How much the Illinois sports betting tax could cost operators

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How much the Illinois sports betting tax could cost operators

00:00 Speaker A

Sports book operators under pressure as Illinois introduces a tax hike on wagers. Lawmakers pass the budget that includes a tax of 25 cents per wager on the first 20 million online sports bets. After that, the tax rate increases to 50 cents per wager. For more on what this does mean for sports betting, let’s get to Citizens Senior Equity Research analyst, that would be Jordan Bender. Jordan, it is always great to see you on the show. So, these names were under some pressure today, Jordan. I’m looking at DraftKings was down about 6%, Flutter finished down nearly 3%. If I’m an investor, Jordan, I have capital committed to these two names. How worried should I be? What what is it going to mean for their bottom lines?

01:46 Jordan Bender

Hey Josh, good to see you as always. You know, we left Friday at work and not expecting really anything coming over the weekend. And less than 24 hours later, DraftKings and Flutter, they got hit with some pretty big taxing increases out of Illinois. You know, the reaction today from investors and you can see it in the stock, the stocks here as well, is this was just really out of the blue. This wasn’t expected. And that’s a little bit of the scary part is we’ve seen tax increases as part of this industry. And that’s expected, and it’s all kind of done on a flat tax. The flat tax just comes up. This was done more on a graduated tax basis. And this is the second year in a row, which has caught investors off guard. Um, you know, the scary issue here is the line of sight behind some of the tax increases are starting to get shorter and shorter. Illinois, this happened in less than 24 hours. It wasn’t on anyone’s radar. Um, these companies will have to work through how do they adjust the business models. But, you know, we’re market upper form on both of those names. We’re bullish on the industry. We think there’s ways to actually offset some of these tax impacts, which for DraftKings, we estimate will be about 80 million a year and Flutter will be about 85 million a year on an annualized basis.

04:23 Speaker A

Those ways to offset it, Jordan, those levers you think they could pull, walk us through it.

04:48 Jordan Bender

So, historically, what we’ve seen is you take costs out of the cost structure. You uh sales and marketing comes down. Some of the technology costs might come down. I think this time around, given this is Illinois, it’s the second year in a row this has happened. The effective tax rate now is over 50%. And these companies are getting to the point where on, you know, on a Illinois P&L or even a New York P&L, they’re not making all that much money anymore, just given how high the taxes are. So, on the surface, there’s ways to offset this. Um, you make people bet more, you make people bet more parlays or longer leg parlays. And the last interesting point here, which I’ve had a lot of discussions with investors here today is, you know, we see this with like the ride handling apps with Uber and Lyft where they’ll actually show you the actual surcharge or impact for every ride on your receipt. Um, you know, investors have been kind of throwing that idea out there today of, you know, putting on your bet slip Illinois implemented 25 cents for every wager. And then beyond that, there’s actually a 50 cent step up as well. But just showing the end consumer this is what the state has done. Um, you know, the messaging so far today and yesterday from DraftKings and some of these sports betting operators is they’re more willing this time to just pass it off to the to the consumer and not necessarily take the hit themselves. So, a little bit change of tone this time over historical tax rate increases. But you know, we kind of talked about the gross impact for DraftKings and for Flutter. We don’t think you’ll come anywhere close to that, and I think the consumer is going to take a lot of the brunt here of that.

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