Extras On Excise: Judge Rules New York State Can’t Regulate Fantasy Sports Under State Constitution

On Oct. 26, 2018, Acting Albany County Supreme Court Justice Gerald Connolly ruled that the state’s interactive fantasy sports (IFS) law violates the New York State Constitution. According to the court’s decision, the New York Legislature did not have the authority to permit and regulate fantasy sports without a constitutional amendment. The future of New York fantasy sports is now unclear.

The case is White v. Cuomo, initiated in 2016 by a group of New York citizens who are relatives of persons suffering from gambling disorders or are gambling addicts themselves. New York Gov. Andrew Cuomo (D) and the New York State Gaming Commission are the defendants in the case.

The judge’s decision calls into question the regulatory regime for fantasy sports that the New York legislature created in 2016. Since Aug. 3, 2016, New York has required providers of fantasy sports contests to register with the state and pay a fantasy sports gross revenue tax. The tax is 15 percent of the fantasy sports gross revenue, as well as an additional half percent tax of up to $50,000 per year. And in 2016 alone, the state raised $2.3 million in tax from registered fantasy sports contests.

New York Judge Says Fantasy Sports Are ‘Games of Chance’ and Therefore ‘Gambling’ Under the State Constitution

Article I, § 9 of the New York Constitution restricts gambling to lotteries operated by the state, pari-mutuel betting on horse races, and casino gambling at one of the seven casinos authorized to exist in the state.

The plaintiffs in the case argued that the state constitution prohibits gambling and the legislature didn’t have the power to use a statute to change the meaning of “gambling” to exclude fantasy sports.

As part of the New York bill which legalized IFS in 2016, the Legislature made findings that fantasy sports are not “games of chance” because competitors win based on their skill and knowledge rather than random chance.

The judge, however, found that fantasy sports involves “to a material degree, an element of chance, as the participants win or lose based on the actual statistical performance of groups of selected athletes in future events not under the contestants [players] control or influence.” Although the judge acknowledged that fantasy sports involves significant skill, “[n]o research, investigation, skill or judgment of the IFS participant can effect such future athletic performances.” The judge pointed to poker and horse racing as examples of gambling that are games of chance in spite of involving significant skill.

The judge held that the legislature’s findings were at odds with the ordinary meaning of “gambling” and the New York Constitution prohibits the state from authorizing fantasy sports.

An interesting wrinkle in the court’s decision is that the judge upheld the authority of the Legislature to exclude fantasy sports from New York anti-gambling laws. The judge wrote, “the legislature has the full authority to define and limit such offenses in the context of an anti-gambling statute as in its discretion it deems appropriate.” 

What’s Next for Fantasy Sports in New York?

This isn’t the first time that fantasy sports providers have had to operate in a legal grey area in New York. In 2015, the state attorney general issued fantasy sports providers with cease-and-desist orders. The two largest fantasy sports providers, DraftKings and FanDuel, fought the issue and lost in state court. After Friday’s ruling, is fantasy sports outlawed in New York once again?

Perhaps that depends on who you ask.

 “The practical effect is that the state should shut this down immediately,” Cornelius Murray, the lawyer for the plaintiffs in the case, told The Buffalo News.

DraftKings outside counsel David Boies told New York Daily News, “We are pleased that the court upheld the New York legislature’s decision to decriminalize daily fantasy sports contests and that DraftKings can continue to offer their services to players. We are continuing to study the court’s decision invalidating the regulatory structure and are committed to working with the legislature.”

Continue the discussion on Bloomberg Tax’s State Tax Group on LinkedIn. How will the fantasy sports industry be impacted by this ruling? What are the chances that New York will be able to get a constitutional amendment authorizing fantasy sports?

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