The Jock Tax': How pro athletes are being taxed by the states

When Texas Rangers shortstop Alex Rodriguez stepped onto the field at the All-Star Game last July in Milwaukee, there was a huge cheer from the crowd.

There may have been cheering at the Wisconsin Department of Revenue as well: By appearing in the event, Rodriguez obligated himself to pay more than $8,000 in Wisconsin income taxes.

Rodriguez and hundreds of other athletes and entertainers are finding that some of their biggest fans are state tax collectors. A growing number of states — and some cities as well — are aggressively pursuing high-income nonresidents who earn income from within the states' borders.

This ultimate commuter tax — often dubbed the "jock tax" — is creating a major headache for its targets and has spawned a cottage industry of accountants and bookkeepers who advise high-profile figures on how to minimize their state taxes, prepare returns and make payments for taxes they cannot escape.

Players sometimes move to different states, which accountants say can help when it comes to items like signing bonuses, but they have little choice about where they play their games.

"It's a nightmare," said Ronald Rubin, a certified public accountant in Bethesda, Md., who does tax returns for several professional athletes. "You have some players filing 12 or 14 state income tax returns."

The players "moan about it, but it's really a pain for the accountants," said former Washington Capitals goalie Bernie Wolfe, who now runs Bernard R. Wolfe & Associates Inc., a financial planning firm in Chevy Chase, Md. "They have this tax return that's about the size of an atlas — a hundred pages for a tax return. They bill the player and the player gets upset because of the costs."

Stars like Rodriguez, who make millions of dollars a year, get little sympathy, and accountants and state officials say they generally pay what they owe.

"You see at the end of the year your paycheck comes in and you have 15 different states that take out money," said Washington Capitals left wing Steve Konowalchuk, who earns around $1.5 million a year.

"It's kind of weird."

Agents and others, though, say many marginal players, who may have careers lasting only a few years and paychecks far smaller than A-Rod's, can see a significant portion of their earnings drained away by the jock tax. The tax also applies to coaches, trainers, equipment managers and others who travel with the team, though many of them make fairly modest salaries.

States have long asserted the right to tax income earned within their borders, but the soaring incomes of athletes have given the jock tax special significance. The fiscal woes facing many state and even municipal governments have made them more aggressive in their collection efforts.

"Maybe 10 years ago no one should have done this, but since others have done it, we felt we owed it to our citizens to be collecting this tax," said Cincinnati city councilman David Pepper, who in December helped pass a law applying a 2.1 percent earnings tax to out-of-state professional athletes, which is expected to bring in about $750,000 to the city.

"If we don't do whatever anyone else does, we're the ones with the 'kick me' sign on us."

Some experts say the tax is unfair because it singles out certain groups.

"It's not fair (that) just because this particular occupation is so easy (to track) and no one feels bad for" the rich players that they have to pay these taxes, said David K. Hoffman, an economist with the Tax Foundation in Washington.

Hoffman argues that the players are paid by their teams in their home states and are not in fact earning their money at away games. In addition, he said, "the cities and states are the ones that benefit. When a famous athlete goes to a city that doesn't have the most popular team, he fills the seats. But his paycheck doesn't change."

Hoffman, who calculated the taxes incurred by Rodriguez for playing in the All-Star Game, figures that Wisconsin pulled in more than $133,000 from all the players in amounts ranging from A-Rod's $8,864 to $58 each from National Leaguers Eric Gagne and Jimmy Rollins.

States argue that their taxes are equally applicable to everybody, but some concede that practical considerations do play a role. Maryland, for example, doesn't try to tax airline pilots, though their situation might seem analogous to athletes', because "it's not considered enough of a significant activity that they are involved in when they stop briefly" in the state, said a spokesman in the comptroller's office. Also, it would be a "bureaucratic nightmare ... trying to assess what percentage of their salary should be taxed. It's just not doable."

But where the tax can be collected easily and in large amounts, states are interested.

California, which is looking at a $35 billion budget deficit and has 15 teams among the four major professional leagues, has an employee assigned almost exclusively to keeping track of the comings and goings of professional athletes: Duane Hoffman, associate tax auditor with the California Franchise Tax Board and the man in charge of the nonresident athlete audit program.

Hoffman said the state is an equal-opportunity taxer.

"We don't just pick on athletes," he said. "The law is designed for everyone who is doing business in California."

Hoffman pores over sports publications and online sites analyzing which teams are coming from where, which players are playing, when they arrive and when they leave.

"I am the only one in the office who gets to legitimately look at the sports (Web) sites," he said.

"This is a guy who knows the injury and waiver wire better than many managers," said Stephen Kidder, a Boston tax lawyer who represents the players' unions in Major League Baseball, the NHL and the NFL.

"(Hoffman) knows exactly who is here and who is on the plane and on the roster."

"There is one state I won't mess with," said Kimberly Morton, who handles the tax returns of professional athletes for CSMG Inc., a major sports agency. "If you get on the bus and step foot in the state, California will find out."

In many cases, teams withhold money from players' wages and pay taxes to the municipality or state in which the game is played. Those payments by the team can be made monthly or quarterly.

Some states, such as California and New York, monitor the process closely.

Many states require the athlete to file a state tax return, with the result that many professional athletes have tax returns that stretch for hundreds of pages and cost several thousand dollars in accounting fees.

One way athletes can reduce their tax bill is to get as much money as possible up front in a signing bonus, and to receive that bonus as a resident of a tax-free state. If contracts are worded carefully, signing bonuses are not considered wages and an athlete can then avoid paying any state income tax, including the jock tax, on that money, agents say. The savings can reach hundreds of thousands of dollars for big-time players.

Sports agent Ron Del Duca saved client Tom Barndt, an NFL defensive tackle at the time, nearly $200,000 by advising Barndt to establish residency in Nevada before he signed a contract that included a $3.3 million bonus to play for the Cincinnati Bengals in February 2000.

"I basically told him, 'If you like Vegas and want to save some money down the line, establish residency,' " said Del Duca, of Virginia Beach. "But you physically have to show the tax people it's a legitimate relocation. You can't do it the day before you sign the contract."

Even without the signing bonus, players who live and work in a tax-free state can save millions in annual taxes.

Case in point: Because Rodriguez resides in no-income tax states (Florida and, now, Texas) and plays half of his games in no-tax Texas, he avoids paying a state income tax on at least half of his income. At $25 million a season, half of his salary comes to more than $12 million. If he avoids paying, say, a 3 percent state income tax on that amount, Rodriguez is saving $360,000 free and clear. That's $3.6 million over 10 years.

"Tax planning is an important part of financial strategy for any professional athlete," said Octagon sports agent Gregg Clifton, who represents such big-name baseball players as pitchers Tom Glavine, David Wells and Baltimore Orioles outfielder B.J. Surhoff.

"While we don't encourage athletes to move just for tax reasons, there's a clear benefit to relocating to tax-free states."

New York Yankees pitcher Wells, a native Californian, relocated to Florida in the early 1980s to be close to spring training and have easier access to offseason workouts.

With his 16-year career earnings estimated to be in excess of $40 million, Wells has probably saved several million in state income tax, not to mention the interest that those savings would have earned over the years.