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By Che Odom
Aug. 30 — Resident versus domiciliary. Whether New Jersey taxes the income of Pennsylvania residents working within its borders.
These issues may not grab national headlines, but the people most impacted do: names like Tom Brady and Sidney Crosby.
Professional athletes like those are Sean Packard's clients.
And so Packard, tax director at the sports agency Octagon Financial Services, closely tracks “jock taxes,” including recent proposals to exempt Olympic awards from taxation—Michael Phelps is an Octagon client—and the whereabouts of clients throughout the year.
Particularly with an ever-changing and challenge-filled legal landscape, preparing tax returns for 220 athletes is a year-round job. States and locales are becoming increasingly creative in looking to cash in on the famous earners who blitz through their state.
However, he told Bloomberg BNA Aug. 25 that the most stressful part of his day is getting his two young children, ages 1 and 6, out of the house in the morning.
“It’s like go, go, go, the whole morning, and then when I get here,” to his office in McLean, Va., “it’s like, ahh,” he said, leaning back in his chair.
His desk sports multiple computer monitors, towering over stacks of paper.
Just down the hall, photos of big-name athletes smile or stare down at visitors. A pool table, foosball game and ping pong table are nearby.
Packard, a graduate of Colorado's William Howard Taft University, keeps a baseball glove in his office to throw-catch with coworkers to relieve tension.
His typical day may involve advising a golfer on tax risks or negotiating with tax officials.
Media outlets and athletic groups call on him to explain developments, depending on his knowledge of federal, state and local trends.
And what dominates the conversation? Income taxes targeted at professional athletes. This is an evolving area of great concern to Packard and other tax and accounting professionals. In the last several months, Tennessee and Cleveland, Ohio, have begun to refund money collected by “jock taxes.”
Tennessee had imposed such a tax on resident and nonresident National Basketball Association players since 2009 (107 DTR H-1, 6/3/16).
The Tennessee tax hadn't been levied on National Hockey League players since 2014, and was never imposed on National Football League players. The tax expired June 1, requiring refunds for portions of taxes already paid by hundreds of basketball players.
A winning lawsuit forced Cleveland to begin issuing refunds to athletes. Last year, the Ohio Supreme Court voided the city's system of levying a 2 percent tax on visiting NFL players' salaries based upon the number of games played in a season rather than the number of duty days spent in Cleveland (219 DTR H-1, 11/13/15).
Nassim Lynch, the city’s tax commissioner, told Bloomberg BNA Aug. 19 that the tax was based on the NFL’s method for paying players, so it shouldn't have been invalidated.
Though the NFL pays players per game, the tax was unfair because it was imprecise and caused too much salary to be subject to tax, Packard said.
“Cleveland was not taxing for days actually worked in the city,” said Packard, who has filed for refunds on behalf of players as result of the court opinion.
Lynch wouldn't say how much the city has paid out in refunds since the U.S. Supreme Court refused last fall to consider the city’s appeal of the state court decision. He also wouldn’t say how many players have requested refunds.
Another city official, who didn't want to be identified because he wasn't authorized to speak to the media, told Bloomberg BNA Aug. 26 that the city has received “many dozens” of refund requests from NFL players.
Other jurisdictions still use the per-game method of calculating tax, but not for football, which has a shorter game schedule than most sports, Packard said.
In contrast to Cleveland, jurisdictions that count only duty days— i.e., days actually worked within the state—are on sound footing, Packard said. Duty days can include preseason training, practice days and post-season play.
Arizona only begins counting duty days at the team’s first regular season game, because the state is a popular spring training spot, Packard said.
Also on Packard's radar is a potential change looming in New Jersey.
Gov. Chris Christie (R) in July announced that state may withdraw from a tax reciprocity agreement with neighboring Pennsylvania.
Under the pact, New Jersey doesn’t collect income taxes from people living in Pennsylvania and working in New Jersey.
If the pact is nullified, higher-income Pennsylvania residents working in New Jersey are likely to pay much more. That state has a flat 3.07 percent income tax rate, while New Jersey's graduated income tax tops out at 8.97 percent.
One of Packard's clients plays for the Philadelphia Flyers; he practices in New Jersey but lives in Philadelphia. “He, all of a sudden, will have to pay New Jersey taxes for all those practice days. It will be bad for them,” Packard said.
Ultimately, when it comes to taxes, the biggest issue facing pro athletes, who travel from town to town and live in multiple states, is establishing where they are residents and where they are domiciled, Packard said.
“We try, with guys bouncing around a lot especially, to look that we report everything properly, that a guy is not going to be domiciled in a place that he doesn’t want to be.”
Keeping track of jock taxes, changes in the law and his clients' various domiciles is essential when it comes to advising players, he said.
“We need to be able to tell a player, ‘Hey, when the season is over, don’t spend any more time around there, because those days will count against you,' ” he said.
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