I read in the newspaper that should baseball player Vernon Wells sign with the Texas Rangers for roughly $16 million to $18 million per year, he would save roughly $10 million / year in tax savings considering he makes his principal home in Texas and Texas has no state income tax.
Currently Vernon Wells plays baseball in Canada. Can a pro sports player not keep his tax advantage by designating his principal residence in Texas but at the same time playing for a sport's team outside the state of Texas?
Income is taxed under two scenarios. One being your state of residence taxing all income regardless of where it's earned. The other, the one that hits home, is that tax is imposed by the state in which it is earned. There's a good chance that for every away game, taxes are due to that state (where the game is played). So, unless there is a reciprocity agreement between states (NY and NJ come to mind, but then no one actually plays in NY anymore), an athlete's income would be subject to the same rules for any non-resident earning income in that state. And that just doesn't apply to athletes, but artists, entertainers, musicians, etc, as well as their crew. So the coaches, paid cheerleaders, road crew, and staff are also filing dozens of state returns each year. But then, that's why they make the big bucks.
-- Paul Thomas, CPA snipped-for-privacy@bellsouth.net
The $10 million is a typo. Baseball players are taxed in the State in which they live and in the States in which they play. So with the Rangers, Wells would play half his games in Texas and that means a healthy portion his salary would not be subject to State income tax. I suspect any games he plays in Florida would be treated the same.
Texas goes to Spring Training in the Grapefruit League which is in Arizona. Some of his salary may be taxed there.
It all depends on the facts and the law of the jurisdiction where the team that employs the player is located. As Paul noted, professional athletes pay tax on an apportioned share of their earnings to every state where the team plays games or where it engages in other activities such as spring practice, unless the state has no individual income tax or has a reciprocal agreement with the state where the athlete resides. The proration is usually done on a "duty days" basis -- counting all days from the beginning of spring practice to the last playoff game in the denominator, and all days in the state in the numerator. Of course Texas has no reciprocal agreement with any other state, since it has no individual income tax. There are no special rules for professional athletes similar to the rules for military personnel, who retain a domicile in the state where they lived when they joined the service unless they take specific action to change it. The military rules are prescribed by federal law (the Servicemembers' Civil Relief Act of 2003, successor to the Soldiers' and Sailors' Civil Relief Act of 1940). Each state defines residence for income tax purposes by its own rules. So if a player who originally lived in Texas was hired by a team in Illinois, and moved his family to Illinois, bought a house there, sent his kids to school there, etc., he would probably become an Illinois resident for tax purposes even if he still considered his domicile to be in Texas. Under Illinois law, he would be present in the state for a purpose that is not temporary or transitory (under an employment contract that could be renewed indefinitely), and therefore a tax resident of the state. On the other hand, if the same player kept his home and left his family in Texas, and traveled to Illinois for games and practices there, he might not become an Illinois resident. Illinois would take all of the facts and circumstances into consideration in making that determination. So ... it depends.
I once saw an article with Shaquille O'Neal's accountant in it, and yes, you are correct that the pro athlete must file a return in every state that he plays in. The accountant had a stack of returns nearly two feet high, ready for O'neal to sign. If I could only get ONE of those clients. :)
Is this only true for occupations where you spend a significant portion of your time away from the state of your main office? If I normally work in Massachusetts, but my company sends me to work in the California office for a couple of weeks, I don't expect to pay California taxes for the earnings during those weeks. An athlete probably only spends 3-4 days per year in any particular away game state, less than a ordinary executive traveling to another company office for a week or two -- why does the athlete have to pay taxes in those states, but not the executive? However, baseball players in northern states *do* spend several months in the south for spring training -- it would make sense for them to pay taxes in the southern state during that time.
