed this decision, stating it would not move forward with the surcharge. Other industry leaders, including FanDuel and Penn Entertainment, quickly distanced themselves from similar plans, leaving the issue of how to balance high tax rates with profitability unresolved.