March 11 will be remembered as the day the sport’s world stopped. As the Utah Jazz and Oklahoma City Thunder were about to tip-off, tests revealed that a player on the Jazz contracted COVID-19, which prompted the National Basketball Association to postpone the rest of the games that night and suspended the season the next day. The National Hockey League followed suit with suspending their season and Major League Baseball has postponed the start of theirs. The only sport to continue with its offseason plans, trying to remain on track, is the National Football League (NFL). The NFL proceeded with its draft as planned, although it was changed to a virtual event. The NFL has also insisted that training camps and the 2020 season will continue as scheduled.
Let’s assume the NFL will proceed as planned and discuss how training camps affect player’s tax bills and how recent state shutdowns will impact them.
As a general rule for state taxation, all income earned is taxed in the state in which the taxpayer is a resident of. If a taxpayer works in a different state, then income derived there is also taxed. The taxpayer would then receive a credit from their resident state for taxes paid to the other state to avoid taxing the payer twice on the same income. Some states do not have any personal income taxes. If a taxpayer is a resident of a state with no income tax and works in a state with income tax, the taxpayer will still pay income taxes in the state in which they work. The resident state will not tax the income, but it does not remove the obligation to the state in which they work.
Athletes, like everyone else, are taxpayers who pay state income taxes. The apportionment of their salaries derives from the percentage of duty days in each state divided by total duty days. Duty days are any days a player is required to be with the team. They are accumulated from training camp until the end of the season or until the team’s playoff run ends. The athlete adds up the total number of duty days performed in a state and divides it by the total amount of duty days for the year and allocates a percentage of their income to that state.
For purposes of this article we will examine the Dallas Cowboys. In the NFL, there are 16 games played with half at home and half at an opposing team stadium. For those familiar with the NFL, there is the potential for home games to be overseas or at a neutral site, but for these purposes, we will assume it is eight home games in Texas and eight road games in eight different states. Half of the players’ salaries will be apportioned to Texas. That also means 6.25% (one game divided by 16 total games) will be apportioned to the other eight states. Texas is one of those states that does not have a personal income tax. Therefore the players would not be paying state taxes on 50% of their salaries, as long as they were Texas residents.
The above calculation did not include a bulk of the duty days. Also included in the duty days are training camps, practice days, preseason games and playoff games. In total, there are usually about 160 to 180 duty days to an NFL player’s season. Using the 2019 training camp schedule, the Cowboys training camps lasted 20 days with 16 practice days. Of the 20 days, only those 16 practice days will count towards the player’s duty days.
If the Cowboys training camp took place in Texas, then it would not be a big deal to have additional duty days in a state that has zero income tax, as long as those players were residents of Texas or any other state that has no personal income tax. However, to get away from local distractions, the Cowboys train in Oxnard, California. California has the highest tax rate amongst the 50 states at 13.3%.
Let’s use Cowboys Quarterback Dak Prescott as an example of how his taxes are affected by hosting training camp in California. We will assume that Prescott has become the first $40,000,000 a year salaried player (he is currently under a franchise tag for $31,000,000) with the largest contract in NFL history, making for a great case study. We will assume there are 160 total duty days. Since training camp is mandatory and Prescott participated in all 16 practices, 10% (16/160) of his football income, which equates to $4,000,000, will be allocated to California. At a tax rate of 13.3%, he will have a tax bill owed to California of roughly $532,000.
As stated above, the NFL is looking to continue as planned for the 2020 season. However, states are at various stages of reopening. Texas has already moved to Phase 1 of reopening while California is still under shelter-in-place laws. If, by the time training camps open around late July, California has not fully reopened, the Cowboys will have to look to another reopened state for camp. Since Texas is on its way to reopening, there is a strong possibility that the Cowboys host training camp somewhere deep in the heart of their home state. Luckily, Prescott is a resident of Texas and hosting training camp there would save him $532,000 in taxes to California.
Sports are a large part of America’s culture and we are hopeful that they return in 2020. However, it does not appear that every state will be ready to host practices or games. Those states that will not be able to host anything and also have high income taxes will lose out on tax revenue. The players, however, will be able to reap the benefit of having a lower tax bill. It will be interesting to see if this changes the practice habits of any teams going forward as the players get used to having a lower tax bill in the current year.