New Jersey: Super Bowl-sized taxation—win or lose
It is almost time for the time-honored American tradition of the Super Bowl. No matter your interest, whether it is the game itself, the office “Super Bowl square” pool, the commercials, or the legacies of various players, the Super Bowl is an American institution. What stimulating topic will you add to the many debates of the evening?
Here is one we believe will spark debate—the fundamental fairness of state “jock taxes.”
In many states, special laws are applicable to professional athletes and other entertainers to collect revenue from those athletes traveling to the state to perform either at a sporting event or concert.
In anticipation of Sunday’s game, much attention has turned on the application of New Jersey’s so-called “jock taxes” as they apply to Peyton Manning. In Manning’s situation, winning the Super Bowl may be the only way he might earn net wages for his efforts (considering only state taxation).
How this would work is as follows:
- Peyton Manning’s 2014 salary: $15MM.
- Manning is reported to be in New Jersey for eight days in preparation for the Super Bowl.
- Manning is expected to be in New Jersey for an additional two days during the 2014 season, for a total of 10 days in 2014.
- There are approximately 235 duty days in the NFL season.
- Players on the winning Super Bowl team each receive $92,000, while players on the losing team each receive $46,000.
- Manning earned $23,000 and $42,000 for winning the divisional playoffs and conference playoffs, respectively.
|Peyton Manning's 2014 Salary
||Super Bowl Win
||Super Bowl Loss
|2014 Playoff Earnings (w/o Super Bowl)
|2014 Super Bowl Earnings
|Total Estimated 2014 Compensation
|Ration: Days in NJ (10)/Total Duty Days (235)
|Earnings Allocable to NJ
|Application of Top NJ Tax Rate to Allocated NJ Earnings (@ 8.97%) Based on Days (8) in State for Super Bowl
|Percentage of NJ Taxation on Super Bowl Earnings
Note that these percentages, where Manning actually pays more tax than he earns in his time in New Jersey, do not consider other applicable taxes, namely federal income tax.
Regardless of the tax consequences, we at the Multistate Tax Update do not believe state taxation will give any of the athletes participating in the Super Bowl much pause after (or before) the coolers of Gatorade drop Sunday night. However, we need to ask if such stark levels of taxation are fundamentally unfair on a policy level, considering that the majority of Manning’s tax liability is due to his 2014 regular season earnings (not his Super Bowl earnings) which he has not yet earned. Manning is incurring most of his New Jersey tax liability as a result of his participation in the Super Bowl, not because he is a resident of New Jersey. We must remember that a fair argument can be made that the players participating in Sunday’s game, including Manning, are causing New Jersey and the City of East Rutherford significant costs to accommodate and ensure the safety of the players and fans. These are costs that those involved in the game should, at least in part, bear.
For additional background on “jock taxes,” reference the Tax Foundation’s (dated) report.
Illinois: Department of Revenue issues emergency retailers’ occupation tax sourcing rules in wake of Hartney decision
The Illinois Department of Revenue (Department) issued emergency rules on Jan. 22, 2014 to provide immediate guidance to Illinois retailers in determining certain local retailers’ occupation tax obligations in the wake of the Illinois Supreme Court decision in Hartney Fuel Oil Company v. Hamer, which invalidated the Department’s prior rules governing the sourcing of such taxes.
Retailers’ occupation taxes
In general, the retailers’ occupation tax statutes permit local taxing jurisdictions to impose retailers’ occupation taxes on any business engaged in the business of selling tangible personal property in their territories. The retail businesses reimburse themselves for the retailers’ occupation tax liability by collecting use taxes from the purchasers. The determination of the jurisdiction in which a business would need to pay retailers’ occupation taxes has been the subject of controversy between certain retailers and various taxing authorities.
Sourcing of retailers’ occupation tax and the Hartney decision
Prior to Hartney, in order to reduce Illinois sales tax (which refers to the combination of the retailers’ occupation tax imposed on the retailer and the use tax collected from the buyer) imposed on a retail transaction, retailers would often structure the transaction so that the final order acceptance occurred in a jurisdiction with low or no local sales tax. This sourcing method was in accordance with the prior rules promulgated by the Department, which permitted sales for local retailers’ occupation tax purposes to be sourced to the jurisdiction in which the sales order was accepted.
