Maybe not so much when it comes to throwing, catching and hitting. However, you might when it comes to taxes. If you, or your company makes money in multiple states, you may have more in common than you think.
Most companies that do business in multiple states are aware that they are subject to pay state income taxes based on allocation. Some firms use sales percentages as their allocation base while others look for various options. For example, many trucking companies use number of miles as an allocation base.
Individual tax-payers should be aware that the same may apply to them. Their income may be taxed based on which state it is earned in. Employment in varying states within a given year may lead to the requirement of multiple state tax returns. A common allocation method for individuals is the number of days worked in each state as a percentage of the total days worked for the year.
Professional athletes are often targeted as those that fall victim to multiple states’ income taxes. Major league baseball players, in particular, are susceptible since they are highly compensated and spend so much time playing out of state. MLB teams play an average of over 80 road games every season. For those athletes who reside in states with low or even no taxes, this can result in a substantial addition to the athlete’s tax liability.
The two most common ways that ballplayers allocate their high earnings to different states are the Duty Days Method and the Games Played Method. The Duty Days method takes into account all the days spent in a state as a percentage of the total days of the season (from the beginning of spring training to the close of the season). The Games Played Method only takes into consideration the number of pre-season, post-season, and regular season games played, it doesn’t account for travel days or spring training.
The team and city that a major league ballplayer plays for can affect how much extra state income tax they will face. For example, the Cincinnati Reds who play in the National League, face more opponents from high-tax California, and do their spring training in Arizona. The Detroit Tigers on the other hand, play more frequently against their American League (AL) opponents in non-tax states, and do their spring training in Florida.
The 2013 Detroit Tigers’ AL schedule has them set to play 20 games in the states of Florida, Texas or Washington, all of which do not have state income taxes. In addition, they spend almost two months of spring training playing in the Grapefruit League in Florida. The smaller number of days spent by Tiger players earning income in non-tax states may give them a tax advantage over players on other teams.
The Cincinnati Reds’ 2013 road schedule only has them playing nine games in states without income taxes. In addition they are scheduled to play 13 games in California, which at up to 13.3%, has the highest state income tax of any state in the country. The Tigers will only spend six days of 2013 playing on the Golden Coast. Also, spring training for the Reds is spent in the Cactus League in Arizona, instead of non-tax Florida.
Moral of the story: whether it’s a company or individual, the state in which money is earned matters. Just like professional athletes, individuals or companies that do business in multiple states should be mindful of how they are allocating their earnings, and what states they may owe taxes to. Keep in mind that most states have reciprocity agreements with border states and an actual tax return is not needed. More importantly, if you make it to the big leagues, make sure you play for an AL team!
By: Anthony J. Mifsud, Staff Accountant