Part 1 of this series focused on Michael Jordan’s Revenge Tax. You can read that blog here. Part 2 will focus on how the “jock tax” raises many different multistate and national taxation issues.
Let’s start by looking at an example. An NFL player is under contract to obtain a bonus of one million dollars if they catch 100 passes throughout the season. The NFL player catches pass number 100 at an away game in a state in which he is a nonresident. Can that nonresident state asses a jock tax on the one million dollar bonus? On one hand, the bonus has nothing to do with the state in which he is located. On the other hand, perhaps the particular state’s playing field had the right playing surface or the climate was ideal to make the catch easier for the player. Perhaps the state had better amenities so that the player got better sleep the night before, which led to an increase in focus. The answer to this question is that the bonus is generally taxed as regular income, while the actual “jock tax” is separate. But instead of income earned from bonuses, what about income earned from endorsements? To add one more layer of complexity, what happens if the athlete has played in countries outside of the United States?
Generally speaking, endorsement income is taxed in the athlete’s home country. The exception is the United Kingdom (UK). The UK wants to tax endorsement income earned by any athlete who plays in the UK. Before 2012, there was a formula for how this tax would work. This formula was not great for certain types of athletes, such as a triathlete. Due to the grueling nature of triathlons, a triathlete may not compete in many events over the course of the tax year. In this example, the triathlete competes within the UK for one event and competes outside of the UK for one event. This is only a total of two competitions for the entire year. Under the previous UK formula you take the events in the UK (1) and divide it by the number of worldwide events (2) to get 50%. If that triathlete was paid $100,000 for endorsements worldwide (meaning not just within the UK), $50,000 would be taxed in the UK. This is an incredibly high tax rate when the triathlete spent only one day in the UK for the particular event. There is however a revised calculation that factors in how many training days the athlete spent in the UK, compared to outside the country. This of course begs the question as to how a training day gets defined. Does sleep or rest and recovery count as training? This revised calculation makes it easier for NFL games to be played abroad as the UK revised tax is similar to when a team gets taxed for playing in a different state within the U.S.
However, what if an NFL team were to relocate to the UK? Now the team and athletes are no longer taxed the same way. Instead, about half of the games would be in the UK and half in the U.S. This means about half of the athlete’s and team’s salary would be taxed in the UK at a maximum rate of about 45%-50%, while the other half would be taxed at the U.S. tax rate of about 37%. So will NFL players and teams be willing to pay more in taxes? Or will the UK allow for a tax break for an NFL team to come to the UK – if so, how would other athletes feel about that?
As you can see, the taxes for athletes can become complicated. It is important to seek guidance from experienced tax professionals.