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The salaries of professional athletes continue to soar, so it is not surprising that revenue-hungry states try to claim a share of the spoils by taxing players from visiting teams when they invade their turf.
Origins of the Jock Tax After the Chicago Bulls beat the Los Angeles Lakers in the 1991 National Basketball Association (NBA) Finals, California notified Bull’s megastar, Michael Jordan, that he owed income tax on his earnings while in Los Angeles. In a direct response to that action, the Bulls’ home state of Illinois passed a law imposing income taxes on athletes from California and any other state that taxed its residents. That legislation was often referred to as “Michael Jordan’s Revenge.” In the intervening years, many city and state governments followed suit and now nearly every state that hosts professional sports teams has some form of this “jock tax.” |
This practice can generate multistate tax liabilities for sports figures, as well as highly paid corporate executives, and throw a confusing array of state laws and practices at employers. States and Congress have proposed solutions but they appear to have little chance of success.
Where Things Stand
Going into the current major league baseball (MLB) season, the average salary on the April 5 Opening Day was $4.2 million, a 6.3 percent increase from $3.95 million in 2014 and a 15 percent rise over the past two years.
Naturally MLB players and other athletes owe income taxes in the states where their teams are based (unless those states have no income tax). But other states are reaching into the pockets of players who enter their jurisdiction for certain games.
Technically, any state or city with an income tax can assess tax on earnings within its boundaries. This makes athletes fair game and now nearly every state has a “jock tax” (see right-hand box).
The same basic rules pertaining to income taxes and withholding apply to regular business people and sports figures. Although high-profile professional athletes are easier to track as their schedules are available to everyone, some states have started to cherry-pick other targets.
Crazy Quilt of State Laws
For employers and employees alike this presents a dilemma involving “road warriors” — residents of one state who are often working in another. State laws are a patchwork that makes oversight extremely difficult. Fifty states means 50 sets of rules, encompassing varying standards for assessing taxes.
For instance, several states have a first-day rule — the day you enter the state and work you owe income tax. Other jurisdictions allow a grace period ranging from 10 days to two months before it imposes tax.
To complicate matters, a state might assess tax on income earned rather than time worked, according to the Council on State Taxation (COST), a trade group for multistate corporations. You can imagine the complexities when a person travels to 10 or 20 states a year.
It can become even more confusing because:
- Employers often are not apprised of these rules or have chosen to ignore them;
- Enforcement has been hit-or-miss; and
- States such as New York and California aggressively track out-of-state workers, while others are less vigilant.
Statewide and National Solutions
State tax authorities are not blind to the problem. In some cases, states in close proximity have signed reciprocal agreements. New Jersey and Pennsylvania, for example, have agreed they will not tax the earnings of residents of one state who work in the other state. Washington, D.C. has reciprocity with all states, largely due to its status as the seat of the federal government and its attractiveness to out-of-state workers.
In addition, the states have developed a model legislation through the Multistate Tax Commission. The model legislation would not require employers to withhold income tax on non-residents for 20 days or less and the employee would not be required to pay income tax on those earnings. New York, one of the most aggressive states, currently has a 14-day grace period if certain conditions are met. The commission comprises virtually every state in one form or another and aims to achieve greater uniformity in state tax laws.
However, the model legislation would apply only to workers from states agreeing to the pact or from states with no income tax. (Note: The proposed law would not be extended to professional athletes, whose contracts typically spell out tax issues because they play so many away games during a season.) Thus far, only North Dakota has signed up, suggesting that the model legislation has little appeal.
Congress Seeks Solution
Congress has also taken notice. Under a proposed Mobile Workforce Income Tax Simplification Act, first introduced in 2012, the grace period for non-residents would be extended to 30 days. The legislation would retain the current credit to offset income tax in non-residents’ home states.
The Federation of Tax Administrators (FTA), which provides state tax authorities and administrators with such services as research and information exchange, opposes the legislation, partly on the grounds that is would hurt some states more than others. For example, COST estimates that New York would lose $45 million a year, even presuming that executives would scale back business trips to the state, while California would forfeit $15 million annually.
The FTA passed a formal resolution against the proposal that passed in the House but was never voted on in the Senate. Earlier this year, Sens. John Thune (R, SD) and Sherrod Brown (D, OH) introduced a similar version, but the consensus is that bill won’t pass this year either.
Clearly, the laws in this area are evolving. Consult with your legal and tax advisers to stay abreast of any new developments to ensure you comply with all the laws and let your employees know if anything changes.