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When the Cliff Lee saga reached its apex last month, a new type of article began to sprout up across the web. Instead of analyzing how Lee projected to perform and comparing his worth to the offers from the Rangers and Yankees, some writers began to calculate which offer would actually prove more favorable given the tax rates of the cities and states involved. Based on the tax codes of different jurisdictions it stood to reason that Lee might actually be able to take home more net compensation in an offer that, on the surface, looked to pay less in salary than another. I found this type of analysis intriguing since, by day, I am an accountant for a mid-sized firm in the Philadelphia suburbs. Naturally, articles that marry my two careers are right up my alley, but given the general confusion that arose from many of these pieces, I felt it prudent to do some research of my own and provide a primer of sorts on what is known as the “jock tax,” as well as some key components of how players are taxed.

For starters, what is the jock tax? To answer, we must take a trip back to 1991, when Michael Jordan and his Chicago Bulls beat the Lakers for the NBA championship. When it became known how much money Jordan stood to receive just from winning the title alone, the state of California decided it made sense to tax his earnings. After all, he earned that money while playing in California, and even though he wasn’t a resident of that state, the Franchise Tax Board felt that his non-resident income earned should be taxable to their benefit. Soon thereafter, Jordan received a tax bill from California. In retaliatory fashion, the Illinois Department of Revenue began sending tax bills to athletes from California who played in Illinois, a tax that became known as “Michael Jordan’s Revenge.” Suffice to say, it was not long before many other states and even local jurisdictions got in on the act.

The Jock Tax was given its name based on the principle that states tend to tax non-resident athletes earning income in their territory. Technically, the tax on non-resident income applies to everyone working out of state, but athletes tend to make more money and their salaries and schedules are out in the open for everyone to see. It isn’t the most difficult thing in the world to determine how much tax Chase Utley owes from road games if we know when he is there, how long he was there, his salary, and the tax rates of the states and cities involved. As I will explain below, the actual process can be tricky given the lack of a uniform code across the state and local jurisdictions, but the major pieces of information fueling the calculation are readily available.

Essentially, an athlete is liable for taxes in two primary states: his home team state, and his state of residency. Someone on the Diamondbacks who meets residency criteria in Georgia would be liable for state taxes in both Arizona and Georgia. Some states, like Texas, Florida, and Washington, do not levy a personal income tax, which is one of the main reasons athletes tend to flock to those cities. When the athlete travels to play a team on the road he is liable for taxes on income earned while in those states. The tax is based on a pro-rated portion of the player’s salary, which can be arrived at through the games played method or through what are known as duty days. The two methods produce different results. What makes the situation rather wonky is that duty days are not uniformly defined.

As an example, if a baseball season has 220 duty days, and a player making $10 million spends four duty days—say a travel day and a three game series—in a state with a 6.85 percent tax rate, then his taxable income for that state would be (4/220)*$10,000,000, or $181,818. His tax liability would be $181,818 * 6.85 percent, or $12,454. Given how much athletes make, this should illustrate just how much money governments can earn from taxing non-residents. Under the games played method, the taxable income would be (3/162)*$10,000,000, or $185,185, and the tax incurred would be $12,685.

In this example the discrepancy across the two methods is negligible, but when dealing with football players, who have a season with 200 duty days but way fewer games the differences in the methods can be substantial. Making matters even screwier is how a travel day can actually count as a duty day in both the departing and arriving states, depending on the specific statutes of each state. This obviously results in double taxation. On the positive front, most “home” states offer credits for taxes paid to other states. In Pennsylvania, if I end up paying income tax to Illinois, California, and New York, I get credits for the amounts paid on my Pennsylvania return, reducing the burden of my home state. In theory, this should mean that athletes would not be paying much extra tax, but because states do not follow a uniform rate, it is certainly possible for an athlete to pay a higher amount based on the primary state of his team and the teams he plays on the road.