-- Barry Margolin, snipped-for-privacy@alum.mit.edu Arlington, MA
*** PLEASE don't copy me on replies, I'll read them in the group ***
It applies to the executive as much as to the athlete. If your company sends you to work in the California office for a couple of weeks, and your total gross income exceeds California's filing requirements, you are subject to California tax on your earnings from services performed in the state. This is true of everybody. Of course, if you work out of state only on rare occasions and for short periods of time, it is unlikely that anybody is going to get excited about it. Some states have de minimis rules; others do not. EVERY state that imposes a comprehensive individual income tax asserts jurisdiction to tax nonresidents on income from sources in the state, which includes income from services performed there. In the late 1980's the national accounting firm I was working for at the time was "caught" by the State of Colorado. They had sent consultants (installing ERP systems, I think) into the state for extended periods of time working on projects there, and had not withheld Colorado taxes. There was talk of criminal prosecution. You can imagine how quickly the firm got into compliance! From that time on, we were all required to show on our time sheets not only what client or project we worked on, but where we did the work. And the firm withheld for every state even if we spent only a day or two working there. I believe all the national and most of the regional accounting and law firms are in compliance nowadays, and most large corporations as well. A lot of smaller businesses have not got the message. I talked to some folks recently from a consulting firm in Atlanta that has been sending people on contracts lasting 9 months or longer all over the U.S., and withheld only Georgia taxes on everybody. I referred them to a state and local tax consulting firm in their area that will be able to help them get into compliance. Katie in San Diego
I believe that you darn well *should* be expecting to potentially pay taxes on those earnings ("potentially" because your CA earnings might not be enough to be taxable). However, for non-celebrities, CA has no way to find out you were in-state, so no way to enforce it.
One has to wonder just how workable such a system is! After all, companies who send their employees out of state are committing them unknowingly to filing non-resident income taxes too -- a substantial administrative overhead and potentially expensive, for states like CA for example where total liability is assessed as a fraction of an individual's entire world-wide income. What about universities that send staff scientists to work at the various national laboratories? Typically, these scientists might work for weeks at a time (not de minimus) in several high-tax states -- when I was in that position, which wasn't that long ago (but outside the statute of limitations), the question never came up. Are there tax treaties between states that cover this sort of thing? Thinking of where I worked, it would have been a significant disincentive had my university "done the right thing". And exactly how is a small business (or large one for that matter) supposed to comply? I now run a small consulting firm out of Nevada and we're considering sending employees (including myself) into CA. How is one supposed to withhold and report? How much of the income would be attributable to CA? Pro-rate salary according to the number of days worked (say 5/7 th's of the base salary for each week)? Would it be considered acceptable to lower ones salary for the duration of a contract (unlikely to be longer than 3 months) to minimize CA taxes (as an owner, I do have that flexibility at least for myself)? What about liability for such add-ons as CASDI, for which the payee can never receive any benefit? The whole system seems designed to restrict the inter-state trade in services. I know it has been argued in this forum before that it somehow "levels the playing field", but were this to be the case, non-residents ought to get the same benefit as residents for their money (in CA, access to the UC system, for example). Since they do not, it all seems so very unfair. Are states like CA likely to be happy to receive any income at all, or are they likely to dig their heels in when one pops up on their radar screens and go for the jugular. Having dealt with the CA state board of equalization before, I think I'm not likely to be thrilled with the answer.
Actually there are a number of ways for state tax authorities to find out about "non-celebrities" performing services in the state. None of the consultants who worked for the accounting firm in Colorado were celebrities! I suspect Colorado found out about their activities in an audit of the client company. An audit of a major corporation doing business in the state might well uncover the activities of nonresident senior management (i.e., highly compensated individuals) working there. And you'd be surprised how many state tax auditors monitor the business sections of newspapers looking for information. However, Rich is right in suggesting that for most individuals working in other states, the states involved have no automated system that will easily get them the information. It's catch as catch can. Katie in San Diego
Moderator: It is also called 'playing the audit lottery' which is IMRHO more unethical than comingling funds. If you earned the money, you pay the taxes and sleep well at night.
There are reciprocal agreements among groups of contiguous states whereby an individual who resides in one party state and works in another pays tax only to the state of residence. For example, Illinois has such agreements with Michigan, Iowa, Wisconsin, and Kentucky. Several of the Eastern seaboard states have reciprocal agreements. Neither New York nor California has any reciprocal agreements with other states.
