State income tax on non-residents incorrectly labeled a jock tax
Author: Alan Pogroszewski
The term “jock tax” first appeared in an article by Elizabeth Ekmekjian, “The Jock Tax: State and Local Income Taxation of Professional Athletes” published in the Seton Hall Law Journal in 1994. Since then, the jock tax has been highly publicized—but with little understanding of the difference between income taxes that specifically target professional athletes and the basic constitutional right for a jurisdiction to impose their own tax system on non-residents.
One of the most complex issues facing professional athletes is the income tax burden caused by nonresident income earned in multiple jurisdictions. With local governments facing financial crises, increasing revenue through the taxation of non-resident individuals is popular because it imposes no additional burden on current residents. Income taxes imposed on non-residents is constitutional and each state has the ability to tax all individuals who perform services within their jurisdiction.
For a nonresident tax to be truly a jock tax, the jurisdiction would have to specifically write legislation that targets only athletes. I believe this has only happened on two occasions. One, just before the NHL lockout in 2004, the province of Alberta, Canada implemented a nonresident income tax on NHL players who played in Calgary and Edmonton and used this tax to help subsidize the province’s hockey franchises. Two, Tennessee’s professional privilege tax on players in the NHL and NBA for games played in their state.
In my 2009 article, “When is your CPA as important as your ERA?” I noted that nonresident taxation on professional athletes gained national attention in the early 1990s. That’s when Philadelphia began enforcing its city tax on nonresidents, specifically athletes, while Illinois retaliated against California’s nonresident tax on Michael Jordan and his Chicago Bulls teammates following their 1991 NBA Championship against the LA Lakers. Despite the publicity received from both Philadelphia and Illinois’ implementation of a nonresident tax, state court cases have shown that California has been taxing nonresident athletes since 1968 and New York has been doing so since 1971.
Twenty of the 24 states that are home to a professional sports team in the four major leagues currently enforce nonresident state tax laws. Each of these states also provides a tax credit to resident athletes for taxes paid to other states. Even though these tax credits erode the additional revenue from the nonresident tax, states continue to tax nonresident athletes because it remains profitable.
In a 2006 study, I determined that 12 of the 14 states that were home to a professional baseball team increased their tax revenue by taxing other states’ players as nonresidents, the state of California (with five major league baseball teams) represented 43% of this additional revenue generated.
From an athlete’s perspective, nonresident taxation/the jock tax increases tax liability and the complexity of compliance. When you look at Albert Pujol’s most recent free agent signing with the LA Angels of Anaheim, you see that during the 2012 MLB season, he will face state nonresident taxation in 11 states and three cities. Combined with his resident state, federal, Medicare, and Social Security taxes, Pujols will take home only 56.44% of his annual salary.
Clearly, all professional athletes would benefit from proper tax guidance—especially when it comes to complying with state tax regulations and jock taxes that target professional athletes.
For information about the jock tax and other key tax issues for professional athletes, please contact me at 585-705-3405.
ALAN POGROSZEWSKI is an Assistant Professor of Sports Studies at St. John Fisher College and the President of his own tax consulting business whose clientele include professional athletes performing services on three separate continents. Prior to accepting his position at St. John Fisher College, Mr. Pogroszewski was the Vice President of Business Operations for Sports Consulting Group, a firm that specializes in the representation of professional hockey players. Mr. Pogroszewski received his M.B.A. from Rochester Institute of Technology in 1996 and his M.S. in Taxation from St. John Fisher in 2003