This summer, new gambling legislation passed in Illinois and Kentucky generated significant attention, particularly due to their innovative prediction market tax proposals. However, what might have a more lasting impact are the new regulations established for daily fantasy sports (DFS), setting a potential precedent for other states considering similar approaches.
In recent years, discussions around DFS 2.0 have surged, especially as the industry experienced a shift toward against-the-house models that drew scrutiny from state gaming regulators and industry peers. Although priorities have evolved, this year's developments in state regulations indicate a clear direction for the future of DFS.
Three states have adopted laws this year that create a more defined regulatory framework for DFS and impose new taxes on it. Illinois's budget bill SB 3019, effective July 1, established clear definitions for fantasy games, set a 15% tax on adjusted DFS gross gaming revenue (GGR), and instructed the Illinois Gaming Board (IGB) to develop licensing requirements and other regulatory obligations.
In Kentucky, House Bill 904, which took effect on July 15, amended state law to create a licensed, regulated, and taxed market overseen by the Kentucky Horse Racing and Gaming Corporation (KHRGC). Virginia's House Bill 145, effective July 1, directed the Virginia Lottery to formulate rules for a licensed and regulated market, imposing a 10% tax on GGR along with an additional 2.6% revenue-based fee.
While the approaches vary slightly, the overarching goal remains the same: to clarify the regulatory parameters for DFS and eliminate the ambiguity in how operators can conduct their business. Common elements in the legislation include a clear distinction of DFS from traditional forms of gambling like sports betting, requirements for fee payment to acquire operating licenses, taxation based on GGR, and licensing that only permits peer-to-peer fantasy contests rather than against-the-house games.
According to Jason Barclay, Chief Legal Officer and Head of Public Policy at leading operator PrizePicks, the coordinated regulatory efforts in Illinois and Kentucky present a model that other jurisdictions could adopt. He emphasized the fairness of these new laws for both operators and regulators, highlighting that they incorporate necessary consumer protections alongside appropriate licensing and tax provisions.
Barclay noted, "Illinois and Kentucky are two terrific examples. We think they immediately become models for the rest of the country. The laws ended up coming out very fair and reasonable, both for operators like us but also for regulators." He believes that other states will likely follow suit, particularly larger states like California, Texas, and Georgia, as they strive for responsible regulation of fantasy sports.
For established operators such as PrizePicks, clearer definitions and regulations for fantasy sports are highly appealing; a well-defined operating environment provides certainty and a secure pathway forward compared to navigating ambiguity and potential prohibitions. Barclay expressed, "we have as much incentive as anybody to make sure that this category is properly defined."
Recently, within the gaming industry, significant shifts have occurred, especially regarding dual-currency sweepstakes gaming, which many states have begun to ban. Similarly, an ongoing focus has emerged on regulating the increase in prediction markets in relation to sports betting amidst legal uncertainties. In response, PrizePicks has developed a new product line aimed at navigating this gray area.
Notably, there was a pivotal change last year when the California Attorney General Rob Bonta declared that all forms of paid-entry DFS should be considered illegal. In response, operators like PrizePicks and Underdog moved away from against-the-house pick’em contests, which had drawn comparisons to sports betting. PrizePicks now exclusively focuses on a peer-to-peer model, aligning with the only recognized legal framework in Illinois, Kentucky, and Virginia.
Barclay stated that ongoing discussions with regulators affirmed that a P2P-only model is essential for differentiating fantasy contests from sports betting. He highlighted the importance of their communication with regulators, asserting, "Once you sit down with legislators and regulators, and say, ‘hey, that’s what we’re trying to accomplish and that’s the player we’re targeting’, they hear you, they get it." This motivation to define the DFS space is increasingly evident amid the evolving landscape of state regulations.
