If you enjoy betting on sports (whether year-round or just during football season), you may want to be interested in the tax rates that betting companies face in each state.

DraftKings announced on August 1 that customers in states with higher tax rates (where 30 percent or more of the winnings go to the state) will have to pay a surcharge on every winning bet starting in 2025 to cover this burden.

This surcharge will force bettors to pay a fee of three to four percent on all winnings from successful bets and would affect players in New York, Illinois, Pennsylvania and Vermont.

No other bookmaker has announced plans to do this, so why DraftKings?

Gaming analyst Chris Grove, partner at Eilers & Krejcik Gaming, described this as a risky threat from the betting giant to the legislatures of the affected states.

Illinois raised the betting tax rate from 15 percent to 40 percent of winnings earlier this year.

“DraftKings is a threat to any state that wants to raise its tax rates,” Grove told the Washington Post, adding that the tax rates are not too high right now but could be if other states try to do what Illinois just did.

Grove adds that this threat, aimed at state legislatures rather than bettors, is a risky suggestion from DraftKings CEO Jason Robbins.

“They’re a little bit trapped in that threat,” Grove said. “Either they do it and anger consumers, or they don’t and their future threats are hollow.”

Online sports betting is currently available in all but twelve states, but more are expected in the coming years and eventually a tax rate will have to be agreed upon.

“There is currently no reason for the states to charge less than 30 percent,” Grove said, pointing out that betting operators in New York could operate at a tax rate of 51 percent.

“New York has gravity. Tax rates are not going to go down unless you do something.”

Grove adds that online sports betting is a 25 to 30 percent margin business, making it quite lucrative, especially when operators bring in large volumes.

The problem here affects the smaller providers such as Fanatics, ESPN BET, BetRivers and BetParx.

Can these operators even exist if they do not reach the required scale or even come close to it?

Sports betting analyst Ryan Butler told the Washington Post that new operators may well be doomed to failure as we move ever closer to a duopoly in sports betting.

DraftKings and FanDuel control approximately 70 percent of sports betting activity across the country.

“The taxes, licensing fees, regulatory and compliance costs, and business expenses make it really difficult for new operators to enter the market,” Butler said. “This is especially concerning when DraftKings and FanDuel alone account for about two-thirds of national revenue, and seven other sportsbooks combined account for another third. Aside from those nine, all other bookmakers – combined – account for less than one percent of national revenue.”

Competition in this market is crucial, but the tax rates and resulting surcharges that DraftKings imposes – for now – on its customers mean that there is one big loser: the little guy.

Where will you go?

It is likely that some bettors who do not want to pay an additional three to four percent tax on their winnings before filing their income tax return will return to the illegal market.

“Illegal sports betting operators will always be a part of the U.S. sports betting ecosystem,” Butler added.

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However, as we have seen in the past when Shohei Ohtani’s interpreter bet millions of dollars with an illegal bookmaker, ideally one would like to keep such dealings under control.

This is no easy task in the world of sports betting, but projected tax rates in the range of 30 to 40 percent will surely only hurt consumers and destroy competition in a growing market.