I have been
reading recently that the jock tax may be affecting where athletes decide to
play. For example, Ndamukong Suh, an NFL defensive tackle formerly with the
Detroit Lions, was wooed by the Oakland Raiders but opted instead to sign with
the Miami Dolphins. I can understand a top-tier athlete not wanting to play for
a team as dysfunctional as the Raiders, but one has to wonder whether that
13.3% top California tax rate was part of the decision. Florida of course has
no income tax.
Let’s not feel sorry for Suh, however. His
contract is worth approximately $114 million, with $60 million guaranteed.
So what is
the jock tax?
Let’s say
that you work in another state for a few days. You may ask whether that state
will want to tax you for the days you work there. Some states tell you upfront
that there is no tax unless you work there for a minimum number of days (say
10, for example). Other states say the same thing obliquely by not requiring
withholding if you would not have a tax liability, requiring you (or your
accountant) to reverse-engineer a tax return to figure out what that magic
number is. And then there are … “those states,” the ones that will try to tax
you just for landing at one of their airports.
Take the
same concept, introduce a professional athlete, a stadium and a game and you
have the jock tax.
It started
in California. Travel back to 1991 when Michael Jordan led the Bulls to the NBA
Finals. After the net was cut and the celebrations finished, Los Angeles contacted
Jordan and informed him that he would have to pay taxes for the days that he
spent there.
Illinois did
not like the way California was treating their favorite son, so they in turn
passed a law imposing income tax on athletes from other states if their state
imposed a tax on an Illinois athlete. This law became known as “Michael
Jordan’s Revenge.”
How do you
allocate an athlete’s income to a given city or state? That is the essence of
the jock tax and what makes it different from you or me working away from home for
a week or so.
If we work a
week in Illinois, our employer can carve-out 1/52 of our salary and tax it to
Illinois. Granted, there may be issues with bonuses and so on, but the concept
is workable.
But an
athlete does not work that way. What are his/her work days: game days? Game and
travel days? Game, travel, and practice days?
Let’s take
football. There are the Sunday games, of course, but there are also team
meetings, practice sessions, film study, promotional events, as well as
minicamps and OTAs and so on. Let’s say that this works out to be 160 days. You
are with Bengals and travel to Philadelphia for an away game. You spend two
days there. Philadelphia would likely be eying 2/160 of your compensation.
This method
is referred to as the “duty days” method.
Cleveland
separated from the pack and wanted to tax players based on the number of games
in the season. For example, the city tried to tax Chicago Bears linebacker
Hunter Hillenmeyer based on the number of season games, which would be 20 (16 regular
season and 4 preseason). Reducing the denominator makes Cleveland’s share
larger (hence why Cleveland liked this method), but it ignores the fact that
Hillenmeyer had duty days other than Sunday. What Cleveland wanted was a “games
played” method, and it was shot down by the Ohio Supreme Court.
Cleveland also
had an interesting twist on the “games played” method. It wanted to tax Indianapolis
Colts center Jeff Saturday for a game in 2008.
However, Saturday was injured and did not play in that game, making Cleveland’s
stance hard to understand. In fact, Saturday was injured enough that he stayed
in Indianapolis and did not travel with the team, now making Cleveland’s
position impossible to understand. Sometimes bad law surfaces when pushed to
its logical absurdity, and the Ohio Supreme Court told Cleveland to stop its nonsense.
Tennessee wrote
its jock tax a bit differently. Since the state does not have an income tax
(more accurately, it has an income tax on dividends and interest only) it could
not do what California, Illinois and Ohio had done before. Tennessee instead charged
a visiting athlete a flat rate, irrespective of his/her income. For example, if
you were a visiting NBA player, it would cost $2,500 to play against the
Memphis Grizzlies.
Tennessee also
taxed NHL players (think Nashville Predators) but not NFL players (think Tennessee
Titans).
I guess the
NFL bargains better than the NHL or NBA.
One can
understand the need to fund stadiums, but this tax is arbitrary and capricious. What about a non-athlete traveling with the team? That $2,500 may be more than he/she earned for the game.
Tennessee
has since abolished this tax for NHL players but has delayed abolishment until
June 1, 2016 for NBA players.
In other
news, NFL players remain untaxed.
We have talked
about the denominator of the fraction to be multiplied against an athlete’s
compensation. Are you curious what goes into that compensation bucket?
Let’s answer
this with a question: why do so many athletes chose to live in Texas or
Florida? The athlete may have an apartment in the city where he/she plays, but
his/her main home (and family) is in Dallas, Nashville or Miami.
Let’s say
the athlete receives a signing bonus. There is an extremely good argument that
the bonus is not subject to the jock tax, as it is not contingent upon future
performance by the athlete. The bonus is earned upon signing; hence its situs
for state taxation should be tested at the moment of signing. Tax practitioners
refer to this as “non-apportionable” income, and it generally defaults to
taxation by the state of residence. Take residence in a state with no income
tax (hello Florida), and the signing bonus escapes state tax.
Consider Suh
and the Miami Dolphins. California’s cut of his $60 million signing bonus would
have been almost $8 million. Florida’s cut is zero.
What would
you do for $8 million?