On top of that, there are also times where athletes are double-taxed, such as the case involving Sammy Sosa back in 1999—you know, back before he looked like a zombie. Sosa played for the Cubs, but was also considered a resident of the state of Illinois. The Illinois Income Tax Act provided credits for taxes paid to other states for their residents, but not for residents of the state who also played for teams in the state. In other words, because Sosa played for the Cubs and lived in Illinois, he was taxed twice, whereas an Illinois resident playing for the Phillies would only be taxed once. All told, he paid about $65,000 in taxes to various states in 1998 and was then charged $38,000 by Illinois for taxes on the same income. Outraged, Sosa filed to have parts of the Illinois Income Tax Act deemed unconstitutional. Though the court acknowledged that double taxation was taking place, Sosa lost the case.

Because of the jock tax, it is common for baseball players to file upward of 20 state tax returns per year, which can be a boatload of work for those filing and preparing. Because of the sheer multitude of compliance involved it can be an administrative headache if the tiniest of mistakes emerges. Additionally, players are taxed on the tickets they leave at the gate for friends and family, as well as their per diem compensation. With per diems, players are given a specific amount of money each day for food, since the team covers travel expenses, and any amount that is above the tax-exempt amount—which is different for each state—goes on the player’s W-2 form. Not all per diem funds are taxable, just the amounts exceeding the exempt portion.

While the jock tax first surfaced with Michael Jordan back in the early 1990s, and jurisdictions soon caught on, not every team immediately complied. According to a source of mine who formerly served in the accounting department of a major-league team, his team had been in compliance from the time he arrived, but many of the teams they played were not withholding taxes owed to the road team cities. The situation reached a head in 1997, when interleague play began, because now teams were traveling to cities in which they have never played before, with different taxes and rates to take into account. Eventually, the jurisdictions began harassing teams for the taxes owed, which proved bothersome given that so many had a gross receipts tax, where a business incurs tax purely on the revenues earned, regardless of the net profit or loss.

For teams operating with a loss, being taxed on revenues they were not even converting to profit would only exacerbate their financial woes. If teams had to allocate television revenues to every city and state they traveled to, and had to start paying gross receipts tax in every jurisdiction, their tax bill would increase materially. The income tax was not considered too much of a burden because given the short time a team stayed in each road city and the high salaries of the players, losses were often experienced. To avoid the gross receipts tax problem, a compromise was reached with municipalities where teams would withhold the payroll taxes for each state and city, and nothing else.

Further, there is the issue of what criteria determines whether someone is a resident of a specific state, which comes into play when taxing non-salary income. A famous case from a few years ago involved Derek Jeter, where the city of New York was trying to retroactively tax Jeter as if he was a resident of New York from 2001-03, even though the Captain claimed that his primary residence was in Tampa, Florida. Not only would the city be able to collect taxes on his salary if he was found to be a New York resident, but they would also reap the benefits of taxes owed on all of his endorsement income or other non-salary income. Since Florida doesn’t have a state income tax, many athletes will make it their primary residence to shelter their income. In Jeter’s case, the auditors leading the case against him explained that the shortstop owned a multi-million dollar apartment in the Trump World Towers and argued that, if the shortstop of the Yankees is not a resident of New York, who is? Eventually, Jeter settled out of court, but issues like this surface all the time.

 In summary, players are liable for taxes to their state of residency and the home state of their employing team, as well as to the states in which they earn income as non-residents, which occurs every time they are on the road. They are taxed for per diems and tickets left at the gate, and though it might seem like the various non-resident income taxes wash out for every player, it is certainly possible given the difference between the duty days or games methods, and the actual rates of the “road cities” for a player to incur more tax than he would in another situation. Determining what Cliff Lee would take home in net pay given the state and city taxes for New York and Philadelphia—Texas does not have a state tax—is certainly an interesting way to attack a hot topic from a different angle, and hopefully this information will help clear up confusion regarding taxation in baseball.   

