Don't Mess With Taxes

The big question when it comes to fantasy sports is are the popular online operations games of skill or gambling? The answer according to New York's top lawyer is gambling.

New York Attorney General Eric Schneiderman (right) on Tuesday, Nov. 10, sent cease and desist notices to DraftKings and FanDuel.

"Our review concludes that [the company's] operations constitute illegal gambling under New York law," Schneiderman wrote in the letter sent to the two fantasy sports sites. 

"Our investigation has found that, unlike traditional fantasy sports, daily fantasy sports companies are engaged in illegal gambling under New York law, causing the same kinds of social and economic harms as other forms of illegal gambling, and misleading New York consumers," Schneiderman said in a statement announcing the action against the two sites that account for most of the fantasy sports participation.

"Daily fantasy sports is neither victimless nor harmless, and it is clear that DraftKings and FanDuel are the leaders of a massive, multi-billion-dollar scheme intended to evade the law and fleece sports fans across the country," the AG said.

Skill rules: Fantasy sports companies disagree, arguing that their game participants rely more on skill in selecting players than luck and therefor are not gambling.

That designation allows them to operate under an exemption in the federal Unlawful Internet Gambling Enforcement Act (UIGEA).

Following the AG's action, FanDuel issued its own statement:

"Fantasy sports is a game of skill and legal under New York State law. This is a politician telling hundreds of thousands of New Yorkers they are not allowed to play a game they love and share with friends, family, coworkers and players across the country. The game has been played — legally — in New York for years and years, but after the Attorney General realized he could now get himself some press coverage, he decided a game that has been around for a long, long time is suddenly now not legal. We have operated openly and lawfully in New York for several years. The only thing that changed today is the Attorney General's mind."

Many players expressed the same sentiment on the New York Attorney General's Facebook page.

DraftKing's response was reported by ABC New's Rebecca Jarvis on Twitter:

Increased scrutiny, criticism: The New York action is the latest in increased scrutiny of the games, which offer millions to winners.

In October, the Nevada Gaming Control Board determined that daily fantasy sports games were a form of gambling and banned them from being played in the Silver State.

Illinois lawmakers are considering legislation to regulate the games.

And the U.S. Attorney's office in the Southern District of New York is investigating whether the business model behind daily fantasy sports firms violates federal law.

Even one of the congressmen who helped draft the 2006 UIGEA loophole that DraftKings and FanDuel rely on is now skeptical.

Jim Leach, who served as Representative of Iowa's 2nd District from 2003 to 2007, told the Associated Press that he and his House colleagues had no idea daily fantasy sports would "morph into today's cauldron of daily betting."

Current members of Congress also are questioning the fantasy games. Rep. Frank Pallone of New Jersey, the ranking Democrat on the House Energy and Commerce Committee, wants an official review of fantasy sports, specifically their relationships with professional sports teams and players.

All this comes on the heels of allegations that employees of the two top fantasy sports sites were placing bets using information not generally available to the public.

League, fantasy connections: Will these accumulated attacks be enough to spur changes in how these games operate nationwide?

There's no clear line right now, especially given, as Pallone notes, the connections between powerful and rich sports leagues.

In New York City, DraftKings has a deal with Madison Square Garden. It covers on-court signage at Knicks NBA games, Rangers NHL matches games and a fantasy lounge at the venue. DraftKings also has deals with the NFL's New York Giants and MLB's New York Yankees.

FanDuel has advertising deals with the Brooklyn Nets NBA team and the NFL's New York Jets.

Beyond the Big Apple, major media companies are major investors in both fantasy sports sites. And they advertise ad nauseam on televised sporting events.

Those financial investments in some of the United States' premier sports franchises put DraftKings and FanDuel in a pretty strong position to battle the state and possibly federal agencies aligned against them.

But as every sports fan knows, upsets are not that unusual.

You also might find these items of interest:

• Fantasy football payouts mean real income taxes
• Even on big sports gambling days, Uncle Sam comes up short
• Fantasy sports income: Miscellaneous or gambling, all are taxable with differing tax deductions