State governments eye cash from fantasy sports

CHICAGO — State legislators across the country are preparing for a nationwide battle over the booming and largely unregulated daily fantasy sports industry.

The high-stakes fight pits established gambling interests against a nascent industry that counts about 1 in 6 Americans as players.

{mosads}More than half of the nation’s state legislatures are set to debate measures to codify the existence of daily and weekly fantasy sports sites, which could provide a lucrative new revenue stream for cash-strapped governments.

New York Gov. Andrew Cuomo (D) signed legislation last week making his state the eighth to legally regulate online daily fantasy sports. The New York measure requires companies to register with the state gaming commission and to pay taxes on revenue generated within the state. A similar bill sits on Massachusetts Gov. Charlie Baker’s (R) desk, though he has yet to sign it.

In the last year, Kansas, Virginia, Indiana, Tennessee, Mississippi, Colorado and Missouri have legalized daily fantasy sports. Bills have been introduced in another 30 states, according to the National Conference of State Legislatures, which holds its annual conference this week in Chicago.

“This has been a growing issue in the states this last year,” said Jake Lestock, an NCSL analyst. “We can only imagine that in the next session, more and more states will take this up.”

Daily fantasy sports competitions, run by companies like Draft Kings and FanDuel, allow players to buy in to short-term fantasy contests that may last a day or a week. First established in 2009, daily competitions have grown exponentially in the last year after the two industry-leading companies spent heavily on television advertising to boost their consumer bases.

The companies operate within a gray area of federal law: Sports betting remains illegal in all but four states under the 1992 Bradley Act, while the 2006 Unlawful Internet Gambling Enforcement Act specifically exempted fantasy sports from a national ban on financial transactions involving online gaming.

That gray area effectively leaves the decision to regulate fantasy sports leagues up to the states.

Many states plan to debate something similar to Indiana’s law, the first that included a specific ban on fantasy games involving collegiate or amateur athletes. The conservative American Legislative Exchange Council has circulated a model version to their members, too.

Cuomo’s signature ended a yearlong feud between the fantasy sports companies and New York Attorney General Eric Schneiderman (D). In September, Schneiderman threatened legal action to stop the sites from operating in New York; the companies agreed to suspend operations there in March.

Among the questions legislators must consider is whether daily fantasy sports leagues are games of chance or games of skill. The fledgling industry, which does not want to be lumped in with other forms of gambling, want their products to be considered games of skill.

Gaming companies, represented by the American Gaming Association, want fantasy sports to be considered games of chance so that they can claim a piece of what could become a lucrative market.

“Every state has a different definition of what constitutes gambling,” said Jeremy Kudon, an attorney at Orrick Herrington & Sutcliffe who represents FanDuel and Draft Kings. “Most states, it comes down to whether something is more skillful or more chance.”

The distinction matters in states like Maryland, where the constitution requires any expansion of legalized gaming to face a voter referendum. State Sen. Richard Madalino (D) said the debate over fantasy leagues has taken up a considerable amount of time in Annapolis, putting the industry in a precarious position: They can pursue what is certain to be a costly referendum campaign, or they can sue the state over a legal opinion defining their product as a game of chance.

“Do you fight a referendum, or do you fight a court case?” Madalino said.

In Nevada, one of four states in which sports betting is legal, the state attorney general has also said fantasy sports constitutes gambling. Kudon said Draft Kings and FanDuel have not sought a license in Nevada because they disagree with the attorney general’s ruling.

Both sides say states must address the gray area in federal law to clear up legal uncertainty.

“Our industry has been largely sidelined from participating in daily fantasy sports, and it’s because there is not legal clarity,” said Sara Rayme, a senior vice president at the gaming association. 

Some industry groups warn legislators who hope the fantasy sites will provide a new font of tax revenue may be disappointed. Missouri legislators estimated they would receive up to $10 million a year from taxing daily fantasy sports, though Steve Brubaker, head of the Small Business of Fantasy Sports Trade Association, said his calculations suggest the state is likely to receive only between $600,000 and $800,000 per year in fantasy sports-related tax revenue.

“If you’ve got stars in your eyes about how much money you’re going to make off the industry, get to know the industry,” Brubaker warned. “The money is just not there. It’s not that large.”

But the industry expects significant growth in years to come. The Fantasy Sports Trade Association — which is not related to Brubaker’s group — says more than 57 million Americans participated in fantasy sports in 2015. The average player spent $556 on services and products related to the industry, the group estimates.