Admittedly, I am not an expert on tax issues, for that, you may have to visit a site similar to Good Service Tax (https://www.goodservicetax.com/) or a law firm that specializes in tax matters. My specialty in high school was math (perfect score on the SAT), but I ended up majoring in Political Science and have yet to take income tax in law school (perhaps I will take it in my final semester). As dry as the subject might be, though, it is extremely important to have some sort of knowledge about tax laws if you wish to represent professional athletes. Sure, you can siphon off the duty of preparing takes to a CPA, but it is always good to be a jack-of-all trades. Even if you never use your tax knowledge to benefit a client, it makes for some interesting dinner conversation…right…
I really have to hand it to my boys over at Sports Law Blog. My favorite part of the site is the posts that include suggested new sports law review articles. I don’t care how busy you are; you need to take the time to stay abreast of the latest news and happenings in your industry. Reading this site is not enough. Some law review articles can really take your practice to the next level.
In his most recent New Sports Law Scholarship post, Geoffrey Rapp lists some great reads. I have already read through From parts unknown: WWE v. Jim Hellwig in the ultimate battle for character copyright, Signing bonus skimming and a premature call for a global draft in Major League Baseball, and the topic I would like to cover in this post: Taxing the business of sports. You may not be able to access these articles without a Westlaw or LexisNexis login.
So back to taxes and what you need to know. You can save your clients money by knowing which states have state taxes, what those state taxes are, and which states have reciprocal agreements with other states. It is important to understand why state taxes are owed so that you and your client can have a full understanding of taxes in general. Lawyers can help with this sort of service and you could get assistance from Brotman Law and other law firms to hopefully improve understanding and make a plan. For instance, did you know that Florida, Texas, and Washington have no tax on resident or nonresident income? That means if you are an MLBPA certified agent, you want to keep the Mariners, Rangers, Astros, Rays, and Marlins on your radar. Unless your client is offered a similar salary by one of those teams and another team in a high tax state (i.e. – California), tax concerns may not be as much of a concern. But if your client is offered a $4 million per year deal from Oakland, Anaheim, or the Dodgers, and a $4 million/year deal with the Marlins and he does not care where he plays the majority of his games, you should advise him to head to the East coast Sunshine State.
The four major sports leagues have teams based in twenty states that have individual state income taxes. And those states have nonresident tax laws. This means that whenever your clients make money for playing in a state with state income tax, they have to pay a portion of their earnings to that state. To make matters worse, some cities have their own separate, small income taxes. Playing in Florida, Washington, or Texas won’t allow your client to avoid all income taxes (think Federal, as well), but it could save your client a lot of money (and Geico isn’t even involved).
States with high income tax rates for professional athletes: California (9.3%) – additional 1% if you make over $1 million, Minnesota (7.85%)
States with low income tax rates: Illinois (3%), Michigan (3.9%) – Detroit also has a 1.35% city tax, though.
Pennsylvania is tricky. There is only a 3.07% state tax, but watch out for those city taxes. In particular, Philadelphia wants that money. 2.801% city tax for residents. 3.7716% city tax for non-residents of Philadelphia. Ohio can also be pricey because of a separate Cleveland and Cincinnati city tax.
It’s also good to understand reciprocal agreements between states, but I’ll leave that for a future post..maybe.