The IRS is moving forward with its plan to treat fantasy sports operators like FanDuel and DraftKings as gambling companies

In a recent memo, the agency reasserted claims it made this summer: Daily fantasy sports are a form of wagering for tax purposes, and are therefore prone to a federal excise levy on wagers.

Much like sports betting, which is legal in nearly half the country, each state takes its own position on daily fantasy sports, although many treat the former as a game of chance and the latter as a game of skill—which matters for legality. Until the IRS released a similar memo in July, which DraftKings CEO Jason Robins criticized as “deeply flawed,” there had been no clear cut federal position on whether fantasy play constitutes gambling or not.

“The argument that DFS transactions are excluded from wagering as a game of skill are unpersuasive,” the IRS said.

The recent memo has shocked the DFS community, according to Baird Fogel, a partner at Morgan Lewis & Bockius LLP in San Francisco, who heads the law firm’s sports betting group.

“It is doubling down and that’s what makes this so much more problematic for the industry because it’s at the federal level,” Fogel said.

The IRS could soon start charging a 0.25% wager tax on each fee paid to play. Those costs would almost certainly be passed down to players, Fogel said.

While neither memo is binding in court, “it will be very difficult to defeat this determination if the IRS does not reconsider its position,” Fogel said.

Historically, most legal determinations deemed DFS a game of skill, relying on a chance versus skill test. Twenty-two states have affirmed that fantasy sports contests are games of skill and thus not gambling, according to the Fantasy Sports & Gaming Association.

“DraftKings’ position, which has been confirmed by state legislatures and courts throughout the country, continues to be that DFS is not gambling and contest entry fees are not wagers,” said R. Stanton Dodge, DraftKings’ chief legal officer.

The agency’s analysis is improper with a predominance test that weighs whether skill or chance is more dominating, said Daniel Wallach of Wallach Legal LLC, which specializes in sports wagering and gaming law.

Every state attorney general opinion has concluded DFS is a game of skill, Wallach said. The IRS “conclusion goes against the prevailing view” backed by court rulings as well, he said.

(Updated with comments from gaming attorney starting in 11th paragraph.)
 
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