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SALT TALK: Secret State and Local Tax Revealed

Posted by Wayne K. Berkowitz CPA, J.D., LL.M. on Jun 11, 2019 9:57:26 AM
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Elvis Costello, soon to be recognized as an “Officer of the Order of the British Empire” (“OBE”), summed it up best when he penned the lyrics “She thought that I knew and I thought that she knew.[1]” This is exactly how I felt when colleagues, clients, friends and everyone else would ask me questions about the so-called “Jock Tax.” While I never knew what this super-secret mystery tax consisted of, I always thought I should know or at least my superiors certainly would.

So what is this Jock Tax we speak of? You mean you don’t know. All right, I will let you in on a secret. There is no Jock Tax. What we are referring to is simply the nonresident income tax. The same nonresident income tax that any of us are subject to if we perform services in a state other than our state(s) of tax residence.

Athletes certainly are subject to special apportionment rules. Nevertheless, a special tax is still a mystery to me. States differ on the formula, but most adhere closely to something close to a “duty day” formula. Duty days include not only game days, but training camp days, meetings, promotional days and virtually any other commitment made to earn their team salary. If this wasn’t the case, just imagine a Dallas Cowboy (Texas has no income tax) playing one game in East Rutherford, New Jersey (where the New York Giants sadly play) and being expected to report one-sixteenth of their earnings (one game in New Jersey over a sixteen game season) to New Jersey non-resident income tax. This certainly does not seem fair and that is why states have recognized the game day apportionment formula simply does not work.

Interestingly enough, while those not in the know are often bemoaning a non-existent additional tax on athletes, the world of sports provides a much clearer and consistent set of rules than those provided to the rest of us. Let us look at some real mysteries:

  • The lawyer who spends countless months working in her home state on a litigation matter and appears in court one day out-of-state;
  • The investment advisor or advisory firm that never sets foot out of their home state, but has a national client base;
  • The salesperson travelling throughout the world whose earnings result largely from customers based in one or two locations;
  • The telecommuter who works from a home in a different state from their employer.

The list goes on. When states provide a specific methodology, they are often inconsistent and can result in income taxed multiple times or not at all. Now that I’ve taken the mystery out of the Jock Tax, let’s see if we can enlighten all nonresident taxpayers. If you have questions, contact me at wberkowitz@berdonllp.com.

Wayne Berkowitz, a tax partner and head of the State and Local Tax Group at Berdon LLP, advises on the unique requirements of governments and municipalities across the nation.

[1] From the song “Mystery Dance” released in 1977 on the album, “My Aim Is True.”

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