DraftKings Returns To New York

photo by Ian Kennedy

A couple of weeks ago, I received a very gratifying email.

As a New Yorker, I had been without access to DraftKings for months, due to the state’s attorney general. Eric Schneiderman took aim at daily fantasy sports last fall, leaving DraftKings and its competitor FanDuel unable to operate in the state. But, as of early August, DraftKings was ready to ask me to verify my account so I would be set to play when the company returned, just in time for football season.

This happy ending arrived courtesy of New York’s lawmakers, who passed a measure earlier this summer that will clear the way for daily fantasy sports to return to the state, though with a few new restrictions. Gov. Andrew Cuomo signed the legislation earlier this month, saying, “This legislation strikes the right balance that allows this activity to continue with oversight from state regulators, new consumer protections, and more funding for education.”

The law makes New York the eighth state to legally regulate daily fantasy sports. Massachusetts, DraftKings’ home base, recently passed legislation allowing the companies to operate until July 2018, with a commission set to study potential longer-term regulation. Bills similar to New York’s have been introduced in 30 other states.

Securing permission to operate in the New York market is obviously a huge win for daily fantasy sports, the more so because New York came down on the side of declaring it a game of skill, not chance, meaning it does not constitute gambling. It seems unlikely that every state will come to the same conclusion, though, since daily fantasy sports represent something of a gray area. For example, Nevada – one of four states in which betting on sports is legal – defines fantasy sports as gambling, though DraftKings and FanDuel have chosen to dispute the ruling.

Yet the reason that many other states will probably follow New York down the path of calling daily fantasy sports a game of skill is simple: tax revenue.

Assemblyman J. Gary Pretlow said that fantasy sports “have the potential to generate millions of dollars in revenue for New York State.” New York’s legislation includes a 15 percent annual state tax on gross revenues for sports fantasy contests with an entry fee; the state will assess an additional 0.5 percent on companies, up to a maximum of $50,000. Lawmakers in Albany predict about $5.5 million in annual revenues from the new regulations, much of which will be earmarked for education funding.

Potential tax revenue drove the legislation forward, but it also contains some sensible regulation, which will be enforced by the New York State Gaming Commission. The new rules include requirements such as excluding players who are under 18 or who are employees of professional sports teams, and prohibiting betting on the performance of players in high school or college. The law also tackles the problem of what it calls “highly experienced players” – in other words, the “sharks” who have the skill and time to pursue predictive modelling and intense data analysis beyond the reach of casual hobbyists. In theory, requiring companies to clearly identify these players before opponents go head-to-head with them will reduce the chance of novices finding themselves out of their league without warning.

While the New York legislation is undoubtedly a win for daily fantasy sports companies, they do not face totally smooth sailing going forward. Schneiderman has said that his office’s amended lawsuit against DraftKings and FanDuel will proceed, focused on allegations of consumer fraud in advertising. And there are still about 40 states where the companies’ status remains unclear. But New York’s green light still represents both a lucrative market in the present and a framework that other states may adopt or modify going forward.

Some observers have even expressed hope that New York’s decision signals a shifting landscape more generally where sports betting is concerned. Several states have considered bills recently to legalize sports betting – again with an eye toward raising revenue – and NBA Commissioner Adam Silver has said his sport, at least, is prepared for an era of legal gambling.

I am not sure I would read New York’s law as a sign that a shift that major will arrive overnight. But it does represent a sensible response to a new form of gaming that has roots in both gambling and traditional fantasy sports, but is distinct from both. As I observed last November, the best solution was to let lawmakers legislate. With the incentive of a lucrative industry to tax, Albany was able to create sensible guidelines reasonably quickly. Here’s hoping other states will follow suit.

As for me, I verified my DraftKings registration and now I am more than ready to play.

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