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Life is just a fantasy. Can you live this fantasy life? – Aldo Nova

Now that Super Bowl 50 is finished, life is getting back to normal for NFL football fans.

But in the world of fantasy sports, the play never stops.

I should acknowledge that unless one of my kids is involved, I’m not much of a sports fan. But I am intrigued by this fantasy sports phenomenon — particularly its real-life consequences. After all, approximately 56.8 million people in the United States and Canada played fantasy sports in 2015. The fiscal impact of the fantasy is real.

It’s not all fantasy in fantasy sports. The players are real, and the results of fantasy games are based on how well, or poorly, each flesh and blood player does in an actual game. The money fantasy players pay to play and receive when they win is certainly real. Although it’s not required to pay to play Fantasy Football, you have to pay to be eligible for prizes. Eilers Research estimated that Daily Fantasy Sports (DFS) generated around $2.6 billion in entry fees in 2015; DFS leaders FanDuel and DraftKings were expected to pay more than $1 billion each in prizes (Forbes). Some players make millions.

And the legal problems now facing the industry are real. DFS is considered illegal in six states. In a January advisory opinion, Texas AG Ken Paxton said that DFS “run counter to Texas law.” The next step is unclear, but according to the New York Times, DraftKings intends to continue its operations in Texas. FanDuel and DraftKings have already initiated litigation in New York and Illinois, where the legality of DFS has been challenged by the attorneys general. If states do permit the industry to continue, increased regulation seems certain. “At least 21 states are expected to introduce fantasy sports regulation.”

Real life expenditures

According to the Fantasy Sports Trade Association, players spend an average of $465 per year on the game (league-related costs, single-player challenge games, and league-related materials). Costs can quickly rise for players of DFS, who can draft a team in the morning and know if they’ve won or lost by evening. The Washington Post makes this comparison: “If season-long fantasy is a long-term investment, daily fantasy is a slot machine.”

But while your fantasy team may not be a sure bet, you can count on the fact that states will find a way to tax booming industry.

Given the unique nature of fantasy sports, related tax laws are anything but straightforward. Here are a few ways the reality of taxes impinges on the fantasy.

The consultants

We pay people to advise us on financial and real estate transactions, so why not seek advice when playing a fantasy sport? After all, winnings are real. And so, it turns out, are fantasy sports consultants. They analyze your draft room and provide “a competitive edge over” league mates.

Professional services, which include consulting services, are exempt from sales tax in most states. As David Brunori wrote for Forbes, “Every attempt to tax professional services in the past 20 years has failed.”

That said, they are subject to sales tax in the following three states:

  • Hawaii (Hawaii Revised Statute § 237-13(6)(A))
  • New Mexico (New Mexico Revised Statute § 7-9-4; New Mexico Admin Code §3.2.18)
  • South Dakota South Dakota Revised Statutes § 10-45-5

The draft

Even I know that the draft is essential. What I didn’t know is that for many Fantasy Footballers, it’s a social occasion.

According to American Express Spending and Saving Tracker, an average fantasy league spends approximately $436 on a draft event. Expenditures include:

  • Food (56% of fantasy fans): $64
  • Non-alcoholic beverages (48%): $50
  • Alcoholic beverages (47%): $60
  • Clothing (42%): $65
  • Travel (33%): $197

How much is subject to sales tax? It depends on the state (remember that 5 states have no state sales tax).

Here’s an example of how it would work at a draft event in Sausalito, California, with the above spendings. The sales tax rate of 9% applies to the alcoholic beverages ($5.40 tax) and clothing ($5.85). It applies to carbonated non-alcoholic beverages but not milk or juice, so let’s apply tax to $25 ($2.25) for drinks, plus ice (approximately $0.45). The chips and dips and veggie trays are exempt, but get a couple of cheese pizzas from Dario’s delivered and it will cost approximately $52 ($4.68). 9% of $197 for travel is $17.73.

All told, sales tax for this draft event amounts to more than $36.

Want to know more? Watch Will’s Whiteboard, How Food Gets Taxed.

The insurance

If your star fantasy player gets injured in a real game and is out for the rest of the season, your hopes of winning could be shattered. Fortunately, as in real life, it’s possible to purchase insurance for such devastating events.

Enter fantasy sports insurance, an industry that seems to have evolved from a Tom Brady injury during the first quarter of the first game of the 2008 season.

Not all payers are eligible for coverage. However, if you pay a premium for those that are, you’ll get a payoff in the event of a season-ending injury. The legality of fantasy sports insurance is questionable, but assuming you can purchase it, is it subject to sales tax?

Like consulting services, insurance services are taxable in Hawaii, New Mexico, and South Dakota.

The materials

Adult players spend an average of $46 annually on fantasy sports materials:

  • Online premium website: $14
  • Fantasy sports magazines: $9
  • Draft boards with labels: $7
  • Cheat sheets / draft kits: $6
  • Draft software: $5
  • Tablet / Smartphone apps: $4

Tangible personal property like draft boards and cheat sheets are subject to sales tax in any state with such a tax. That’s the easy part.

Things get more complex when trying to figure out the taxability of apps, software, and online subscriptions. To fit new products and services into tax law you must first be able to define them, which is easier said then done with respect to the taxation of digital goods and services. The only thing certain is that there is much uncertainty.

Want to know more? Read Identification & Taxability of Digital Products.

The litigation

Wherever money exchanges hands, litigation is sure to follow. Believe it or not, there is such a thing as fantasy sports law. Attorney services are taxed like consulting and insurance (see above).

The win

Cash prizes may be subject to income tax, but what about other types of prizes? Since you’re not buying a prize, sales tax probably won’t apply. But if you win, say, a car and bring it home to use or store, you’ll probably have to pay use tax on it.

Aldo Nova says, “… Forget all that you see, it’s not reality, it’s just a fantasy.” I respectfully disagree. The tax implications are real. Learn more about automated compliance.

A shout out to Planet Money’s The Real Economy of Fantasy Sports.