High-Salaried Visitors Feel Bite of the ‘Jock Tax’

The Detroit Pistons trounced the Lakers in the NBA Finals, but the state of California may get the last laugh when it mails tax bills to Motor City stars such as Chauncey Billups and Tayshaun Prince.

When out-of-staters land in California to work, the Golden State takes a share -- 9.3% of their daily pay while they’re here, to be precise. And it’s not small change. Over the last decade, so-called nonresident taxes have soared nearly threefold in California, now amounting to about $1.3 billion annually.

California isn’t the only state exacting a toll from out-of-state athletes, either.

Of the 24 states with professional sports teams, 20 impose so-called jock taxes on nonresident athletes, said David K. Hoffman, adjunct scholar at the Tax Foundation, a Washington think tank focused on state and federal tax issues. The other four don’t impose income taxes on anyone. Several cities -- Cleveland and Columbus, Ohio, for example -- recently have imposed jock taxes of their own. So, too, have Puerto Rico and Alberta, Canada, Hoffman said.

Indeed, the taxes are becoming increasingly common -- and they’re not just levied on professional athletes any more. In many states, including California, nonresident taxes are due whenever any out-of-stater lands on business. That’s got some members of Congress worried enough that they have proposed legislation to rein in states intent on taxing people who live elsewhere.

As a practical matter, however, few states have enforced their laws on traveling business people because the taxes involved aren’t worth collecting. That’s slowly changing, but middle- and lower-income business travelers are still rarely hit.

But watch out, Alex Rodriguez. When his New York Yankees play a California team, the Franchise Tax Board will be watching and dividing his $22.5-million annual salary by his “duty days” -- the number of days he either plays a game or attends a mandatory practice. That result is his work-day wage, which the Tax Foundation calculates at $267,857. It is multiplied by the number of days he spends working in California to determine his taxable income for the year.

Tax Bill for Year

Because the Yankees play a total of nine regular season games in California this year, California will collect a tidy $224,196 from Rodriguez, Hoffman said. And the tab would rise, of course, if the Yankees played here in the World Series.

Add up the salaries of the rest of the Yankee players, coaches and staff to assess more nonresident taxes, and it’s easy to understand why some state auditors spend their days doing little more than reading entertainment reports to see when Robert Redford might hit town to work on a movie or when Norah Jones will sing at the Anaheim Pond.

They, too, are subject to California income tax -- and state auditors will make sure they know it. Theoretically, traveling salespeople are supposed to pay state taxes, too. An Ohio salesman who makes $50,000 a year, for example, earns about $200 a day, and would be liable for 9.3% of that, or $18.60, for each day he works in Los Angeles.

But few traveling salespeople know about the obligation, and the state hasn’t put a lot of resources behind chasing visitors for $18.60.

“Obviously, actors and entertainers and athletes are easy to track,” said Denise Azimi, a spokeswoman for the Franchise Tax Board. “An architect who comes out from New York is probably more difficult to find.”

Still, state auditors are doing their best to assess nonresident taxes on everyone and have made notable progress. But some experts say that’s not good news. The reason? Retaliation.

California is far from alone in taxing the income of visiting out-of-towners. Virtually every state with an income tax system has the right to do the same, said Arthur Rosen, partner at the law firm of McDermott Will & Emery in New York. When one state gets more aggressive about collecting, other states must become more aggressive just to get their money back.

That’s because nonresident taxes paid to California are subtracted from the tax due on New York resident returns. Unless New York assesses state taxes against an equal number of well-heeled out-of-towners, the state loses revenue each time one of its residents becomes subject to income tax elsewhere. And that’s true in almost every state that imposes an income tax. (Illinois is the exception because it doesn’t credit its residents for payment of out-of-state jock taxes, Hoffman said.)

Retaliatory taxation has a long history in this area, added Hoffman, who blames the whole jock tax phenomenon on California. It may have been coincidence, but California stepped up its nonresident tax collection efforts after the Los Angeles Lakers lost to the Chicago Bulls in the 1991 NBA championships.

“The jock tax began with California trying to get revenge on Michael Jordan,” Hoffman said. “Illinois fought back with a retaliatory tax the next year. Since then, many other states have joined in.”

The Franchise Tax Board’s Azimi called Hoffman’s account nonsense. Nonresident tax rules have been on the books since the 1950s, she said. The state did get far more aggressive about collecting the tax in the early 1990s, she said, but that was largely because sports and entertainment salaries were soaring, so it made economic sense to assign collection agents to the area.

Aggressive Collecting

Whatever the reason, nearly every state has become significantly more aggressive about collecting taxes on nonresidents in recent years, Rosen said.

Although he isn’t troubled by the effect on entertainers and athletes, who were the traditional targets of the tax, Rosen said he was offended by the harm done to the salespeople, lawyers, consultants and other business travelers who are neither famous nor rich. As states work harder to enforce nonresident taxes, more ordinary folks are getting nabbed by taxes that they’d never have imagined were due.

“Traditionally, states have only applied the tax to actors, entertainers and athletes, but we increasingly are seeing states auditing companies with traveling executives,” he said. “A large portion of the American business community thinks that states are trying to impose state income taxes where no state income taxes have been imposed before.”

Worse is that nonresident tax laws are often vague and it is tough to figure out when a diligent taxpayer should be filing a return in another state, he said.

“I don’t think anyone would argue that if a person worked in a state for 75 days a year that they should not be responsible for paying nonresident income taxes in that state,” Rosen said. “On the other hand, if an individual spends 10 days in a state during the year, expecting that person’s employer and that individual to have a tax obligation in that state is asking too much.”

Rosen has testified in support of a proposed federal law, HR-3220, that would clarify when companies would be subject to visiting business taxes. The proposal states that companies are not subject to nonresident taxation in a state unless they have employees or tangible property in that state for more than 21 days a year.

The proposal is a long way from passage, though, and it does nothing to help the hapless employee or athlete, Rosen acknowledged.

Passing federal laws to restrict state taxation is a tricky issue, but it needs to be addressed for workers and companies, said Andrew Chamberlain, a spokesman for the Tax Foundation. Otherwise, business travelers could face such a nightmare of multiple state tax forms that they might become reluctant to travel on business at all.

“This is a real slippery slope,” Chamberlain said. “If jock taxes continue to be applied this aggressively, more and more professionals that travel to other states are going to be subject to them. Eventually, a traveling executive would have to pay tax in every state that he visits during the year. That creates an untenable level of complexity.”

Kathy M. Kristof, author of “Investing 101” and “Taming the Tuition Tiger,” welcomes your comments and suggestions but regrets that she cannot respond individually to letters or phone calls. Write to Personal Finance, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012, or e-mail kathy.kristof @latimes.com.