While many football fans saw Sept. 7, 2017, as the long-awaited return of the NFL season, it appears many states may have seen the date as a self-imposed deadline to generate some extra revenue by delving into the muddy waters of taxing fantasy sports.
As background, many states, including New York, generally define a “fantasy sports contest” as a game in which individuals use “their knowledge and understanding of athletic events and persons engaged in those sports events to select and manage a simulated team roster whose performance directly corresponds with the actual performance of human competitors on sports teams and in sports events.”
In reality, many people’s experiences with fantasy sports are limited to participating in a league around the office or with friends, taking turns picking NFL players from different teams in an attempt to try and build a super-team (and, more importantly, to beat friends in head-to-head matchups throughout the football season).
What many individuals may not realize, however, is how vast the fantasy sports industry has grown.
In June 2017, the Fantasy Sports Trade Association (FSTA) valued the industry at slightly over $7 billion, and stated there were roughly 59.3 million fantasy sports players in the United States and Canada (the largest number in the history of the study).
While a sizable portion of these numbers are from the casual, off-the-books leagues discussed above, there is also the ever-growing world of daily fantasy sports contests run by companies such as DraftKings and FanDuel. These daily fantasy contests allow players to go online, create an account, pay an entry fee, draft players, set lineups, and compete against other individuals for shorter periods of time—typically one week—instead of traditional, season-long contests.
Even though the daily fantasy sports industry is a relatively new creation, its value is increasing at an exponential rate: the FSTA estimates the average fantasy sports player spent roughly $5 on daily fantasy sports contests in 2012, $257 in 2015, and $318 in 2016.
In an effort to capitalize on this previously unregulated industry, 16 states have enacted laws related to fantasy sports, per the Legal Sports Report, with four states (Delaware, Maine, New Hampshire, and New Jersey) all passing legislation since June 2017. Below is a short summary of the most recent tax and licensing requirements from each of these four states.
Delaware has been one of the more aggressive states in taxing fantasy sports, as the state enacted 2017 H.B. 249 on July 26, 2017, which requires individuals and entities running fantasy sports contests (i.e., “fantasy sports operators”) to register with the state and pay an annual $50,000 licensing fee. Operators must also pay a tax on any fantasy sports gross revenue generated within the state, with the tax rate being the greater of 15.5 percent or the highest rate adopted by another state.
Maine chose to tax bigger fantasy sports operators when it enacted 2017 S.P. 449 on Aug. 2, 2017. The bill requires fantasy sports operators to register with the state; pay a $2,500 annual licensing fee if the operator had gross fantasy revenues equal to or greater than $100,000 during the preceding 12 months; and pay a 10 percent tax on fantasy sports gross revenues if the operator had gross fantasy revenues equal to or greater than $100,000.
New Hampshire has taken a different route than the other states, choosing to regulate the fantasy sports industry without taxing it. The state passed 2017 H.B. 580 on July 20, 2017, which simply requires fantasy sports operators offering contests with an entry fee for a cash prize to the general public to register with the New Hampshire Lottery Commission.
Lastly, New Jersey enacted 2017 A. 3532 on Aug. 24, 2017, requiring fantasy sports operators to register with the state; pay an annual licensing fee in an amount sufficient to cover the Division of Consumer Affairs’ costs in issuing permits and overseeing fantasy sports activities; and pay a 10.5 percent tax on the fantasy sports operator's fantasy sports gross revenue for each quarter.
While these four states are the most recent to enact laws related to fantasy sports contests, expect many more to follow suit. In addition, given the vastly different strategies states have taken to tackle the fantasy sports industry, be sure to follow Bloomberg BNA’s products to stay abreast of any applicable news and updates.
Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Which state do you think is taking the best approach to regulating and taxing fantasy sports contests?
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