By sending your employees to perform services in California, your business, however it is organized, becomes a California taxpayer, subject to all applicable California tax laws. Since you are an employee, I presume your business is a corporation (S or C), since an LLC or partnership would not compensate you as an employee. The corporation must register with the California Secretary of State (qualify to do business in the state) and will be subject to the corporate franchise tax, including the $800 minimum. It must also register as an employer with California and withhold California individual income tax from its employees' salaries to the extent they represent compensation for services performed in California. In addition, if the corporation is an S corporation, you will also be subject to California personal income tax on your distributive share of the corporation's income apportioned and allocated to California, in addition to the portion of your salary that relates to services performed in California. California is no different from any other state that imposes comprehensive personal income taxes in this regard (apart from the $800 minimum tax). If you are sending employees into any other state to perform services, you must register with that state as well. For unemployment insurance purposes each employee is reported to one, and only one, state, regardless of how many states he or she works in during the year. If most of an employee's services are performed in Nevada, the employee should be reported to Nevada for unemployment insurance purposes, not California. As for reducing your own salary during the time you're working in California ... does that smell right to you??
You can think whatever you like about the justice of this system, but it has been in place for a very, very long time
-- about as long as states have imposed individual income taxes. The U.S. Supreme Court held many years ago that a state may tax all of the income of a resident (Shaffer v. Carter, 252 U.S. 37, 40 S. Ct. 221 (1920)) and may also tax all property and business transactions within its borders (Travis v. Yale & Towne Mfg. Co., 252 U.S. 650 (1920)). As a result, any individual who has income from a source in State A, while residing in State B, is subject to tax on that income by both states. While the resulting multiple taxation is generally mitigated by the allowance of credits or reciprocal agreements between states, there does not appear to be any constitutional requirement that such relief be allowed. It is a matter of legislative grace. Of course, since you are evidently a Nevada resident, the decision to accept contracts requiring the presence of yourself and your employees in any other state will result in incremental tax liabilities for both your business (assuming it is profitable) and the individuals involved. You should be taking that into account in negotiating contracts with out-of-state clients.
If the returns come up for audit, they'll be audited.
As for SBE auditors, though, in my (admittedly limited) experience they are easier to deal with than Nevada auditors. Those guys are like junkyard dogs ! Katie in San Diego
Yes, we are a C corp, and we have in the past registered as a foreign corporation so we know all about that $800. We also know how aggressive they get if you forget to "deregister" when you've finished. But that was to perform services in Nevada for a CA client, rather than actually performing them in CA. Correct me if I'm wrong, but CA businesses are supposed to withhold 7% from payments to out-of-state service providers who aren't qualified to do business there, but most in my experience have no idea this is required. We just try to do the right thing in an evil world. Now we'll need to be physically in CA, we have to deal with the EDD as well. Employees will be there 3-5 days per week, returning home on the weekend. Since I believe CA "de minimus" allowance is < 5days over a whole year, there seems no way of *not* dealing with this.
Well, that's rather the point, isn't it? Exactly how does one apportion "compensation for services performed in CA" for someone on a salary? Typically, we'd bill the client based on that person's time card, but the salary that the employee receives isn't related in any way to to that time card. So how does that get apportioned? We might even "fixed bid". Does that make a difference? I can guess at several mechanisms one might use, and clearly I'm going to select that which is most favourable to minimize CA tax liability. Why not? One way would (for me) be to divide hours worked in CA into my usual 80-hour week. Would that be acceptable? Would I need timesheets covering all I do in those 80 hours in case of audit? Another would be to look at what the labor department thinks someone ought to be paid in a particular role, but that's likely to be far higher than salary received in NV for equivalent work, and their figures are notoriously inaccurate anyway. Is there case law where someone has had an apportionment scheme challenged and overturned?
That's good to know. Our experience rate in NV makes this insignificant. What about SDI?
Sure. I'm enjoying the beach in my off-hours, rather than sweltering in the desert. I no longer need my "hot weather salary allowance". And as long as I'm being paid more than minimum wage, who gives a fig? Or to put it more specifically, has the EDD ever given a fig enough to challenge such an arrangement in tax court and established a precedent?
Yes, well. It's all risk management after all. Clearly, several major universities and a whole load of small to mid size job shops have decided that simply ignoring the whole deal is the optimum approach. Presumably CA know all about this. Presumably, too, aggressively auditing firms that
*are* at least going through the motions of compliance is not in CA's long term interest. I suppose I'm naive to expect clarification in a public forum. BTW, if selected for audit, are you supposed to high-tail it over to Sacramento, or does the auditor (like the angel of death) come and visit you? And if one is no longer registered as a foreign corporation in CA when the audit occurs, what mechanisms are there for getting a tax adjustment for the expense of compliance?
