The advent of Name, Image, and Likeness deals (NIL) provides college athletes with new opportunities for financial profit. However, it also exposes them to potential risks, one of which is tax liabilities.
Impacting U.S collegiate athletics, an NIL deal means the student-athlete can earn from endorsements and monetize their athletic success outside their school-funded scholarships and benefits. This is a marked change since the Supreme Court’s NCAA v. Alston ruling in 2021.
Most college athletes, especially those in Division I of the National Collegiate Athletics Association football and basketball, have some form of NIL agreement. Some deals even reach into the six-figure range or beyond. These deals are essentially private transactions between the athlete and the sponsor, despite efforts from the NCAA and universities to regulate them.
Notably, many student athletes are not seasoned commercial actors nor tax law experts. Consequently, they might find themselves facing unanticipated tax bills from various states, coupled with potential fines and penalties. Questions of residence and earned income become critical in this context. The issue of where the income from these deals is subjected to state tax can have significant financial implications, particularly in states where personal income taxes are imposed.
The student’s state of residence becomes a critical factor. States imposing a personal income tax generally levy it on all residents’ income, irrespective of its source. Even residing temporarily in different states for college doesn’t necessarily change the state of residency. Attempts to feign residency in a state with lower taxing rates could lead to penalties for failure to file, understatement of income, or fraud. High-profile athletes with NIL deals could face similar scrutiny.
One must also consider where the income is earned, or its source. Income earned within respective borders is often taxed by states. To avoid double taxation, credits for taxes paid to other states on the same income are provided by the state of residence.
The IRS stated in January that it was “considering all options” around tax-exempt status of name, image, and likeness collectives. It had previously made it clear in a legal advice memo that many NIL collectives aren’t tax exempt.
Due to the complexities of tax laws, it is advisable that NIL recipients seek guidance from experienced tax professionals. This is akin to a college athlete needing a good coach who will watch out for their best interests both on and off the field.
This article, originally appeared on Bloomberg Law, authored by Timothy Gustafson and Baird Fogel of Eversheds Sutherland.