Lawmaker introduces bill to regulate, tax daily fantasy sports in N.J.

New Jersey on Monday joined dozens of other U.S. states in addressing the legality of daily fantasy sports, with a state senator introducing a bill that would charge companies that offer the competitions an annual fee of 9.25 percent of their gross revenues.

That matches the effective tax rate paid by Atlantic City’s casinos.

The bill’s sponsor, James Whelan, a Democratic former mayor of Atlantic City, said that he had spent several months meeting with players, regulators, and executives of daily fantasy sports companies to help him draft a bill “that puts important consumer safeguards in place while not impeding people’s ability to play and enjoy daily fantasy sports.”

The state Department of Law and Public Safety, which includes the Division of Gaming Enforcement, would oversee and regulate daily fantasy sports in the state by issuing permits to “casino licensees and other business entities that wish to conduct daily fantasy sports games in the state.”

Most daily fantasy sports contests charge players entry fees ranging from $1 to more than $5,000, with contests that have as few as two players or as many as thousands. Fans select a group of players from a variety of professional or college teams in a given sport, with a “salary cap” limiting the number of marquee players a contestant can have on his or her team.

These variations on traditional season-long fantasy sports — which went mainstream in the 1980s — are at least five years old. But their existence was little-known until the daily fantasy sports companies DraftKings and FanDuel — fueled by tens of millions of dollars in venture capital — began advertising extensively during football games last fall.

Questions arose in October about whether a DraftKings employee had used “insider information” about which star players were being chosen most frequently to win $350,000 in one weekend in September in contests offered by FanDuel. A law firm hired by DraftKings concluded there was no special advantage for that employee, but the resulting controversy prompted calls for regulatory oversight by daily fantasy players, elected officials, and even the companies themselves.

Whelan’s bill would prohibit daily fantasy sports company employees or their relatives from playing those games or sharing proprietary information with others, with the companies subject to fines of up to $200,000.

At least 17 states already have bills under consideration that are similar to Whelan’s, according to legalsportsreport.com, a website that analyzes the industry. Elected officials in Trenton officials said last fall that they did not want to introduce a bill that could muddle the state’s oral argument before the 3rd U.S. Circuit Court of Appeals in its bid to legalize Las Vegas-style sports betting in New Jersey. That hearing took place last month in Philadelphia, with a dozen judges announcing they would take the case under advisement.

Whelan introduced his bill the same day that Gov. Terry McAuliffe of Virginia signed into law the Daily Fantasy Sports Act, making his state the first to regulate the industry. The bill requires the sites to pay an initial fee of $50,000, keep players’ funds and operating funds separate, and to submit annual audits to the state for review.

Also on Monday, FanDuel agreed to stop offering daily fantasy games that have entry fees in Texas, in a deal reached with that state’s attorney general.

Daniel Wallach, a Fort Lauderdale, Fla.-based gambling law attorney, said that Whelan’s bill was in the “middle of the pack” in terms of the amount of state involvement in the regulation of daily fantasy sports, compared to the numerous bills pending in other states. He also lauded the annual fee plan.

“Rather than charge a flat licensing fee, which could keep many smaller companies out of the market, the imposition of a 9.25 percent tax would seem be the most equitable approach I’ve seen thus far,” Wallach said.

Regulators in Nevada announced in October that daily fantasy sports operators would have to register with the state because their product is a form of gambling like sports betting, which is legal in Nevada. A month later, New York Attorney General Eric Schneiderman sent cease-and-desist letters to DraftKings and FanDuel demanding that they immediately stop accepting entry fees from New York state residents. That battle with the companies is still playing out in court.

Whelan’s bill will be discussed at a Senate committee hearing in Trenton on Thursday.

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