Shares of online sports gambling website DraftKings (DKNG -10.29%) got decked on Tuesday, falling 13.5% through 11:50 a.m. ET. The Wall Street Journal reported that Illinois legislators have approved their 2025 budget, including a provision that would more than double taxes on sports betting operators.
Citing multiple analyst reports, TheFly.com estimates that the new law, if signed by the governor, will raise DraftKings’ Illinois tax rate from 15% to 36% or 37%.
How bad is this for DraftKings?
It’s not 100% clear how bad this news is for DraftKings, which paid only $10.2 million in income tax last year, according to data from S&P Global Market Intelligence. Even that sum is surprising, though, because the company reported an operating loss of $786 million last year. So you wouldn’t ordinarily expect it to have paid any income tax at all.
Illinois, however, appears to tax not profits per se, but rather “adjusted gross revenue.” Last year, DraftKings’ revenue was $3.7 billion, which implies the tax hit from this new law could be quite large.
How this news could get worse for DraftKings
But shareholders shouldn’t panic. According to the latest tally from DraftKings, online betting is legal in 25 states right now, and Illinois is just one of those 25. So as long as just one state is raising taxes — even if it’s doubling them — the financial hit shouldn’t be large.Â
The bigger danger is that other strapped-for-cash states might glom onto Illinois’ idea and start raising taxes on sports betting. If this idea turns contagious, the future for DraftKings could start to look more ill.
Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.