The fantasy sports industry celebrated a victory on Friday, when the first bill expressly legalizing and regulating fantasy sports was signed by the governor in Virginia.
The only problem? At the same time, it can be seen as a setback for much of the rest of the industry. That much became clear when the Fantasy Sports Trade Association sent an email to its membership on Monday night — shortly after Gov. Terry McAuliffe signed the bill into law.
That email indicated concern with an “onerous” licensing fee of $50,000 that will be difficult for many operators to afford. The FSTA indicated that it would be working to change the fees that have risen in fantasy legislation’s language around the U.S.
One company that had been hoping for regulations across the country — Star Fantasy Leagues — has already indicated that it will leave Virginia because of the fee. Legal Sports Report has reached out to some operators about their desire to be licensed in Virginia. Outside of DraftKings and FanDuel, it’s unknown how many companies might look to be licensed in Virginia.
So, Virginia might have a regulatory structure for fantasy sports, but it’s possible it will create an environment that two companies — or possibly a handful — will operate in. Otherwise, DFS will be off limits to operators who do not want to be licensed.
What the FSTA said
Here’s the full email sent from FSTA president Paul Charchian:
Today, the Governor of Virginia signed into law the “Fantasy Contests Act” which establishes a legal framework for fantasy sports operating in the state. Indiana’s legislature has also passed a bill which is expected to be signed by Governor Mike Pence.
Both cases represent an important step in the ongoing process of creating legal clarity for fantasy sports, a goal we all share.
However, both states have an onerous mandatory regulation fee that makes both states untenable for the majority of the FSTA’s members. We are deeply concerned that these states have made it impossible for so many of our member companies to do business. The FSTA will work toward improving those bills as quickly as possible.
At this time, the majority of the bills introduced in other states have fees that should allow our contest operators to remain viable in those states. The FSTA will remain vigilant to ensure that state lawmakers understand the ramifications of high registration fees.
Just a week ago, the FSTA was trumpeting the movement of the Virginia bill:
— FSGA (@FSGAtweets) February 24, 2016
The legislation changed since it was first written, but the bill, as introduced, already had the $50,000 fee. You can read the initial version here. It was not until after the bill was passed that the FSTA voiced any public concern regarding the fee and its impact on its members.
FSTA was waiting for Virginia bill to become law
Despite concerns raised by a handful of paid-entry season-long contest operators last week, the FSTA still did not openly oppose the bill in Virginia. Why? Because it would have been poor optics for the industry.
Last week, Charchian sent an email to some of the concerned operators who earlier wanted the FSTA to oppose the Virginia bill as written, or call on the governor to amend it. Here is some of what he wrote to them at the time:
I will say this: sabotaging our own bill will be A) unlikely to change anything in Virginia, and B) political suicide for us in every other state. It should be viewed as a “nuclear option” only.
Please remember, getting good legislation passed is best outcome for everyone in the industry. We all need legal clarity for fantasy sports…just ask anyone struggling for payment processing. And that remains our goal. We didn’t hit the mark in Virginia, and we recognize that.
It’s clear the powers that be in the industry wanted to put a tally mark on a the positive side of the ledger regarding DFS legislation, and be able to point to it as a success for other states.
The email sent Monday night appears to be an effort to appease FSTA members who are unhappy with the bill in Virginia as passed. In addition to season-long operators, that probably includes a number of DFS operators who will be unable to pay the $50,000 fee in Virginia. That also goes for states like Indiana, which has a similar fee structure.
How the DFS fee problem gets fixed
The question now is — can the genie be put back in the bottle? The legislation in Indiana — which now sits on the governor’s desk — started out as the model FSTA bill, which included a $5,000 fee. That has been upped to $50,000 initially, through the course of amending the legislation.
If the Indiana bill passes, it would be Virginia redux, for the fantasy sports industry: “Hooray” for passing regulation, “boo” for fees that are too high. It’s clear, at this point, that the $5,000 fee was a poor starting point for the discussion of regulation; states are not looking to provide even basic regulation as possibly a break-even or losing proposition.
Does the fantasy sports industry have the pull to change bills after they’ve already been introduced, or to stop states that want to impose higher fees? Do DraftKings and FanDuel care if other operators can afford to get into regulated markets? FanDuel CEO Nigel Eccles indicated at a meeting in Nevada on Monday that he does not want to see a duopoly in state after state.
In some states, DFS bills are being amended to have licensing fees be paid as an offset against a tax, that can be paid over a longer period of time; or tied to a company’s revenue or number of users. That did not take place in Virginia, however.
LSR’s Chris Grove suggested amendments that may have improved the Virginia bill from its final form:
That the registration fee be tied to the cost of investigation of the application, as larger companies will likely involve more complex and costly investigations.
That a portion of all costs that the DACS should naturally incur during the process of carefully overseeing the industry be covered by a small excise tax on entry fees an operator receives from within the state.
How interested the industry is in anything that is termed as a “tax” is a variable, however.
It’s certainly not too late for the industry to try to stop the momentum behind higher fees, and to float a fee structure that makes more sense for everyone. Right now, it’s unclear how many states will even pass DFS legislation this year, so there is still time to work on legislation beyond the 2016 legislative sessions.
But the FSTA model bill and its $5,000 fee per operator does not seem to be a likely endgame. Starting out with different language regarding licensing and taxation would likely be a smart tack for the industry to take.