Budget deficits have forced some states to get very creative in pursuit of tax revenue. In January, AccountingWEB described some unusual use tax collection initiatives being pursued by some states. This month we focus on the "Jock Tax," usually reserved for highly paid athletes but recently extended to target lawyers, professional speakers, consultants, and yes, even accountants.
Recently, some states have added to their tax collecting efforts by collecting big tax checks from traveling superstars who earn their money on the road. Because so many of these so-called superstars are professional athletes, the out-of-state tax on these mega-earners has come to be called the "Jock Tax." While more states get on the Jock Tax bandwagon, and while more and more types of traveling wage-earners get targeted for the tax, accountants realize that the true headaches come from all the paperwork involved in getting the tax money to the right authorities.
Everyone knows that the money earned from a job is subject both to Federal income tax and to state income tax, assuming you live and work in a state that has an income tax. If you work in a state other than the state in which you live, the state where you work has the right to assess its own state income tax on your income.
To relieve the burden faced by people all across the country who live near state borders and work across the state line, most states participate in a reciprocity program with their neighbors, agreeing to let residents of each other's states pay tax in their home state. The state revenue agencies take care of settling up differences so that, ideally, neither state loses out in the bargain and the residents can go about their business without having to pay tax in two states.
But what happens if you live in, say Indiana, and travel to California to do some work? The states aren't neighbors and there's no reciprocity. Technically, California has the right to tax you on the portion of your salary that you earn while you work in California. In reality, the amount of tax money the non-resident state can collect usually isn't worth the cost of collection. If your job takes you to California and you earn $1,000 from your job while you're there, the tax on this income is small enough that it would take more effort that it is worth for the California government to track you down and send you collection letters, so most states don't go after the average traveling employee.
But since the late 1970s and early 1980s when professional athletes started negotiating huge salaries, states have found a new source of revenue that really is worth pursuing, or so it would appear. States, particularly those with major professional teams that attract competing teams from other states, have started tracking the players who come to play in their state, and have begun assessing income tax based on a prorated portion of the players' salaries.
It's up to the accountants for these players (and entertainers, and now other high-earners like lawyers and speakers who are starting to attract the notice of state revenue agencies) to figure out the jumble of who gets tax for what income. And states aren't waiting patiently for the accountants to figure out the morass. High-rollers who don't pay up on a timely basis receive penalty and interest assessments from states that kept track of their presence, through newspapers and promotional literature.
What's particularly interesting is that, in the end, most of the collection process may be a wash. States give their own residents tax credits for taxes paid to other states, so as to avoid a situation of double taxation. So say Indiana hosts 30 out-of-state professional players for three days and collects tax on the income those players earn in the three days of their visit. The next week, Indiana's home team goes to another state for three days and Indiana's 30 players have to pay tax in the other state on income that otherwise would have been taxed in Indiana. Both states may come out even, particularly if their tax rates are similar.
Extra confusion comes from the fact that each state determines its own formula for apportioning the income of out-of-state professionals. And then there are the states that have no income tax. Their players must still pay tax when they go to play in a taxing state, but when the other state's players come to the home court to play, the state doesn't get any tax benefit. Accountants who specialize in multi-state taxation might find all of this intriguing, but most will say the calculations are way more trouble than they're worth.