Taxation With Representation

Is a certain team’s offer is better than another’s but your client prefers to play for the team offering a lower salary? Can state income taxes bridge the gap?

Three days ago, I had the privilege of listening to and meeting NFL agent Hadley Engelhard of Enter-Sports Management. The University of Florida College of Law Entertainment, Arts, and Sports Law Society hosted Mr. Engelhard in a setting that included about 60-80 audience members (seemed to be pretty much all law students besides me). Mr. Engelhard was in town anyway due to Wednesday’s Pro Day at the University of Florida (he represents Gators Reggie Nelson and Earl Everett in this year’s NFL Draft).

The speech was very insightful and covered a variety of issues, many of which I have covered in the past and a few that I hope to post on in the future. As a side note, Hadley is a graduate of my college and happens to also be alumnus of my high school (Nova High).

Besides touching on all the important facets of being a Sports Agent like post-career planning, understanding contracts, negotiation skills, being ethical, etc., Hadley brought up a point that I had never thought about: state income taxes.

When negotiating a deal for your client, there are a lot of factors that go into making a decision on what team he/she plays for. Money is not always the prime motivation for a player to move to a certain city. Some players want to play where their family lives, prefer a certain climate, do not want to change time zones, etc. These factors can all play a role in deciding to take a smaller monetary deal for your client. But Hadley brought up an interesting point; just because a team is offering less money, does not mean that in the end, your client will be seeing less money in the bank.

States differ on their income taxes. Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming all have absolutely no state income tax [Individual Income Tax Rates-2006]. In a state that does have an income tax, your client is going to fall into the high bracket for payments. In California, if your client is making over $1 million per year, you can count on shipping 10.3% of his/her income to the state.

So let’s think of a hypothetical. You have a client who has his family in Miami and really would prefer to play for the Miami Dolphins instead of the San Fransisco 49ers. The 49ers are offering a 5-year $30-million contract with $12-million guaranteed while the Dolphins are offering a 5-year $28-million contract with $10-million guaranteed. After state income taxes are factored in, is it really worth it to ship your client out to San Fransisco when he really wants to play in Miami? Probably not (you can still try to bump up the Dolphins offer by threatening to sign with the 49ers, though).

Your client will have to pay federal income taxes no matter what state he/she plays for, but factoring individual state income taxes into the decision of where your client signs can benefit your client in many ways. Thanks to Hadley Engelhard for bringing up this excellent point in his speech.

-Darren Heitner