Detroit Issues Guidance to Assist Non-Resident Athletes Determine City Income Tax Liability

Athletes will owe Detroit’s income tax for the days spent performing their duties in the city, apportioned based on the number of standard “duty days” for the season.

By Jess Johannesen, SALT manager

In our June 2015 SALT Newsletter, we wrote an article discussing the Mobile Workforce State Income Tax Simplification Act of 2015. That act (H.R. 2315) was introduced by the 114th Congress in the House in May 2015, and although it passed the House in September 2016, it stalled in the Senate. In March 2017, the Mobile Workforce State Income Tax Simplification Act of 2017 (H.R. 1393) was introduced in the House (the “Act”). [1] The Act, almost identical to its previous version, continues to propose a uniform bright-line rule for determining at what point an employee who works in multiple states is required to pay income taxes to a state other than his or her state of residence, as well as when an employer is required to withhold state income tax on a nonresident employees’ wages.

Currently, state thresholds for these requirements vary greatly and are often set very low, causing significant compliance burdens on multistate employers. The Act would relieve an employer from withholding state income on wages or remuneration earned by an employee who performs employment duties in more than one state (and would relieve that employee from owing income tax to a state) unless (1) the state is that of the employee’s residence or (2) the employee was present and performing employment duties in the state for more than 30 days.

However, the Act does not apply to certain professions, including professional athletes and professional entertainers, and many states have guidance regarding the method by which non-resident professional athletes must determine the amount of income subject to tax in a particular jurisdiction. For example, the City of Detroit, which will be welcoming back the Detroit Pistons who return to downtown after playing the last 30 seasons in the suburbs, recently issued a Revenue Administrative Bulletin as a reminder that non-resident professional athletes are subject to the City of Detroit’s income tax on the income earned while working in the City and that employers must withhold and remit those taxes. [2]

As the guidance explains, however, not all of the non-resident athlete’s compensation is subject to the City income tax. Non-resident professional athletes apportion their taxable compensation before determining any local income tax. Pursuant to the Bulletin, non-resident athletes should determine their apportionment percentage based on the ratio of days attributable to the services performed in the City of Detroit. The denominator of this ratio, referred to as “duty days,” includes the total number of days in an athlete’s season (including pre-season games, regular season games, post-season games, practice days, official team meetings, official training camps, all-star games or even days spent traveling on official team business). The City has issued a standard number of “default duty days” for various sport seasons that do not require additional records or support. For example, the default duty days for a football season include 119 days. [3] The numerator of the ratio, referred to as “city days” is any “duty day” in which the athlete is present in the City for any amount of time.

For example, assuming that an athlete for the Atlanta Falcons is a resident of Atlanta, Georgia, the Falcons play one game at the Detroit Lions. The athlete is performing services for the Falcons in Detroit for five “city days,” which include the game, practices, team events and travel days. Also assume that the athlete earned a total of $10 million for the full season. Of this $10 million salary for the season, $420,168 would be apportioned to the City of Detroit (5/119 default duty days). Therefore, the Falcons have an obligation to withhold $5,042 of Detroit income tax on the athlete’s season earnings ($420,168 apportioned Detroit income x 1.2 percent Detroit non-resident income tax rate).

Note here that although the $5,042 of tax is ultimately imposed on the professional athlete, the Atlanta Falcons have the obligation to withhold and remit this tax to Detroit. In addition, the Bulletin describes which income is subject to tax and which is not. For example, incentive bonuses would be included in the athlete’s compensation, but signing bonuses would not.

If it passes, the Act would simplify income tax reporting and withholding obligation for a vast number of employees and employers; however, the Act does not protect everyone. Accordingly, certain individuals and employers would need to continue to stay educated and aware of the various state income tax reporting and withholding obligation rules.

Aprio has experience assisting companies and their employees in evaluating and determining in which states they may have income tax withholding and/or reporting obligations. We constantly monitor these and other important state tax issues, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

Contact Jess Johannesen at jess.johannesen@aprio.com or Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at jeff.glickman@aprio.com for more information.

This article was featured in the April 2017 SALT Newsletter. Click here to view the full newsletter.

[1] An identical version was introduced in the Senate (S. 540) on March 7, 2017.

[2] City of Detroit, Revenue Administration Bulletin 18-10-5-1, 03/01/2017.

[3] It is worth noting that by using “duty day” in the denominator instead of 365 (i.e., a calendar year), more of an athlete’s income will be taxed by the City.

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.

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