Gambling or Skill: Taxation Issues Surrounding the Daily Fantasy Sports Industry

S. Keith Lowe, Jacksonville State University
Benjamin B. Boozer Jr., Jacksonville State University

The E-Journal of Business and Economic Issues, 2021, Vol. 16 (2), 1-21.


With a waxing interest in sporting events, participants are increasingly supplementing passive viewing with a more active role. Fantasy sports leagues have burgeoned as a result, with corresponding increases in live game attendance and media consumption across platforms. Fantasy bettors seek financial gain through the ability of athletes and the likelihood of their team performing well in a sporting event. A major legislative concern within this industry is whether these activities are considered gambling, with its related stigma, or otherwise just a type of sporting activity. More importantly, gambling has a long history as a major source of tax revenue within its lineage. This paper examines these current public policy and taxation issues that will shape the future landscape of fantasy sports. Various legislation has defined type and scope of betting that have been gradually modified to permit a larger role for individual states to develop policies. A majority of states have adopted tests that apply the degree of chance versus skill in a contest. As of 2020, sports betting has been declared legal and is presently providing tax revenue in 23 states plus Washington, D.C. Higher levels of chance are generally deemed an illegal activity, using the 10th Amendment to the U.S. Constitution as a basis. Recent IRS opinions (July 2020) find that daily fantasy sports operators are liable for two federal excise taxes and must identify themselves by registering as a business accepting wagers. Lower gaming taxes are associated with a proliferation of legal sports betting. For this paper each of the following three properties must be present to be considered gambling: consideration, prize, and chance. States have authority in defining gambling activities, with Congress regulating commerce among states. Substantial opportunity exists in taxing online betting as a source of revenue or placing excise taxes on gambling as a method to control consumer 3 behavior. To the extent that federal and state governments continue debating legalized betting activities and the related taxes generated, consumer protection must focus on continued legitimacy of the environment and address addiction risk as a basis for further growth.