Professional Athletes and the State and Local Tax Nightmare
Most individuals live and work in the same state in which they reside and have fairly simple tax filings. They file a single state income tax return and a single federal income tax return. In slightly more complex situations where an individual may own rental property in another state, they may be required to file two state income tax returns in addition to their federal income tax returns. While our annual filing requirements may seem burdensome and frustrating, they pale in comparison to the filing requirements imposed on professional athletes.
Like all individuals, professional athletes are required to file income tax returns in each jurisdiction in which they provide services (both municipalities and states). However, unlike the average employee, professional athletes often work in dozens of jurisdictions in a single year – meaning they have to file separate income tax returns for each city, county, or state in which they practice or play. This creates a tax compliance nightmare that is often referred to as the “jock tax” due to its particular application to professional athletes.
Methods of Calculating State Taxes
The complexity of the jock tax is exacerbated by the fact that an athlete’s salary is apportioned to various states using differing methodologies and even among states using the same general methodology, there are slight differences. The primary method of apportioning tax to the states is the “duty days” method. Under this method, a player’s salary is apportioned to a state based on the number of “days of service” the player has in the state as a proportion to total days of service. Any day in which a player is contractually required to appear at practice, a game, a press conference, public appearance, or workout is considered to be a “day of service”. For example, Indiana defines duty days to include: game days, practice days, days spent at team meetings, days spent with a promotional caravan and at preseason training camps, days spent conducting training and rehabilitation activities if the service is conducted at the facilities of the team; and days spent participating in instructional leagues and all-star or pro-bowl games (see Indiana Informational Bulletin #88). So if a player has a $5 million salary and spent 20 of 200 total duty days within Indiana, the income apportioned to Indiana would be $500,000 ($5 million x 10 percent).
The second primary method that states utilize to allocate income is the “games played” method. Under this method, the athlete’s salary is allocated to the state based on the ratio of games played in that state in proportion to total games played. For example, in Pennsylvania, professional athletes (other than NFL players) must apportion wages by calculating the total games played within Pennsylvania versus the total games played (including all post-season championship games), and multiply the resulting fraction against the athlete’s total salary. In determining “games played,” exhibition games that are officially sanctioned by the team’s league office are included for purposes of both the numerator and denominator of this fraction. Michigan also utilizes the “games played” method to allocate income for professional athletes (other than NFL players), except that exhibition games are not considered.
Under either of these methodologies, a professional athlete can have exposure in a significant number of taxing jurisdictions. For example, based on their 2016 schedule, a professional baseball player with the Chicago Cubs would incur state taxes in California, Ohio, Colorado, Missouri, Wisconsin, Georgia, Pennsylvania, District of Columbia, Illinois, New York, and municipal taxes in Pittsburgh, Philadelphia, New York City, Cleveland, and Cincinnati – for a total of 15 jurisdictions, each of which requiring the filing of an income tax return.
Added Uncertainty
The complexity and burden on athletes is also heightened due to fact that taxability can only be determined accurately at the end of the year. Due to the uncertain nature of post-season play, athletes often don’t know where they will be playing and where tax will be accrued. For example, if the Cubs had faced the Texas Rangers in the 2016 World Series, rather than the Cleveland Indians, each of the athletes would have had at least 4 more duty days in non-taxable Texas instead of the State of Ohio and City of Cleveland. Assuming 200 total duty days for each athlete and a $5 million salary, playing the Indians rather than the Rangers meant that an additional $100,000 was subject to tax in Ohio and Cleveland.
This is also the case with NFL players and the Super Bowl in which the rotating location of the game site has a significant impact on a player’s tax burden. For example, for teams fortunate enough to make the 2016 Super Bowl in Santa Clara, California, each player added 5 to 7 additional duty days in California (taxed at rates up to 13.3%). If the Super Bowl had been in Dallas, each of the players would have had those additional duty days in Texas – which does not impose a state income tax. For a player with a $20 million salary, incurring 7 additional duty days in high-tax California could mean that California can tax an additional $700,000 of income at a rate of 13.3% – adding to a total of $93,100 in additional tax!
Why Athletes?
The general rule of state taxation is that income is taxable where it is earned – and this rule applies to all individuals who may be earning income from services in multiple states. Yet athletes are a significant focus for state and local taxing authorities for a variety of reasons. First and foremost, athletes are a target because of their large salaries, which mean potentially large state tax liabilities. In Major League Baseball, the average salary in 2016 was $4.4 million and 127 players earned more than $10 million annually. In the National Basketball Association in 2016, exactly 100 players had salaries of $10 million or more, with the highest salary exceeding $30 million annually.
Secondly, athletes’ salaries are often publicly available, so tracking the potential income that may be subject to tax is a relatively easy task for a state agency. Ultimately, from an audit perspective, this makes athletes a far easier target that other low-profile individuals who may travel frequently and earn income in various states.
Conclusion
Professional athletes are subjected to extraordinarily burdensome tax filing burdens requiring complex tax calculations to determine the tax responsibilities to potentially dozens of state and municipal jurisdictions. Although there is little that may be done to alleviate all of the filing responsibilities, proper due diligence and planning can ensure that a professional athlete is incurring the least income tax possible and avoid audit. An experienced tax advisor can guide a professional athlete through this complex environment and assist the athlete in minimizing potential taxes – ultimately allowing the athlete to maintain their focus on their profession.