Thank you for reading

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joelefkowitz
1/06
Interesting read. What about players on the DL, would those count as duty days (assuming he is still traveling with the team)? And for that matter, what about guys rehabbing at the team's facilities in, say, Arizona? Or minor league rehab assignments?
EJSeidman
1/06
It all depends on the specific statutes of the states or cities involved. I admittedly did not review all of them else I would have gone insane, but it seems that as long as the player is getting paid, it would count as a duty day. If the player was not getting paid while on the DL then it is likely a duty day would not be accrued.
chabels
1/06
Along these lines, what about players who are on the bench but never play. That is, if the last arm in the Cubs' pen travels to Arizona for a three game series but does not appear in any of the games, would he be taxed? Certainly if you were using duty days, but can a player instead use games played to calculate his liability?
EJSeidman
1/06
It's not a choice of the player, it is specific to the statute's of the state and cities involved. I believe the duty days method is used much more often than the games method. But if a guy was on the bench he would most likely still be taxed. It's just a different denominator in the equation. If it's a three-game series with a travel day, it would be (4/220)*rate in duty days, but (3/162)*rate in games method.
pmatthews
1/06
Thank you for a very insightful explanation of a topic that, from press accounts, seemed pretty straightforward, but turns out to be anything but!
rowenbell
1/06
Wonderful article, Eric.
xenolith
1/06
THat was one of the most interesting articles I've read in a while. Great job.
cfinberg
1/07
Ditto.
Manprin
1/06
Thanks, Eric.

This is part if the reason players have agents. Talking to some minor leaguers and players who make the major league minimum the taxes can really be a burden.

I know entertainers, stand up comics and the like, also have the same issue.

I travel for my job and routinely end up filing in multiple states each year. And every year there are issues with filing electronically and invariably I receive a refund check 6-12 months for being 'double taxed'.

But ask anybody if they want to quit their job because of taxes and I am sure they would shrug it off.
EJSeidman
1/06
Yeah -- entertainers are just like athletes where we know when they are in certain areas due to tour dates. The biggest problem seems to be synergy across the various states and municipalities.
EJSeidman
1/06
One thing I think would be interesting is to see what the taxes looked like for someone who was traded/signed/released multiple times in a year. It must be a headache on top of a migraine.
chiripero
1/06
I was a host family for ballplayers who came to play in the California League at High Desert when I lived down there, hosting mostly players from the Dominican Republic. Some of them talked to me about their tax situation, and thank goodness for Agents, because coming from another country it is difficult enough to perform at a high level, while also contending with language and living conditions. Then you put the tax situation on top of that and you have a full plate ! I have been doing my own taxes since I was 17 years old, and at age 70 I can imagine what a stressful process that would be for a young athlete from another country. Thankfully, the agents are there to assist them in meeting those obligations.
EJSeidman
1/06
I'd love to hear more about this. Feel free to type more here or e-mail me: ejseidman@gmail.com.
redsoxin2004
1/06
As my grandfather always taught me, it's not what you make but what you keep. In addition to factoring in tax impacts on contract offers, cost of living is often over looked.

For example, I looked into this during Lebron's "decision", comparing Cleveland to New York. A $5MM home in the Cleveland suburbs would cost about 3-5x that amount in Westchester County NY for a similar home. Annual property taxes were about $500,000 more per year in Westchester than Cleveland. That's $5MM over a 10-year period. And that was only the property tax issue. Other costs of living ran about 30-50% more in NY than Cleveland.

After factoring in the Jock Tax, a $100MM contract in Cleveland was worth a $145MM contract in NY.
EJSeidman
1/06
I think we might now be getting into quantifying a player's comfort level with a team or city ;-). I'd sure be comfy if it means saving $45 million.
ScottBehson
1/07
That's just the price you pay for living in/near the greatest city in the world. There's a reason it costs more than almost anywhere else- supply (finite) and demand (huge).

