In the summer of 2010, Usain Bolt, the fastest man in the world, skipped the Diamond League meet at London's Crystal Palace and ran in Paris instead. His agent told him he would lose money in London even if he won.1
Britain would have taxed half of his prize money.1 It would also have taxed a slice of his worldwide endorsement income, measured by the days he spent performing and training in the country.2
Michael Jordan's Revenge
American sports have their own version. After the Chicago Bulls won the 1991 NBA title, California taxed the visiting Bulls players on income they earned in the state. Illinois retaliated the next year with a tax of its own on visiting players, and the press dubbed it Michael Jordan's Revenge.3
Other states followed. By 2003, 20 states, half a dozen cities, Puerto Rico and the Canadian province of Alberta had some form of the tax, and each athlete or traveling team member filed more than 20 state, local and foreign income tax forms.3
Foreign athletes face a federal layer too. Payments to nonresident athletes for U.S. events are generally subject to 30 percent withholding on gross income unless the athlete signs a Central Withholding Agreement with the IRS.4
The endorsement question
Prize money is easy to place. A tournament happens in one country on known days. Endorsement income is harder, because a sponsor pays for a name and face that appear everywhere at once.
Tennis produced the leading British case. Andre Agassi's company received payments from Nike and Head, neither of which was resident or traded in the United Kingdom. Agassi played British tournaments, including Wimbledon, and in May 2006 the House of Lords ruled that the sponsorship payments tied to those appearances were subject to UK tax.5
Golf brought the same question to the U.S. Tax Court. In 2011 the court ruled on Retief Goosen's 2002 and 2003 returns, on which the IRS had assessed deficiencies totaling $164,698. It treated his on-course endorsement pay as half personal services and half royalties for his name and likeness, and it sourced the royalties to the places where sponsors used his image.6
Two years later, in a case involving Sergio Garcia's TaylorMade contract, the court again rejected the IRS position that all endorsement income pays for personal services.7
When the rules bend
Britain has carved out exceptions when it wants the stars. It exempted non-resident competitors at the 2012 Olympic and Paralympic Games, a commitment made in its bid for the Games.8 It exempted competitors at the 2013 London Anniversary Games,9 and later those at the 2016 Anniversary Games and the 2017 World Athletics Championships.2
Bolt made his position clear in August 2012, after the London Olympics: "As soon as the law changes, I'll be here all the time."10
The scoreboard shows who won. The tax return shows what the win was worth, and for some of the best athletes in the world, that number decides where they compete.
Notes
- Establishes that Bolt withdrew from the Crystal Palace Diamond League meet because of British tax rules, faced a 50 percent tax on his prize money and tax on outside earnings, planned to race in Paris instead, and that his agent Ricky Simms told him he would lose money even if he won. Accounting Today, Usain Bolt Sprints from U.K. Taxes, July 2010
- Establishes that non-resident sportspeople are taxed on a slice of worldwide endorsement income based on UK performance and training days, and the exemption for competitors at the 2016 London Anniversary Games and the 2017 World Athletics Championships. HM Revenue & Customs, The Major Sporting Events Income Tax Exemption Regulations 2016
- Establishes California's tax on the 1991 champion Bulls, Illinois's retaliatory tax dubbed Michael Jordan's Revenge, the 20 states, half a dozen cities, Puerto Rico and Alberta with a jock tax, and the more than 20 tax forms filed by each athlete. Tax Foundation, Special Report No. 123, The Jock Tax, July 2003
- Establishes that nonresident alien artists and athletes performing at U.S. events are generally subject to 30 percent withholding on gross income and may apply for a Central Withholding Agreement for reduced withholding. Internal Revenue Service, Help for Foreign Artists and Athletes
- Establishes the Nike and Head sponsorship payments to Agassi's company, the absence of any UK residence or trade by either sponsor, his play in UK tournaments including Wimbledon, and the majority ruling allowing the Revenue's appeal. House of Lords, Agassi v. Robinson (HM Inspector of Taxes) [2006] UKHL 23, May 17, 2006
- Establishes the Tax Court's ruling on Retief Goosen's 2002 and 2003 nonresident returns, the $164,698 in deficiencies, the equal split of on-course endorsement fees between personal services and royalties, and the sourcing of royalties to where his name and likeness were used. Journal of Accountancy, Golfer Bogies Endorsement Income, September 2011
- Establishes the 2013 Tax Court decision on Sergio Garcia's TaylorMade endorsement agreement and the court's second rejection in two years of the IRS position that all endorsement income is personal service income. Mondaq, Did Sergio Garcia Lose in Match Play With the IRS?, 2013
- Establishes the income tax exemptions for non-resident competitors and others at the London 2012 Games, made to implement tax commitments in the UK's bid. The London Olympic Games and Paralympic Games Tax Regulations 2010, SI 2010/2913
- Establishes the income tax exemption for non-UK resident accredited competitors at the London Anniversary Games held July 26 to 28, 2013. Finance Act 2013, Explanatory Notes, Section 8: London Anniversary Games
- Establishes Bolt's August 2012 statement that he would compete in Britain all the time once the tax law changed, and his 2010 withdrawal from Crystal Palace. New Statesman, Usain Bolt Is Wrong to Oppose Our Tax Laws, August 2012
The views expressed are the author’s own and are offered as general commentary. They do not constitute legal, tax, investment or accounting advice.