College Athlete Image Deals Create Tax Pitfalls for Students

While providing a new revenue opportunity for college athletes, name, image, and likeness deals have exposed recipients to potential risks—including tax liability—outside the university bubble.

The arrangement, commonly referred to as an NIL deal, has forever changed the way student athletes receive compensation. Since the US Supreme Court’s 2021 NCAA v. Alston ruling, college athletes have become eligible for paid endorsements and can monetize their athletic success outside of their school-funded scholarships and benefits.

Most National Collegiate Athletics Association Division I college football and basketball players have secured some form of NIL agreement, with some deals reaching six figures and beyond. Despite attempts by the NCAA and universities to regulate and control NIL agreements, these deals are private transactions between the athlete and the sponsor.

Not surprisingly, most student athletes aren’t professional consumers of commercial transactions or experts in the complexities of US tax law. As a result, recipients of NIL deals are left underrepresented on the tax risks and can find themselves facing unanticipated tax bills from multiple states, along with fines and other penalties. State taxes can be as complicated as a college football offensive playbook.

Consider the following scenarios: A lifelong California resident basketball player contracts with a clothing company to promote the line in their social media posts made while attending college in Nevada. Or, pursuant to an NIL agreement, a lifelong Florida resident football player agrees to dine at an Athens, Ga., restaurant after every home game while attending school in the state and promote the food on social media.

How can a student athlete determine where the income from these agreements is subject to state tax, if at all? The answers may have real financial impact because, as in these scenarios, California and Georgia impose personal income taxes, but Nevada and Florida don’t.

Questions of Residence

The first critical question to ask concerns the athlete’s state of residence. States that impose a personal income tax generally tax residents on all income, regardless of source.

States have various tests for what it means to be a resident, including objective day-count thresholds and subjective examinations of various factors such as intent to return, so this initial inquiry raises a host of related questions based on a state’s particular test.

For most young adults, their state of residence is where they grew up and where their family is. In other words, it’s the state where an individual spends most of their time and where they have their closest connections. Many college students go to out-of-state schools, but that doesn’t mean they’re no longer residents of the states they left behind.

While it’s possible to change residency, many states consider a college student’s presence to be temporary in nature, such that a student’s state of residence remains the state where they grew up, where their family is, and where they intend to return during school breaks or vacations. In such cases, it’s likely that the “home” state will assert jurisdiction over the college athlete and seek to tax any NIL income earned during a collegiate career.

And while trick plays may work in sports, attempting to create the appearance of residency while at a school in a state with a lower tax rate than one’s home state (or no tax at all) may result in the imposition of penalties, including failure to file, understatement of income, or even fraud.

States are particularly attuned to situations where high-profile, high-net-worth individuals who have been longtime residents claim to have changed their state of residency. High-profile athletes with NIL deals are likely to face similar scrutiny.

Earned Income

The second critical question concerns where the income is earned—in state tax terms, what’s the source of that income? States that tax residents on all income often tax nonresidents on income earned within their respective borders. To avoid double taxation, the state of residence will provide a credit for taxes paid to other states on the same income.

Where income is sourced typically depends on the nature of the income. Is it income from personal services, intangible property, or something else? Most income earned under an NIL deal is from performing personal services. Such income often is sourced to where the services are performed.

Another issue is whether an NIL deal requires an athlete’s attendance at a certain event or location, and where the social media posts are being filmed. These and other questions will help determine the source of any resultant income.

Other income from NIL deals is from intangible property, namely licensing the athlete’s name and likeness. As with determining residency status, states have differing rules for determining whether income from intangible property has an in-state source.

Many states follow the general rule of mobilia sequuntur personam—or “movables follow the person.” In these states, the NIL deal income likely would be sourced to the state of the student’s domicile (or residence). There are exceptions to these general rules as well.

Outlook

The issue could get even more complicated this year. In January, the IRS said it’s “considering all options” concerning the tax-exempt status of name, image, and likeness collectives. The agency issued a generic legal advice memorandum last June stating that many NIL collectives aren’t tax-exempt.

Much like a college athlete needs a good coach who will watch out for their best interests both on and off the court, an NIL recipient should consider seeking an experienced tax professional to help navigate the complex state tax playing field.

While a holding penalty or traveling violation may be embarrassing, they are nowhere near as costly as a significant tax bill.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Timothy Gustafson is partner-in-charge, Sacramento, for Eversheds Sutherland.

Baird Fogel is partner-in-charge, San Francisco, and US sports practice lead for Eversheds Sutherland.

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