More States May Examine Possibility Of Regulating, Taxing DFS

What A Regulated Daily Fantasy Sports Industry Might Look Like

DFS Regulation
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Daily fantasy sports is the hottest form of online gaming — although the industry bases its legality on being a skill-based game, and as such is unregulated in the U.S. And while it’s possible that the status quo remains, it’s also possible that regulatory schemes could be coming down the pike.

The subject of regulation was discussed at a panel at this week’s Global Gaming Expo, with William Hill CEO Joe Asher and Star Fantasy Leagues COO Seth Young talking about the matter. More from ESPN:

The panel was about regulation, so when it turned to that topic, Young again called DFS a game of skill and didn’t want his industry regulated when he said they’re already doing a good job of doing that on their own.

“Why? Why is regulation such a bad thing?” Asher said. “The airlines are regulated. I’m glad they are because I don’t want them crashing into each other in the sky. A fire code exists so you don’t have too many people in a room. That’s a good thing. So when you speak about regulation, you act as though it’s the worst thing in the world? Regulation, in many respects, is actually OK, Seth. So, why are you guys so afraid of it?”

They at least agreed that with regulation comes taxation and Young said both would be OK as long as it wasn’t onerous and allowed companies to make a profit.

Rahul Sood, CEO of the eSports betting site Unikrn, also touched on the subject at the keynote of G2E:

It’s still not clear whether regulation is inevitable. But if it happens, what form might it take?

The lay of the land for DFS

Operators in the industry exclude five states due to laws on the books in those jurisdictions that make daily fantasy sports illegal. Two states — Maryland and Kansas — have passed laws that legalize fantasy sports, though neither specifically describes the daily format. There is debate about its legality in some other states.

The day may come when the legal situation surrounding DFS demands clarity. Consider the gears that are already in motion:

  • A committee in the U.S. House of Representatives may call a hearing on the topic.
  • Some states are already taking a closer look at DFS with proposed legislation.
  • The Michigan Gaming Control Board stated that daily fantasy sports are likely illegal under state law.

Following the online gaming model?

There is already a model for state regulated online gaming. Delaware, Nevada and New Jersey permit forms of gambling over the Internet:

  • Delaware spreads online poker and casino games through its state lottery.
  • New Jersey licenses its Atlantic City casinos for online poker and casino games.
  • Nevada permits casinos to spread online poker.

Regulations in these states offer safeguards against fraud, create tax revenue and require sites to verify players in multiple ways.

And operators are held to a high standard. For example, PokerStars underwent a review of more than a year to determine its suitability for an online gaming license in NJ.

Taxing DFS, and problem gambling services?

Under this type of model, daily fantasy sites would be required to pay additional taxes. The rate may mirror existing gaming taxes, which would be problematic for sites that operate at a loss at this time.

A 10 percent tax on revenue may be the most reasonable rate. This would only tax the admin fee on the contests, which typically run around 10 percent. (For example, if a contest features a $10 buy-in and has a rake of $1, a state would get $.10 of the $10 buy-in in this scenario.)

This tax rate would serve multiple purposes. It would replace the tax rate on the money that may otherwise be spent in casinos. It could also replace the sales tax that would have otherwise been generated if that money was spent within the state. A portion of the proceeds could go towards problem gambling services.

Daily fantasy sites do not typically offer any problem gambling services. This is due to the assertion that daily fantasy sports is a skill game and not gambling. (Some sites do, however, institute ways to limit how much users can play.)

There is some evidence that daily fantasy sports addiction exists. There have been anecdotal reports via the media, and Gamblers Anonymous is thinking about adding DFS to its publication.

Regulation of the industry would likely require sites to offer ways for gamblers to opt out of the industry entirely or for a period of time. This is standard in regulated online gaming. Many unlicensed gambling sites also offer this type of service.

Player verification and other standards for DFS sites

The extent to which daily fantasy sports sites use player verification services is unknown, although it’s apparent that for most sites, it does not rise to the level of what is done at regulated online gaming sites in the U.S. Of course, DraftKings has passed muster in the U.K., where it has been issued a gaming license.

There are “know your customer” protocols in place at DFS operators. But new customers are not typically required to enter a Social Security number. A simple click of a checkbox that confirms that player is 18 years of age or older often satisfies the sign-up requirement, and more verification is generally done when a withdrawal is requested. This would change under a regulated industry.

Players would be required to submit a Social Security number, or at least the last four digits, during the account creation process. A date of birth and full legal name would also be required. This would allow the site to determine whether a player is who they say they are, as well as verify the age of the participant.

There have been reports that safeguards on depositing and withdrawing at some daily fantasy sites are nowhere near as stringent as they are for online gaming. This would stop under regulation, with stronger KYC protocols.

Other standards that would be put in place under a regulated environment:

  • States would need to set a minimum age to play daily fantasy sports. This may be anywhere from 18 to 21 years of age.
  • Daily fantasy sites would be required to place funds aside in a segregated account. Player funds would not be permitted to be used for operating purposes. This ensures that a failed site can pay its players.

Of note: some of these safeguards are covered by the Fantasy Sports Trade Association and are required for membership, although specifics aren’t given on how the requirements need to be met. Nearly every operator on the market in the U.S. belongs to the FSTA.

Changes in marketing material

DraftKings and FanDuel spend millions of dollars each week on television advertising. A variety of commercials are used. Some advertisements have players stating how they were hooked to daily fantasy from the first game or the adrenaline rush it creates. These types of promotions could go away as they promote symptoms of problem gambling.

Some players have voiced anger towards the first deposit bonus offered at daily fantasy sites, and how they were initially presented. It has even brought legal action. Bonuses and other promotional offers may need to be approved by a regulatory agency to ensure all terms are properly disclosed to avoid any confusion.

Can states regulate daily fantasy sports?

There is some debate as to whether regulating daily fantasy sports is even possible at the state level. Sports legal expert Daniel Wallach wrote in March that the Professional and Amateur Sports Protection Act (PASPA) may prohibit most states from doing anything more than decriminalizing daily fantasy sports. Regulating the activity “may run afoul PASPA,” according to Wallach.

The four states exempted from PASPA are Delaware, Montana, Nevada and Oregon:

  • Montana already operates fantasy sports through its state lottery.
  • Nevada has the ability to legalize nearly any form of sports betting.
  • Delaware only writes NFL parlay cards. Citing its PASPA exemption, Delaware attempted to offer similar sports betting to Nevada through its lottery. Delaware was stopped by the sports leagues in a 2009 court battle. The court ruled that Delaware could only offer the same type of betting it did before PASPA was enacted.
  • Oregon’s sports betting was similar to Delaware’s, except that it also once spread NBA parlays. Oregon has made no attempt to reenter the sports betting market since its Sports Action lottery ceased after the 2006 NFL season.

A few states have at least considered regulation bills, so far: California, Texas and Illinois. They are not likely to be the last.

If and when the DFS industry will be regulated is still an open question. But if it is regulated, you can expect a lot of changes to how the industry has to operate.

John Mehaffey
- John is a writer for multiple gaming poker publications, including USPoker.com and PlayNJ.com. Read more from John by following @John_Mehaffey on Twitter.