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Daily Tax Report: State

California’s Fair Pay to Play Act Should Boost Income Tax Revenue

Oct. 4, 2019, 7:10 PM

California could see a revenue boost from its groundbreaking Fair Pay to Play Act, which allows college athletes to financially benefit off their image and likeness.

“The general rule is that California residents are taxable on all of their income, regardless of source. Therefore, any players that are California residents would be subject to California income tax on any income they received off their likeness,” said Chris Smith, spokesman for the California Franchise Tax Board.

Smith said that if the student athletes aren’t California residents, the state’s taxation of their income “would be based on the nature and the specific details of the income and whether that income would be sourced to California.”

The law, which wouldn’t take effect until 2023, would transform the landscape for college athletes in the state, opening up the chance for them to be paid for capitalizing on their name, image, or likeness. It comes amid a broader national debate over compensation for student-athletes, who generally aren’t paid beyond the value of a scholarship for bringing their schools and the National Collegiate Athletic Association potentially massive amounts of revenue.

The National Collegiate Athletic Association, has publicly expressed opposition to the law, signed by Gov. Gavin Newsom (D) on Sept. 30.

“Unfortunately, this new law already is creating confusion for current and future student-athletes, coaches, administrators and campuses, and not just in California,” the NCAA said in a press release. “As more states consider their own specific legislation related to this topic, it is clear that a patchwork of different laws from different states will make unattainable the goal of providing a fair and level playing field for 1,100 campuses and nearly half a million student-athletes nationwide.”

Money Grab

Ryan Losi, a financial adviser and executive vice president at PIASCIK, an accounting firm, said he expects California to make a strong push to collect sales tax on the newly formed income.

“This is a money grab by California, but it makes their universities very attractive to student athletes,” Losi said.

California could make the case that all the money earned by student athletes is subject to the state’s income tax, “Seeing as how the only way to earn that money is by coming to California to play for one of their colleges,” Sean Packard, tax director at Octagon Financial Services in Virginia, said.

The law would apply to private and public institutions, prohibiting them from preventing a student athlete from earning compensation for their sport. California, home to Hollywood and the entertainment industry, has protected an individual’s right to profit off images, names, and likeness.

‘Only A Handful of Students’

Losi said the new bill won’t be a goldmine for all students, and that in reality, only a handful of students are marketable enough to take in a significant amount of income from their image and likeness.

“We’re going to see only a small amount of student athletes actually benefiting from this,” Losi said. “Is it a free market concept? Yes. But will it help everyone qualified? No, it will not.”

Losi said the income would actually be taxed like royalty, which is a payment for an ongoing use of an asset. Income from royalties isn’t subject to self-employment or social security taxes, but only to federal and state income taxes, because there isn’t an actual service being performed, according to Losi.

Losi said that a small number of students could potentially see income in the “seven figure area” form the Fair Pay to Play Act. If a student brought in $1 million and California were able to subject its top rate of 13.3% to the entire salary, the state would take in $133,000 in revenue.

—With assistance from Joyce Cutler in San Francisco.

To contact the reporter on this story: Ryan Prete in Washington at rprete@bloombergtax.com

To contact the editors responsible for this story: Jeff Harrington at jharrington@bloombergtax.com; Vandana Mathur at vmathur@bloombergtax.com

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