DraftKings‘ Q2 earnings also brought with them two potentially serious issues for one of the leaders in US sports betting.
A US Securities and Exchange Commission Form 10-Q filed on Friday showed that:
- DraftKings received a subpoena from the SEC on the heels of an activist investor’s report on DraftKings’ acquisition of SBTech.
- DraftKings is under an audit by the Internal Revenue Service related to the patment of excise taxes on daily fantasy sports.
Both come as disclosures for a publicly traded company, and how much of an impact, if any, either of these revelations could have on DraftKings’ business is unknown and speculative.
DraftKings and the SEC subpoena
The subpoena related to a report from Hindenberg Research about DraftKings acquiring SBTech, and allegations of its service of black markets, among other things. For the rather complicated backstory, you can read Legal Sports Report’s rundown.
A pair of class actions were filed in the US District Court for the Southern District of New York in early July in the wake of that report. Then the subpoena came. From the 10-Q:
On July 9, 2021, the Company received a subpoena from the SEC seeking documents concerning certain of the allegations raised in the Hindenburg Report. The Company intends to comply with the related requests and is cooperating with the SEC’s ongoing inquiry.
Here is DraftKings’ handicapping of the situation in the 10-Q:
Despite the potential for significant damages, the Company does not believe, based on currently available information, that the outcome of this proceeding will have a material adverse effect on DraftKings’ financial condition, although the outcome could be material to DraftKings’ operating results for any particular period, depending, in part, upon the operating results for such period.
DraftKings and the IRS audit
We also learned that DraftKings is facing an audit. Again from the 10-Q:
The Company is currently under Internal Revenue Service audit for prior tax years, with the primary unresolved issues relating to excise taxation of fantasy sports contests and informational reporting and withholding. The final resolution of that audit, and other audits or litigation, may differ from the amounts recorded in these consolidated financial statements and may materially affect the Company’s consolidated financial statements in the period or periods in which that determination is made.
This is almost certainly related to IRS guidance that came down in 2020 that daily fantasy sports operators are subject to the federal excise tax for sports betting. The excise tax is applied as .25% of all wagers, or in the case of DFS, contest entries received.
DraftKings, FanDuel and others have long held that DFS contests are games of skill and wholly unrelated to sports wagering.
If the excise tax were applied to DFS contests, DraftKings could in theory be on the hook for hundreds of millions of unpaid taxes. DraftKings and FanDuel have taken tens of billions of dollars in DFS contest entries over the past decade.
It’s not known if FanDuel or any other daily fantasy sports operators are facing similar audits.