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How Professional Athletes Attribute “Rest Days” for State Income Tax Purposes: A Major Controversy Brews

Many young professional athletes and their less than experienced managers are learning for the very first time that the money “earned” PLAYING or competing is subject to income tax both at the federal level AS WELL AS AT THE STATE LEVEL WHERE THEY ARE PERFORMING or rendering service on behalf of their employer.

Basically for example if you earn money in Colorado you pay Colorado income tax as well as federal income tax on those same earnings. Professional athletes compete or perform (aka earn money) in many different states, the majority of which have a state income tax obligation, some higher than others and all pretty nasty.

A few months ago a select group of professional athletes shared concerns about state level income tax assessments originating from a state with a relatively high income tax rate that shall go nameless. These particular athletes all work for the same employer, live in a state with no state income tax and were collectively aghast at the allegations leveled against them by this HIGH TAX STATE.

In the case grabbing my attention it appears the group in question was targeted because of their affiliation with one particular sports team. Yes I mean these taxpayers were, based on an overwhelming preponderance of circumstantial evidence, collectively and overtly PROFILED by a state taxing authority.

It happens people! Dust off the gloves!

One would imagine that this is a problem between the employer issuing the W-2 and the state income taxing authority as the professional team’s accountants should be tabulating the Duty Days Formula according to a standard and using that data to produce relatively complicated W-2 forms.

A good manager would be double checking these calculations every pay period. However in this scenario the athletes have been caught in the middle of a much bigger fight between the team in question and the state in question. Needless to quip there are many reasons why its not a great team to be on, this being one.

Interrelated and peripheral issues aside I was particularly drawn to the connection involving “duty days” v. “travel days” aka “The Duty Days Formula” as applied to these particular professional athletes while physically present in this one particular HIGH TAX state.

As a general reference, two of the arguments are framed as follows:

1. If an athlete arrives in a HIGH TAX STATE at 10 PM on a Thursday evening for a Saturday morning competition and the only activity scheduled for Friday by his employer is active rest, is Friday apportioned as a duty day – thus subject to income apportionment for state income tax purposes – or a travel day – not subject to income apportionment for state income tax purposes.

2. If a team had a late competition and decided to stay in the state the entire next day to rest and perhaps facilitate future scheduling, how is that categorized for state income tax purposes – duty day or travel day?

On the one hand the HIGH TAX STATE asserts that the athlete is being assigned a duty – to rest – and are laying claim to higher tax revenue from the athlete for resting aka – merely being present – in the state.

The athletes and the team are individually and collectively asserting that because there was no organizational input or direction in how to “rest” that it is more like a recover from travel day aka – a travel day.

Based on all facts and circumstances the athlete’s position seems to have merit.

In an effort to drill down, and being in Colorado, I called a friend both infatuated with professional athletes and also wrapped up solely in the C.R.S. She offered up the following language originating from the Colorado Department of Revenue and espoused the opinion that this position is relatively consistent in most all states.

“Income earned by a nonresident athlete who is employed by a professional team who plays in Colorado and paid by or on behalf of such team is receiving Colorado-source income. The current year contract income reported for federal income tax purposes shall be apportioned in the ratio of the number of days of professional or personal services performed in Colorado over the total number of days during the tax year for which the athlete is required to make his or her services available to the franchise under the terms of his or her contract.”

This applies to active team members as well as all people required to travel with a professional team and applies to ALL for hire athletes, assistants, coaches, team doctors etc.

Turns out this is shaping up to be an issue involving a SIGNIFICANT amount of $$.

Here’s the rub

Duty days are generally defined as all days from the beginning of a team’s official pre-season training through the last day of competition for the season including promotional events etc. This also includes days during the off-season when a team member undertakes training activities as part of a team-imposed program, but only if performed at the team facilities.

Each duty day is assigned to the state in which the service is performed with a few exceptions including for example days in which a team member is on the disabled list performing no substantial services for the team. These days will not be apportioned to any particular state, but will be included in the total number of duty days for apportionment purposes.

Travel days interestingly enough are also considered duty days.

However in Colorado like in most states travel days not involving a game, practice, or required service will not be apportioned to any particular state, but will be included in the total number of duty days.

Colorado Department of Revenue goes on to state that: “The income apportioned by the duty days formula includes all compensation paid to a team member for the performance of services for the team, including the playing of regular and pre-season games, performing required training, or otherwise performing required services.”

The debatable question presently in my mind at least is whether RESTING is a “required service” or part of “required training” of an employee of a professional sports team as it is also part of human nature to indeed rest from time to time in order to both survive in our life form but to also subsequently perform at one’s peak.

Here is where I’m presently at on the matter:

• Coaches, and other support staff may be working on that Friday after they arrive in town from the example above and their income accordingly proportioned to the high tax state, but resting athletes – not so much.

• The term “rest” is in part defined as the absence of work.

• The State in question seems to be resting its hat on the speculation that the mere presence of an athlete in their state means that the athlete is indeed working.

• Resting, doing nothing, that is IMHO the exact polar opposite of working and has no business being proportioned to the High Tax State.

Stay tuned for further updates, particularly whether physical presence alone inside a state border implies one is working in that state.

Original Post By:  John Dundon

Enrolled with the United States Treasury Department to practice before the IRS, governed by rules stipulated in United States Treasury Circular 230. As a Federally Authorized Tax Practitioner and a tax appeals specialist my Enrolled Agent License #85353 is issued by the United States Treasury. With this license I work for U.S. taxpayers everywhere to resolve tax matters and de-escalate stress about taxes or tax disputes for individuals and corporations with federal and state issues.

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