And, yes, I admit I'm an obnoxious NYer
cfinberg
1/07
...who clearly doesn't live in Bushwick.
ScottBehson
1/08
Not to beat a dead horse, because I see the humor in your post, but... if more people moved out of even Bushwick than would be replaced by people who wanted to move there, prices would go down.
mattymatty2000
1/06
Just wanted to say wonderful work, Eric. Thanks for that.
Gordon
1/06
My daughter is a musician who travels and performs in many different states each year. Thus ends up with a return for each of the them that have state tax. A similar situation but at a much lower income level (and I end up doing her taxes).
chiripero
1/06
Eric: I have heard so many comments from baseball fans pro and con about the role agents play in baseball. Most of their negative comments relate to the upscale contract demands by very aggressive agents. Not once did I hear someone discuss the other duties performed by agents, such as preparing complicated multi-state tax forms for the player. Your article here is one that should have been addressed (and may have been somewhere)long ago. I really appreciate what you have written here and it clarifies alot of mis-information out there, or just a lack of knowledge by most fans.

Vicente Padilla, from Nicaragua, started his professional career with the High Desert Mavericks in 1999. One night after a game I was waiting to give Vicente a ride back to his apartment when a gentleman approached me and asked me if I was Bob who was waiting for Padilla. I responded, yes, and he introduced himself as Scott Boras and asked me if it was OK if he spoke to Padilla before we left. He was very much a gentleman and he was interested in representing Vicente as his agent. I don't know the outcome of that conversation, but it gave me an insight into agents that I truly wanted to see. I have had other agents in my home over the years and I respect them much more than I did before, because there is much more there than the media usually reports. You have done us all a great service with this article today.

BTW, when Vicente Padilla was promoted to AAA Tucson, he asked me to wait in my car because he wanted to give me something. He came out with his Nicaragua National Baseball team shirt and gave it to me as a gift of appreciation. I still try to wear it anytime he starts a game.
AadikShekar
1/07
nice story, thank you.
69wildcat
1/06
Very interesting article, well written and informative. I don't know if this is true but it was represented to me as true and I can certainly envision it happening. As you may or may not know the main airport for Cincinnati is on the Kentucky side of the river. Several years ago the county where the airport was located (Kenton, Boone I forget) was suppposedly going to start taxing NL/NFL players for the "privelege" of transitting through on the way to Cincinnati to play. Again, I have no idea if this ever came to pass but, if it did, just one more nightmare for teams, players and everyone trying to keep the accounting straight.
jdtk99
1/06
I'd recomend reading License to Deal by Jerry Crasnick as an interesting look at what it takes to be a baseball agent. The protaganist Matt Sosnick takes his lumps but seems to be doing well now with a cadre of Marlins.