Nevada has changed quite a few things about its tax system recently & invented a whole new business license requirement with draconian penalties that small businesses always forget about. I put it down to all the Californians moving here and trying to make the place feel like home! We even have our own "stealth" income tax now. Thank you CA!!!
Katie -- after the Use Tax for items purchased outside the taxpayer's state of residence, this must be the most under enforced tax law in the country.
I used to work for one of the largest companies in the US. They had divisions in a number of states and foreign countries. During my rather long tenure there I was sent to "perform services" at their locations in at least 5 or 6 states, including California, and at non-company locations in even more states. during all this time I never had state income tax withheld by the company for any state other than my state of residence.
While this company, and I'm sure others like it, took advantage of every opportunity to maximize their profits, I am not aware of any situation when they knowingly violated the law.
I also worked for a large university. While employed by the university I traveled to other states but had state income tax withheld only for my state of residence.
So, these two examples create quite a conundrum. I don't doubt your facts, but I also can't square those facts with the behavior of my previous employers, neither of which was a small operation. Note that I only know about employee tax withholding. Both the company and the university may be registered in California and every other state where they provide services even if only via their business travelers.
Is it possible that there is some agreement we have not discovered that exempts normal business travelers? Or the type of services provided by business travelers is not covered? Can it be possible that one of the 10 largest companies in the US does not know about these tax laws?
Or, perhaps the states do not enforce these laws for ordinary business travelers since they know that the business community, especially the larger corporations in the US, would rise up in arms against the huge amount of added paperwork and demand some sort of reciprocal agreements?
-- Vic Roberts Replace xxx with vdr in e-mail address.
This question remains unanswered. Does anyone else have any input, or are all the CPAs keeping their heads below the parapet in case they tip off the EDD to their various schemes(!)
As Victor pointed out in another post, this must be one of the most unenforced laws in the country. Big corporations and large universities ignore it. Small businesses open themselves up for administrative overhead, tax liability, and possible audit responsibilities out of all proportion to any gain for short-term work if they do the right thing. But small businesses don't have the political clout to direct the state's enforcement efforts so they "fly blind". Despite Katie's assertion that the principle is all settled law, there are still folks gnawing at the edges. Here's an interesting catalog of uncertainties and idiotic rulings including 1) A NJ landscaping company being required by NY to prove that none of their employees worked in the state (now go prove that for your company!), 2) a CA executive being subpoenaed to give a deposition in a NY court and then gets hit with a tax bill, and 3) NY's assertion that non-wage income (including stock options) might be trigger withholding and tax for a non-resident.
The water gets a little muddy because we are talking about two things as if they were the same -- taxability of compensation for services performed in a state by a nonresident, and the employer's responsibility to withhold on payments for such services. Generally withholding is required on "wages," and depending on the withholding statutes of the states, some payments that are compensation may not be wages subject to withholding. That doesn't mean the income isn't taxable to the nonresident individual on a source basis; it just means the employer won't be penalized for failing to withhold on it. That may apply to the bargain element of an NSO, for example. The fact that withholding isn't required under the laws of a particular state doesn't mean it isn't compensation and isn't taxable there. As the table in the JMT article shows, most states consider the bargain element of an NSO to be compensation for services sourced at the location where the services were performed. I certainly agree that this is an area where there is a lot of ignorance on the part of taxpayers and employers, and a general failure on the part of the states to educate them. (Kind of like use tax collection from individual consumers, as Victor has pointed out on numerous occasions .) Enforcement is pretty much catch-as-catch-can because there is no automated program that gets the states the information they need. So they do what they can. But the LEGAL issues, i.e., what the states have the LEGAL POWER to tax, are pretty well settled. Katie in San Diego
I haven't spent time researching the issue, but my guess is that if you apportion it based on the relative number of work days (or maybe even calendar days) he was in California, that would suffice. Stu
Not to mention, it would be close to a wash for many states, since they'd be giving credits for the amounts paid to the non-resident state. (Not quite, low-tax state residents wouldn't recoup all the taxes paid to the high-tax state they visit, but mostly.) Seth
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