IRC § 4401 imposes an excise tax on every "wager." The IRS, in newly issued guidance, determined that daily fantasy sports (DFS) operators are also subject to the federal excise tax applicable to sports wagering.

The definition of "gambling" is typically defined under state law, rather than federal law. In almost every U.S. state, DFS is not gambling, generally because it is considered a game predominately determined by the participant's skill, rather than by chance.

An Internal Revenue Service (IRS) memorandum released on August 7, 2020, available here, takes a somewhat different view as it relates to the application of the federal excise tax applicable to sports wagers. The IRS memorandum relies on the definition of "wager" under IRC § 4421: "(A) any wager with respect to a sports event or a contest placed with a person engaged in the business of accepting such wagers, (B) any wager placed in a wagering pool with respect to a sports event or a contest, if such pool is conducted for profit, and (C) any wager placed in a lottery conducted for profit." The guidance references the carve-out for fantasy sports contained in the Unlawful Internet Gambling Enforcement Act (UIGEA), a federal law that generally prohibits gambling businesses from knowingly accepting payments in connection with the participation of another person in a bet or wager that involves the use of the internet and that is unlawful under any federal or state law.

The IRS explains that whether DFS is a game of skill for state gambling statute purposes is not relevant for determining whether DFS is wagering for federal excise tax purposes. Thus, the IRS declines to address the question of whether DFS is considered a game of skill either under state law or under UIGEA's carve-out.

Further, the IRS guidance goes to great lengths to differentiate between "traditional" fantasy sports and DFS, even pointing out that UIGEA was enacted prior to the proliferation of DFS. Thus, it remains to be seen whether the IRS's guidance concluding DFS companies are liable to pay the wagering excise taxes on entry fees/wagers they
receive will have any far-reaching impact on the growing DFS industry.

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