State taxation of professional athletes and entertainers.

• Author: Schmutter, David

States and localities often target nonresident professional athletes and entertainers to pay income taxes. Such celebrities are often highly paid individuals whose whereabouts can easily be tracked from readily available performance schedules and advertisements. Moreover, tax collections from such taxpayers are an efficient revenue generator. For example, in fiscal 2000, California and Wisconsin collected $94 million and over $11 million, respectively, from nonresident athletes; see Walker," A Closer Look at the Jock Tax,'" Milwaukee Journal Sentinel (7/9/02), at www.jsonline.com/sports/ brew/allstar/jul02/57648.asp.

Why should such taxpayers and their tax advisers be concerned? The Tax Foundation, a Washington-based, nonpartisan, nonprofit group that monitors fiscal policy, reported that the taxation of nonresident athletes is poorly targeted, arbitrary and burdensome; see Hoffman, "State and Local Income Taxation of Nonresident Athletes Spreads to Other Professions," at www.taxfoundation.org/sr123.pdf. Such individuals may have to file returns in over 38 states, not including localities. The sourcing rules for such income may vary significantly by jurisdiction and may depend, in part, on the type of income earned, the state's particular sourcing method and the reporting-entity relationship (i.e., employee, independent contractor, etc.). Moreover, athletes and entertainers may even be subject to "double taxation" as explained below.

Often, athletes and entertainers are treated differently from other highly paid workers, such as investment bankers, corporate executives and attorneys. Are these and other more moderately paid individuals next on the states' radar? Following are the general rules, pitfalls and planning recommendations in this area.

General Rules

Typically, a resident individual is subject to state income tax on his or her worldwide income; a nonresident individual is subject to state income tax on his or her income derived from or connected with sources within the taxing state. In addition, a resident taxpayer is generally allowed a resident tax credit, subject to certain limits, for taxes paid to the nonresident jurisdiction. If the taxpayer's resident state does not impose an income tax (e.g., Florida and Texas), no resident credit is available.

Historically, sports-team athletes would file income tax returns in two jurisdictions: (1) their resident state and (2) the state where home games were played. They did not file...