blcartwright
1/06
I live in Pennsylvania but work in Virginia. Fortunately, the states have a treaty that allows me to have Pa taxes deducted from my check.
EJSeidman
1/06
And even if you didn't, on your PA-40, you would be able to deduct the taxes paid to Virginia to reduce your PA tax liability.
EJSeidman
1/07
Is there anything else tax or business related, pertaining to baseball, anyone is interested in me writing about?
mtr464
1/07
I would be interested in knowing some of the ways teams account for things like player contracts, or other items unique to baseball/professional sports. Also, Paul Beeston has said: “Anyone who quotes profits of a baseball club is missing the point. Under generally accepted accounting principles, I can turn a $4 million profit into a $2 million loss, and I can get every national accounting firm to agree with me.” It would be interesting to know the types of policies teams use when preparing financial statements. Maybe a look at how the policies may obscure the teams actual financial health, or why income is not the proper measure of a team's financial health? But, that might not appeal to anyone but the accountants here.
andyfoy
1/07
I love this idea. Great article, Eric.
bsolow
1/08
For what it's worth, I know that academics who have looked into estimating marginal revenues for teams from actual revenue data use only the data from the Blue Ribbon Commission because it's the only team financial data that's ever been audited. Stories abound about the Cubs having much less TV revenue than the White Sox despite being much more popular while they were owned by the Tribune Co. because there were tax advantages for the Tribune Co. to shift profits away from the Cubs and to their TV business (WGN). It'd be interesting to see if the Cubs' TV deal jumps now that the Tribune Co. doesn't own them.
mrdannyg
1/08
It's not a completely original idea, but I'd be very interested to hear more about the insurance side. Anything from the cost of insurance, to the extra cost of injury-prone guys, how much insurance pays, in what scenarios, etc. I realize tax and insurance are very different specialties, so no high expectations here : )
mtr464
1/07
Eric from one baseball-loving accountant to another: thank-you for writing an article mashing the two together! I am almost embarrassed to admit how excited I was when I saw the title.
ScottBehson
1/07
Thank you, Eric. One of the things I love about BP is how responsive you are to the readers. A few other readers and I made a few comments about this topic in a BP article about two weeks ago, and thought it would make for a good article. Thanks to you, it did!
EJSeidman
1/07
Thanks, Scotty. I try to make myself as available as possible and that's why I always give out my e-mail address. If there is ever a specific topic someone is curious about or research they would like to see done, I'm always willing to have a go at it.
BurrRutledge
1/07
Fascinating read, Eric, thanks. So, did you check to see whether the Jock Tax did have an effect on Lee's three publicized offers? Or, if an accurate accounting is to be found elsewhere, can you provide a link?
EJSeidman
1/07
Haha, I was dreading that question. But I think maybe it would be a fun exercise if I went through it all. Took the Phillies schedule, dissected it, figured out the tax rates of all the states and municipalities involved and come up with a rough estimate, and then compare it to Yanks and Rangers. Unfortunately, with tax season starting for me, well, this week, I don't know if I'd have time. Maybe it can be piecemeal and I'll throw an Unfiltered up.
redspid
1/07
As another CPA on this site, I will point out the credit you get for paying taxes to another state may not equal the actual tax paid. Most states will limit the credit for taxes paid to another state to the rate in effect in that home state.
EJSeidman
1/07
Right -- it might not be a dollar for dollar credit due to this, or in Sosa's case, because of wonky rules. It will reduce the burden but in many cases not wipe it out completely.
yadenr
1/07
Great article, and the comments have been fun as well. Thanks. More baseball accounting!
onegameref
1/07
I have a sneeking suspicion that the states spend more trying to tax the traveling athletes than they make in taxes from the ball clubs they play against and benefit from them being in town. Are the states truly that desperate for income tax that simply travelling to a state to transact business, with all the ancillary taxes involved that the state will take in, really worth the negative perception of money grubbing? As a California resident, I shudder to think how athletes must cringe to see their earned income being thrown down the rathole that is Sacramento. Otherwise, this was a very interesting read. I played ball with a minor league agent that always lamented how he was with his players during the bus ride days and then a smooth talking big league agent would pull him away when he reached or neared the majors. I know it is every man for himself but it still left an impression on me that there may be little honor among agents in the pro sports field. The taxes, I suspect, are completed by professional preparers but the agent is certainly the facilitator and for good reason. The agent needs to keep the player on the straight and narrow.
fgreenagel2
1/07
This was wonderful. Thank you. I'm missing a lot of the writers that are long gone --- this was a real highlight and a good reason to keep hoping that BP can churn out some more really original articles.

This should go in the mythical BP "must read" file that Goldstein or someone has always been saying should be created on the site.
rowenbell
1/07
When I worked for a large professional services firm, if I was working on-site at an out-of-state client for (say) a full week, our firm's payroll function would allocate a corresponding portion of my salary to the other state. Consequently, I would ultimately need to file multiple state tax returns.

However: To the extent that these other states in which I worked temporarily had higher state tax rates than my home state, my firm "made me whole" -- they would pay me an additional amount in order to cover their estimate of the marginal state taxes caused from my working out-of-state (plus the associated tax gross-up). And, after I filed my tax returns for the year, if it turned out that their estimate didn't actually make me whole, I could show payroll my tax returns and get a true-up of the original tax equity payment.

