Just the tax, man
For eight of his first nine major league seasons, Angels pitcher Darren Oliver worked in Texas, where the stars at night are big and bright and, more important, there’s no state income tax.
Yet, each April, he pays a small army of accountants to file more than a hundred pages of returns -- and sometimes checks -- to as many as a dozen states and one province in Canada, covering taxes on income he earned on the road.
“The book’s like this big,” Oliver, holding his thumb and index finger a couple of inches apart, says of the tax documents he filed this year.
If opening day is the best day of the year for professional athletes, then April 15 -- tax day -- is probably the worst. Especially now that 20 of the 24 states with franchises in at least one of the four major pro leagues -- the NFL, NBA, NHL and Major League Baseball -- have laws that require visiting athletes to pay state income tax for each game they play there.
Considering that top-level athletes in football, basketball, hockey and baseball now make an annual average salary of $2.9 million, that means big bucks for states such as California. Home to 15 major professional teams, the state raked in $102 million in taxes from visiting athletes in 2006-07, the last year for which records are available.
As salaries have skyrocketed, the so-called “jock tax” has become widespread and controversial. Its imposition has raised questions of fairness and, for tax expert Joseph Henchman, has laid waste to the once-revolutionary prohibition on taxation without representation.
“Politicians are seeking to shift tax burdens to people that don’t vote,” he says. “It does create a rather disturbing trend because it essentially allows politicians to provide more government services than [citizens] are willing to pay for.”
Oliver, who still resides in Texas during the off-season, is one of few pro athletes willing to speak publicly about the subject, with most who decline saying they’re wary of making their lucrative contracts sound like a burden.
“Nothing surprises me that the government does to try to get some money,” says Oliver, who will make $3.665 million this summer. " . . . The common person, they’re not going to feel sorry for us. And if I was that person, I would be saying the exact thing. I can see both sides of it.”
In the tax world, it’s no secret that athletes are treated differently from other highly paid workers -- investment bankers and corporate lawyers, for example -- who also work in multiple states. The jock tax, critics say, is poorly targeted, arbitrarily enforced and unrealistically burdensome -- and also completely understandable given the current economic climate.
“No, it’s probably not fair,” says Ralph Espinosa, a Miami-based accountant who has done tax work for several NFL and major league players. “But they make more money than most of us. Their information is easily accessible online. Most people know their salaries [and] they can go in and see their schedules.”
Athletes are taxed based on “duty days” they spend in each state. In baseball, there are approximately 181 “duty days,” meaning a player earning $1.81 million would make $10,000 each duty day. Therefore, if that player’s team had three games in California, he would be responsible for taxes on $30,000 of income.
At that point, all the tax collectors have left is a math problem to figure out that Ichiro Suzuki, the highest-paid baseball player in Washington, a tax-free state, will have to pay more than $218,000 in California taxes for the 25 games the Mariners will play there this summer.
The salaries and schedules for lawyers, bankers, entertainers and other professionals who might be subject to nonresident taxes aren’t as accessible. But that hasn’t stopped some states from trying to reel in CEOs and other well-paid executives by auditing corporations for their travel records, tax professionals say.
Touring entertainers such as singers or comedians often have taxes withheld by either the promoter or the venue. But collecting from film crews can be trickier since shooting schedules aren’t publicized and are frequently changed and actors aren’t on the set every day.
“States are focusing their resources on where they can get the money,” says Henchman, tax counsel and director of state projects for the Tax Foundation, an educational group based in Washington D.C.
The advent of the jock tax is commonly traced to the 1991 NBA Finals in which the Chicago Bulls beat the Lakers, then received tax bills from California for the three games played in Los Angeles. However, nonresident tax laws have been on the books in the state since the 1950s.
“A lot of this became kind of an issue in the ‘80s as athletes’ salaries were rising,” says Denise Azimi, spokeswoman for the California Franchise Tax Board. “Athletes weren’t always that well paid. So there wasn’t that much of an impact.”
There is now, though -- along with plenty of compliance nightmares.
Espinosa, who has been preparing tax returns for Florida-based athletes for a decade, says some of his work runs into hundreds of pages -- even though Florida has no state income tax. Complicating matters, tax codes and rates can change from state to state, even from city to city.
Then there are the tax credits players receive if they’re required to pay taxes to two or more states for the same game -- for example: their state of residence, the state where their team is based and the state where the game was played.
“In many cases it’s a wash. You don’t end up paying all that much more,” says William Ahern, communications director for the Tax Foundation. “But you just file a lot more paperwork.”
Most major sports franchises withhold the required minimum tax and provide players -- as well as team broadcasters, trainers and public relations personnel -- with W-2 forms listing states where they need to pay income taxes. However, for players from smaller leagues or for athletes in individual sports such as golf, bowling or tennis, keeping track of who is owed what can be difficult.
Ahern relates the story of a young professional soccer goalie whose mother called the Tax Foundation in tears one spring. Her son had made $26,000 the season before and she was sitting at her kitchen table in Columbus, Ohio, trying to make sense of 10 state tax returns.
In other cases, Ahern says, an LPGA golfer who rarely finished in the money was surprised to get a huge out-of-state tax bill after winning $20,000 in a tournament, and an extreme skater who collected a $200 prize in Cincinnati was asked to give $2 back in taxes.
“It imposes a lot of complexity on people. And a lot of people, they’re not even aware they have this obligation,” Henchman says. “There’s just too much to keep track of.”
Henchman advises athletes to err on the safe side and pay taxes wherever they go. If not, they’re likely to wind up like the 13 former NFL players who found themselves listed on Wisconsin’s online delinquent-taxpayer rolls -- known in the state as the website of shame -- this year. The biggest scofflaw among out-of-state players was defensive back Cris Dishman, who, the website said, rang up a $145,934 tax debt during a 12-year career with four teams.
That would be enough to buy six new police squad cars or pay the salaries of more than four teachers.
Yet no state, Espinosa says, is as diligent as California, where one person at the State Franchise Tax Board works full-time tracking athletes. “I don’t see any as being as strict,” he says. “The way the states look at it is, if you’re going to come here, make money here, you’ve got to pay taxes [here].”
The practice is even spreading internationally -- with unintended consequences.
Last year, Madrid’s Bernabeu Stadium was selected over London’s Wembley Stadium as site of the 2010 Champions League soccer final because British officials couldn’t offer assurances that visiting players would not be taxed by the government.
Closer to home, accountants for NFL players must now pay close attention to where the Super Bowl is played.
When the Seahawks played the Steelers in the title game three years ago in Detroit, Seattle quarterback Matt Hasselbeck reportedly had to pay about $10,000 in taxes to Michigan, a state with which he has no ties. If that game had been played in Florida, as two of the last three Super Bowls were, he could have kept the money.
“Tax competition is certainly alive and well. And it has a dark side and a bright side,” Ahern of the Tax Foundation says. “The bright side is that states can’t raise their rates on income or sales [taxes] way beyond what neighboring states do because it will drive people and businesses away. But the dark side is states compete against each other in gouging each other’s residents. That has been going on for a long time. It’s just that states are getting better and better at it.”
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Now you know
Which states have no personal income tax?
SEVEN STATES HAVE NO STATE INCOME TAX:
* Alaska, Florida, Nevada, South Dakota, Texas, Washington
TWO OTHERS TAX ONLY DIVIDEND AND INTEREST INCOME:
* New Hampshire and Tennessee.