What a Difference a State Makes for Baseball All-Star Robinson Cano

It's official. New York Yankee Robinson Cano will soon switch coasts as a result of the contract that he signed with the Seattle Mariners. Both teams wanted the five-time All-Star second baseman, and both made nice offers. The Yankees offered a seven-year contract for $175 million, or $25 million annually. Seattle's offer was $240 million for ten years, or $24 million annually. Several factors need to be taken into account in determining the better deal, the length of the contract, pay per year, agent fees, and a key factor that is often overlooked – state income taxes.

 
Robert A. Raiola, CPA, ran the numbers on the two deals. As head of the Sports and Entertainment Group at Fazio, Mannuzza, Roche, Tankel, LaPilusa, LLC, a Cranford, New Jersey–based accounting firm, Raiola always looks beyond the gross numbers and focuses on the net amount. "The difference between the face value of the offers and the amount an athlete can actually take to the bank can be staggering. When you sift through the tax details, the results may surprise you," he said. 
 
Apples and Oranges 
Cano is currently a New Jersey resident, where the top tax rate is 8.97 percent. If he remained a Yankee, about 45 percent of his income would also be taxed at New York rates, since the team is based in New York. Over the life of his contract, said Raiola, he would pay $2.2 million a year, just in state income tax. This includes tax to his home state of New Jersey, plus tax paid to states where he played that charge state income tax (commonly called "jock tax"; see sidebar). The $2.2 million is net of the credit that Cano would receive on his New Jersey resident return for taxes paid to other states.
 

Jock Tax

The jock tax is calculated by the number of "duty days" a player spends in a game function, such as practice, training, playing, or meeting, beginning with spring training and ending on the last day of the season, including playoffs. Even injured players who travel with the team still have to pay the same jock tax whether they play or not. 
 
The actual number of duty days varies with the position on the team, a team's success, and how the post-season goes. Pitchers and catchers, for example, arrive earlier for spring training than many of the others on the team.
 
As a Mariner, the tax picture would be vastly different. Washington State has no personal income tax. Assuming Cano becomes a resident of Washington – and he has said he will – he would only incur state taxes when he played in states which do have an income tax. Seattle is in the Western Division of the American League, which includes some teams in states that also do not charge personal income tax. Texas, for example, has the Rangers and the Astros, so time spent playing in Texas would be state-tax-free.
 
Overall, Raiola estimates, as a Mariner and Washington resident, 70 percent of Cano's income would avoid state income taxes. Adding together the estimated jock tax incurred while playing in states like California, which do impose a state income tax, Cano would pay about $504,000 each year in state income tax, said Raiola. Compare that to $2.2 million a year as a New York Yankee. 
 
Mariners     Full Contract      
             
Wages     24,000,000      
Agent Fees   1,200,000        
Federal Tax   9,473,410        
State Income Tax   504,000 11,177,410      
Net Pay     $12,822,590   $128,225,900 10 years
             
             
Yankees     Full Contract      
             
Wages     25,000,000      
Agent Fees   1,250,000        
Federal Tax   9,196,748        
State Income Tax   2,225,368 12,672,116      
Net Pay     $12,327,884   $86,295,188 7 years
             
      $494,706   $41,930,712  
 
Just comparing the two contracts, the Yankees offered $25 million gross per year while the Mariners offered $24 million gross per year. Taking into account agent fees and income taxes, the New York offer is $12.3 million net per year while Seattle is $12.8 million net per year. At first blush, it looked like New York was offering more per year, but actually Seattle is offering the larger-per-year amount when other factors are taken into consideration.
 
Looking at the full terms of both contracts, as a Yankee, Cano would net about $86 million, and as a Mariner he would net $128 million, a difference of $42 million.
 
Also as a Mariner, when Cano plays in his new home state of Washington, he will incur zero state taxes. When he travels to New York in April 2014 to play against the Yankees, New York will charge him approximately $38,000 in state taxes. What a difference a state makes. 
 
Related articles:
 

You may like these other stories...

School tax breaks get House support as Democrats objectRichard Rubin of Bloomberg reported that the House of Representatives on Thursday voted to expand and simplify tax breaks for education as Republicans continue to pass...
Many senior US tax professionals believe that a streamlined audit process will be the top benefit resulting from the IRS Transfer Pricing Audit Roadmap, a new toolkit organized around a notional 24-month audit timeline,...
Tax accounting to be simplified for money-market fundsThe US Securities and Exchange Commission (SEC) voted 3-2 on Wednesday for sweeping changes to institutional money-market funds, Emily Chasan, senior editor of...

Upcoming CPE Webinars

Jul 31
In this session Excel expert David Ringstrom helps beginners get up to speed in Microsoft Excel. However, even experienced Excel users will learn some new tricks, particularly when David discusses under-utilized aspects of Excel.
Aug 5
This webcast will focus on accounting and disclosure policies for various types of consolidations and business combinations.
Aug 20
In this session we'll review best practices for how to generate interest in your firm’s services.
Aug 21
Meet budgets and client expectations using project management skills geared toward the unique challenges faced by CPAs. Kristen Rampe will share how knowing the keys to structuring and executing a successful project can make the difference between success and repeated failures.