The reason I bring this up is: Perhaps professional sports teams do the same thing as my former employer did. In which case, maybe we tend to exaggerate the extent to which these jock taxes drive behavior among athletes -- because perhaps teams already commit to making their employees whole with respect to these taxes.

Eric, any thoughts?
bmmillsy
1/07
Eric,

Just wanted to say this is a fantastic read, and quite fascinating. As someone interested in the economics of sport, I'd love to see more stuff like this.

Here is a question for you:

What about team owners' private income? Given that the firm is operating out of it's own state roughly half the time, have states looked to collect business taxes from owner income itself? Most owners have other streams of revenue and private LLCs to put the operating losses on the books with respect to the baseball team and get around taxes to begin with. Do states look to tax their general income (i.e. income from being Chairman of Starbucks) and attempt to specifically trace a portion of that to owning the sports team and operating in other states?
bmmillsy
1/07
CORRECTION: Did not mean to say "business taxes from owner income", just meant the owner's private income.
Richie
1/07
I remember hearing how Steinbrenner wrote off a race track or some such thing against Yankee profits one year. If Beeston is right (I suspect he was hyperbolizing), then there ought to be some more interesting such stories out there.

Not that I have any idea as to how/if you could get at them, or confirm them. But as an accountant, do you know of any baseball-relevant accounting tricks of the type Beeston was alluding to?
strong
1/07
What I would like to see is what the bottom line income a state or municipality takes in based on having a sports team call it home. If it is as large as it appears here, I am stunned to think that this tax income would not be featured prominently in a Sports team holding a state or municipality hostage for new publicly financed facilities.
mgolovcsenko
1/07
Here's an idea: create an index (where some middle of the road team =100) for expected take-home pay after estimating the impact of the home state income taxes as well as the prevailing states that team plays in on the road.

So if Florida Marlins are 100 .. maybe the Yankees are 93 (based on higher state taxes and playing a lot of games in high-tax states like MA?).

Putting something to numbers might help understand the magnitude of the advantage or disadvantage certain teams have in free agency because of their home states.
mrdannyg
1/08
One problem with that is it would change (slightly) every year - with interleague schedules changing, etc.

The change would be pretty minimal - heck, it could be a great resource for any potential free agents out there!
EJSeidman
1/08
Yeah that could be very interesting. In fact, I bet once I have all the state and local withholding rates in tow I could come up with an algorithm based on a team's schedule to compute it each year.
mgolovcsenko
1/09
As I think about it a bit more, I think what you're trying to do is calculate,for two different teams, the pre-tax salaries that result in the same after-tax income factoring in state (local, too?) taxes & road schedule.

I.e., if the Yankees offer a $1m salary, how much do the Rangers have to offer (presumably less than $1m) for the player to have the same take-home.

The index values should be directly usable to make that type of estimate. Making up numbers here, but $1m x (94 / 103)= ... where Texas and NYY are 94 & 103.

Good luck ... curious as to the results, specifically the magnitude of "advantage" some teams have relative others in competing for free agents.

mgolovcsenko
1/09
You could probably sell the results to most every agent out there.
redsoxin2004
1/08
That's a great idea. I'm going to give it a shot see if my results are the same as Eric.
EJSeidman
1/08
Once you assemble the rates for the cities and states, send it my way. ejseidman@gmail.com. I'll forward you mine when done. Prob work on it in the next few days.
tbreslin
1/11
Fantastic article, Eric. I just want to make sure I got this right because it is something I've wondered about for a long time. Is an athelete in a team sport an employee who gets a W-2 as opposed to being an independent contractor who gets a 1099?
EJSeidman
1/12
Yes, athletes get W-2s and the accounting departments of the teams take care of the various withholding rates for the jurisdictions.
annraebenson
9/03
How do signing bonuses get taxed? Are they prorated with the annual salary also? Or just taxed to the state of residence at the time of receipt of the bonuse?