DraftKings, a leading sports betting company, has announced its intention to implement a tax surcharge on winning wagers in select "high-tax" states, with the initiative set to begin in 2025. This move aims to address the increasing tax burdens faced by the company in states such as New York, Illinois, Pennsylvania, and Vermont.

In a recent shareholder letter, DraftKings highlighted that the tax surcharge would be relatively nominal for customers. For instance, in Illinois, the surcharge is expected to amount to a low- to mid-single-digit percentage of the net winnings that customers would previously have received. The company believes that this surcharge could provide additional upside potential for its adjusted EBITDA in 2025 and beyond.

Importantly, the surcharge will be applicable to every winning wager, irrespective of whether the bettor eventually ends up with a net loss from other bets. Additionally, bettors will also be liable to pay their own fair share of taxes on all their winnings. This move effectively places an additional fee on consumers, a measure that has not been implemented by any other major sportsbook globally.

The decision to implement this tax surcharge comes on the heels of DraftKings' disappointing Q2 earnings report, which fell short of Wall Street expectations. As a result, the company's stock (DKNG) has experienced a year-to-date decline of 10.5%.

This groundbreaking move by DraftKings could have far-reaching implications for bettors in the targeted states if other sportsbooks follow suit. The company has seen a gradual decline in its market share, especially in comparison to rival sportsbook FanDuel, particularly in new states where they have expanded their operations.

Previously, New York and Pennsylvania were the only states that imposed tax rates above 20% on operators, with New York accounting for 51% and Pennsylvania for 36% of total gross revenue in tax collection. However, Illinois has recently implemented new provisions to raise its tax rate to 40%, while other states are also considering increasing their respective tax rates.

DraftKings' shareholder letter explicitly stated that if any other state moves above the 20% threshold in terms of tax rates, the company will implement the tax surcharge in those states as well.

In addition to the tax surcharge announcement, DraftKings recently faced another setback as it shut down its Reignmakers derivative. This decision was made after a federal judge allowed a class action lawsuit to proceed, accusing the company of engaging in the sale of illegal securities related to NFTs (non-fungible tokens).

As DraftKings endeavors to overcome regulatory challenges and compete in a rapidly evolving sports betting landscape, the implementation of the tax surcharge strategy signifies its efforts to mitigate the impact of high tax rates in targeted states while seeking avenues for future growth.