http://moneycentral.msn.com/content/Taxes/P112872.asp
Athletes and entertainers pay millions every year to the states they visit. Now some states are tracking down CEOs and others who earn money on the road.
By Rick VanderKnyff
You may never have hit a grand slam or made a slam dunk, but it's possible you might face the same "jock tax" that costs Alex Rodriguez and Shaquille O'Neal thousands of dollars every time they play a game out of state.
The tax, which emerged in the 1990s to tap the huge paychecks of visiting professional athletes, has spread to include just about anyone who works extended periods in a state that levies a personal income tax.
The 41 states that do so have always held the right to collect tax from nonresidents who do business there. But athletes and entertainers have been the chief targets for nonresident taxes, partly because they tend to make lots of money and partly because their schedules are public and available to tax agencies.
But states are now widening the net to others who travel as part of their jobs, including attorneys and business executives.
Affects more than the wealthy
"Every time there's a tax on quote unquote the rich, the inevitable result is that pretty soon a million people are paying the tax," said Bill Ahern, communication director of the Tax Foundation, a nonprofit and nonpartisan research group that took aim at the jock tax in a 2004 report.
For instance, the report noted, not only do millionaire players get caught up in the tax -- but also every traveling member of the team's support staff, from coaches to trainers. And, remember, not every pro athlete is pulling down big money.
Ahern says he recently got a call from the mother of a professional Major League Soccer goalie who makes $26,000 a year. She was sitting at the dinner table doing her son's taxes -- and told Ahern she had to file returns in 10 states, with taxes due ranging from $200 all the way down to $2.
Arthur Rosen, a tax attorney and partner in the law firm of McDermott Will & Emery in New York, says that some state tax agencies have started targeting CEOs and other executives who travel and have been auditing corporations for their travel records. The trend has really surfaced in the last few years, Rosen said.
A 'compliance nightmare'
"If you're going to start doing this with every traveling businessman and salesman in the country, you're going to start creating a compliance nightmare," said Ahern. "Our position on this is that the states have overstepped their bounds. No matter how desperate states are to balance their budgets, they should not be resorting to this."
In a related issue, some states are taking a more aggressive approach to corporate income tax called "economic nexus," in which they tax companies merely because they have customers there -- even if they have no offices or other physical presence. Rosen has been working in support of federal legislation to regulate the practice.
All in all, said Rosen, "This is a classic quest for tax administrators: You want to get more revenue from people who aren't there. (States) started this even when economic times were better."
Do you have to worry?
The basic rule is this: If you travel for work, or even work remotely for an out-of-state company, those states think you "earned your money" there, and they want you to file a tax return (with the exception, of course, of those states that don't have a personal income tax). So, if you live in California but you do a consulting job in New York for an employer based there, you will most likely pay a New York tax on that income.
The more you make as an executive, the more likely it is that state departments of revenue will audit your company's travel records to see if you need to file. But if you're further down the corporate food chain -- a sales rep, for instance -- you're probably flying under the radar and won't be required to file. For now, at least.
How much time do you need to spend in a state before tripping the nonresident requirement? New York is one of the few states to spell it out, according to Rosen: If you spend 14 working or "duty" days there in the course of a year, you're in the clear. Work in the state for more than 15 days, and the state could require you to file a return. Training days don't count against the total.
Pro sports teams report to tax agencies in the states where they play away games, so athletes are automatically on the hook. Entertainers have public schedules and will probably pay a local tax, in some cases right out of the box-office gate. There are other anecdotal cases -- New Jersey is taxing visiting attorneys, for example.
As for the rest of us, it's murky, so consult your tax professional if questions arise.
Genesis of the jock tax
The nonresident tax is nothing new. The Tax Foundation, however, says it took on a new life in 1991 when the Chicago Bulls beat the Los Angeles Lakers in the NBA Finals -- and the state of California decided to go after a piece of Michael Jordan's income. The Tax Foundation report says that Illinois decided to retaliate the following year by levying a jock tax of its own, dubbed "Michael Jordan's Revenge" in the press.
The tax was applied only to players from states that taxed visiting athletes, which at the time was only California. Today, according to the report, "of the 24 states that have a professional sports team, only four do not have a jock tax." In addition, a number of cities and other localities also have a jock tax.
This is how it works. A pro athlete can be liable for taxes in two primary states, the state where the team is based and the state of residency. They can make it easier on themselves by living in a state without a personal income tax -- which is why so many pros live in Florida.
When they travel with their team, they are also liable for taxes in states with a jock tax. These states calculate the number of "duty days" a visiting athlete spends there for a road game, then send a tax bill for a prorated piece of the athlete's annual income. There is no nationwide standard for calculating what constitutes a duty day.
Athletes claim these extra state-tax payments as credits in their home state to reduce their tax there. Theoretically, then, the jock taxes should not increase the overall tax burden, but because some states have higher tax rates than others, an athlete (or anyone subject to a nonresident tax) can end up paying more overall.
It also creates a complex compliance issue for players who must file returns in multiple states. "Most of our athletes are filing in anywhere from eight to 16 states," said Steven M. Piascik, president of Piascik & Associates, a Virginia accounting firm with a practice that specializes in working with pro athletes.
"Typically, they're not going to pay any more tax," said Piascik, who added that states are within their rights to collect the tax. "Overall, as I tell my clients, it's an administrative burden."
Taxed twice
In the most extreme cases, the jock tax can lead to double taxation. In 2003, slugger Sammy Sosa, then with the Chicago Cubs, sued the state of Illinois because it denied the tax credits he paid for income taxes paid elsewhere. In 1998, he paid a total of $65,316 in taxes to California, New York and three other states; Illinois charged him $38,169 in taxes on the same income.
He lost the case, even though the judge agreed that double taxation was taking place. But the judge ruled that Illinois had the right to collect 100% of the taxes paid by athletes who are Illinois residents and play for teams based in the state. The state department of revenue said Sosa should have lodged his complaint against the five other states that taxed him.
"For us, it's a compliance outrage, and it's a sign of just how far the states will go in their desperation for additional revenues," Ahern of the Tax Foundation said.
Overall, the Tax Foundation argues, nonresident taxes are a wash for the 24 states with major league professional sports teams, because the tax and the accompanying credits basically cancel each other out. Some higher-tax states, such as California, come out as net winners, while some states lose out (and states like Washington and Florida, without a state personal income tax, stand above the fray).
The national Federation of Tax Administrators disputes that there are separate tax laws, such as a "jock tax," that target a specific profession. There is abundant evidence, however, that athletes are singled out for enforcement of nonresident taxes -- and that they are paving the way for other high-profile professions.
The Tax Foundation has called for the abolishment of the jock tax. The Federation of Tax Administrators has supported efforts by state tax agencies, professional teams and player associations to develop rules for a fairer and simpler apportionment of a nonresident athlete's income.