The Court in Hartney determined that the language of the retailers’ occupation tax statute required a fact-intensive inquiry to source the sales for local retailers’ occupation tax purposes to the jurisdiction where the predominate selling activities occurred. Consequently, the Court invalidated the Department’s rule permitting sales for local retailers’ occupation tax purposes to be sourced to the jurisdiction in which the sales order was accepted. The Department’s emergency rulemaking fills the void left by the Hartney decision.
Fact-intensive inquiry for sourcing under the emergency rules
The emergency rules set forth a fact-intensive inquiry to source the sales to the jurisdiction where the predominate selling activities occurred. The emergency rules identify four primary selling activities that will determine where a multi-jurisdictional retailer is engaged in “the business of selling.” These four primary factors are:
- The location of the offer;
- The location of the acceptance;
- The location of the inventory; and
- The location of the sales personnel.
If these four primary factors do not reveal the location in which the retailer is engaged in the business of selling, then the emergency rules provide five additional, secondary factors that may be considered to determine the correct taxing jurisdiction. These five secondary factors are:
- The location of the seller’s administrative functions;
- The location of the solicitation;
- The location where contracts are received;
- The location where title passes; and
- The location where the goods are delivered.
The Department noted in a letter accompanying the issuance of the emergency and proposed rules that some retailers may be unsatisfied with the guidance provided because they prefer a bright line rule or a one-factor test. The Department explained that the retailers’ occupation tax acts prevent it from complying with the wishes of those taxpayers. The Department stated that “[m]any states have avoided the uncertainty that is inherent in a retailers’ occupation tax by adopting a streamlined sales tax regimen that links sales tax to the place where the tangible personal property is delivered. If Illinois wishes to pursue such a policy, it must be initiated by the General Assembly, rather than the Department.”
Effective period for emergency rules
The Department also issued proposed permanent rules, which are subject to public comment and review by the Illinois Joint Committee on Administrative Rules (JCAR). The Department’s emergency rules are in effect for 150 days unless JCAR takes action to suspend them.
Click here to read our prior Multistate Tax Update on the Hartney decision.
Click here to read the Department’s letter about the emergency rules.
North Carolina: Amazon to begin collecting sales tax beginning Feb. 1
In what may appear to be an about face, Amazon voluntarily announced that it will begin collecting sales taxes in North Carolina. This collection of sales taxes is estimated to give state and local governments up to $43 million (up to $30 million for the state) in additional sales tax revenue annually.
We suspect this move was a carefully evaluated and strategic move by Amazon, which historically has begun collection only in states where it plans to create a physical presence (and thus, subjecting it to laws requiring the collection of sales taxes). Accordingly, Amazon announced that it would be making an unspecified investment in North Carolina, indicating that this decision was likely driven by business needs and the compliance requirements arising as a result of those decisions. Interestingly, it does not appear that Amazon acquired any concessions from state lawmakers prior to agreeing to collect state sales taxes, which has often been the case for the online retailer before it agrees to begin collecting sales taxes in a new jurisdiction.
The addition of North Carolina will mark Amazon’s 20th sales tax collection state.
Ohio: Impending severance tax return deadline
As a reminder to those who are subject to Ohio’s severance taxes, Ohio’s fourth quarter 2013 and annual severance tax returns are due Feb. 14, 2014.
Severance taxes in Ohio are imposed on the extraction or other removal of a natural resource from the soil or water. “Natural resource” means all forms of coal, salt, limestone, dolomite, sand, gravel, natural gas, and oil.
For additional information regarding these subjects or any other multistate tax issues, please contact:
Businesses must be vigilant and careful in managing their state and local tax liabilities and exposures. We understand this can be a daunting task. McDonald Hopkins Multistate Tax Services provides a broad range of state and local tax services including tax controversy, tax evaluation, tax planning, and tax policy. With professionals who have worked both inside and outside government agencies, our multistate tax team leverages its knowledge and experience to help clients control their complex multistate taxes.