Those Fantasy Sports Sites Could Mean Real Revenue

March 2, 2016The Wall Street Journal Opinion

If Congress wants an easy way to collect billions in new revenue while helping a burgeoning industry grow, then taxing and regulating daily fantasy sports games looks like a sure thing. These games, led by DraftKings and FanDuel, generated more than $3.1 billion in entry fees in 2015. DraftKings estimates that the market could reach $20 billion in 2017. But the industry is stuck in a legal limbo that only the federal government can resolve.

In 2006 Congress passed legislation to prohibit Internet gambling. The law exempts sports-fantasy gaming, under the rationale that it involves skill rather than chance. But under the law, each state is allowed to regulate—or outlaw—these fantasy games within its borders.

Players of fantasy sports have for years drafted teams and bet money on the outcome of the season. It requires talent and intelligence to weigh the long-term prospects of all the NFL’s quarterbacks and other scoring positions, so few states objected. But DraftKings and FanDuel allow players to wager on the outcome of a single day’s competition—which critics say is little different than a roll of the dice. Six states currently ban these games, and nearly 30 more are considering legislation to regulate or outlaw daily fantasy sports games. New York Attorney General Eric Schneiderman has sued the two companies, claiming they offer illegal gambling.

This regulatory uncertainty undermines the industry. Citigroup has blocked credit card transactions for DraftKings and FanDuel in New York, and the payment processor Vantiv is refusing to do business with them.

It is hard to take politicians’ moral outrage seriously. How can New York justify banning daily fantasy sports while sanctioning gambling at casinos and state-owned racetracks? How can Albany make technical arguments about skill versus chance while also promoting the lottery? That government program requires zero skill, is exempt from truth-in-advertising laws and effectively functions as a regressive tax. The recent $1.5 billion Powerball jackpot generated nationwide buzz without the kind of backlash that fantasy sports games have encountered.

So why are politicians going after DraftKings and FanDuel? Perhaps they have their eyes on higher office, and being tough on gambling is a way to get headlines. Maybe they’re trying to protect the state’s gambling tax revenue, or appease casinos that view fantasy sports as a competitive threat. To paraphrase Mark Cuban, the owner of the Dallas Mavericks and a supporter of fantasy sports: Hopefully this hypocrisy will figure itself out.

Congress needs to intervene. The legal and policy battle over daily fantasy sports is a national issue, not one for the states to decide. And the potential tax revenue is nothing to balk at. Regulating and taxing the industry could generate billions of dollars annually, if fantasy sports are taxed at similar rates to state-run casinos.

The rationale proposed for regulating illegal sports betting also applies to daily fantasy sports. “Bring it into the light, regulate it, and—by the way—tax it,” NBA commissioner Adam Silver has said. “I’ve been watching the presidential debates. We need money for our infrastructure. It’s a good place to get it, from sports betting.”

As it stands, the Fantasy Sports Trade Association, the industry’s largest advocacy group, is playing Whac-A-Mole across 50 states to clarify the business’s legality. It should instead beseech Washington to step in. That is the only way to maximize the opportunity for daily fantasy sports to operate. In exchange for regulatory certainty, DraftKings and FanDuel should be more than happy to give the IRS a cut.