Taxing and Regulating Fantasy Sports Means Real Revenues for NJ

John Reitmeyer, Budget Reporter | September 5, 2017 | Budget
Besides translating into millions of much-needed dollars, new rules also put in place much-needed consumer protections

Large-scale fantasy sports games offered online by websites like DraftKings and FanDuel have been growing in popularity across the country in recent years, and now New Jersey has joined the ranks of states that have enacted laws to both regulate and tax the operators of those games.

The recent change in policy in New Jersey comes just in time for the start of the latest National Football League season, and even though initial projections are meager, it will create a new revenue stream for the perennially cash-starved state budget.

The new state law requires the companies offering the large-scale fantasy games to purchase an operating permit from the state and pay an operations fee equal to 10.5 percent of quarterly gross revenue. It also establishes substantial penalties to punish anyone caught tampering with the outcome of a fantasy game or operating one in New Jersey without a permit, but importantly, that does not apply to the more modest fantasy sports games that are regularly played among family and friends.

Sponsors of the legislation that led to the new law praised its recent adoption by Gov. Chris Christie. They said New Jersey residents have been playing games offered by the fantasy-sports companies for years, but without proper consumer protections put in place to ensure those games, which can generate lucrative payouts for winners, are being run fairly. The adoption of the new law, meanwhile, has also been welcomed by officials from the leading fantasy-sports websites as it now firmly establishes the fantasy games’ legality in New Jersey.

Fantasy fine print

Invented decades ago by sports-statistics enthusiasts, fantasy-sports games generally involve the tracking of the statistical performance of a group of players selected by a virtual “general manager,” with different formats allowing for season-long competitions and even those lasting just one day. In fact, in recent years websites like DraftKings and FanDuel have begun to popularize several types of daily fantasy games, including those using a salary cap to enhance the competition by preventing general managers from stacking their virtual teams with only the best players at every position.

The online format has also allowed the pool of potential daily fantasy general managers who compete against one another to expand dramatically, compared with the more traditional seasonal leagues that are played primarily for bragging rights among family, friends and coworkers. Although online players typically pay only a few dollars to join a daily fantasy contest, prizes can rise into the millions, making the nationwide games lucrative for both the websites and the winning players.

More than just luck

But as daily fantasy games have taken off in popularity and become a significant industry nationally in recent years, questions have also been raised about whether the contests that are played for cash prizes should be considered a form of sports betting, which is still banned in most states, including in New Jersey, despite the state’s recent attempts to loosen federal law. Proponents of the daily fantasy games maintain that success requires much more than luck as the most sophisticated general managers spend hours going over lineups and matchups, assessing trends, and even tracking the likely weather conditions at stadiums across the country on game days.

A federal Internet-gambling law passed in 2006 included an exemption for fantasy contests that rely on the performances of real players participating in real games, but several states have taken the position that daily fantasy contests where cash is at stake are illegal sports gambling and have prohibited them from operating.

New Jersey’s new fantasy-sports law officially establishes the legality of the large-scale fantasy games in the state when cash prizes are offered, as long as the operators follow the new regulations and pay the costs of obtaining operating permits. The law defines a large-scale fantasy sports activity subject to state regulation as a “contest with an entry fee in which a participant owns or manages an imaginary team and competes against other participants or a target score for a predetermined prize with the outcome reflecting the relative skill of the participants and determined by statistics generated based on performance by actual individuals participating in actual competitions or athletic events.”

Financial guidelines

The new law also establishes financial guidelines like requiring the companies to conduct audits and maintain monetary reserves, and it allows them to partner with state-based casinos and racetracks. The law also prohibits players who are under 18 and bans the offering of any fantasy games linked to high-school sports.

Penalties for tampering with the games range from up to $50,000 for individuals to up to $200,000 for operators. Fines of up to $25,000 and up $100,000 would also be established for operating fantasy games in New Jersey without a permit.

Nonpartisan analysts from the state Office of Legislative Services have estimated the bill could generate at least $6.6 million in annual revenue for the state net of the costs it will take to regulate the fantasy games. The analysis was based on national estimates of how many people are playing fantasy sports games and how much money players typically spend in a given year. In all, the analysts estimated the fantasy games could become a $625 million industry in New Jersey, and that 10 percent of that amount would generally be kept by the operators as entry fees, making it subject to the new state permitting charges.

Assemblyman Ralph Caputo (D-Essex) suggested the new law now puts in place strong consumer protections that bring the state up to date as the large-scale fantasy sports have evolved into a lucrative industry.

“This helps keep the games honest and consumers protected,” said Caputo, a primary sponsor of the legislation enacted by Christie.

In the Senate, the measure was sponsored by longtime Sen. Jim Whelan, a Democrat from Atlantic County who died unexpectedly on August 22, just days before Christie signed the bill into law.

A statement issued by DraftKings and FanDuel also highlighted the consumer-protection issue, saying New Jersey’s new law now puts the state “at the forefront of consumer protection nationally.”