Daily Fantasy Sports Fees Deemed Taxable
An internal memo at the IRS indicates that daily fantasy sports companies must pay federal excise tax on their entry fees.
Daily fantasy sports are online games in which fans compete for cash prizes by building a team of professional athletes and earning points based on the actual statistical performances of those athletes. In order to compete, the fans must pay an entry fee. The memo says the IRS considers the entry fees to meet the definition of a wager under the tax code and are therefore taxable to the daily fantasy sports companies.
Sports wagers are subject to an excise tax between 0.25% and 2% on the amount wagered. As a result, the tax applies to the wagers themselves, as opposed to revenue. In addition, companies could face large late penalties for taxes they didn’t previously pay.
IRS memos are not legally binding in court, but an IRS memo does signal the IRS’s position in audits. The full IRS memo can be found here: https://www.irs.gov/pub/lanoa/am-2020-009.pdf