Can North Carolina tax income that visiting professional athletes earn for games or events in the state, and may its Department of Revenue arrange for a private company to file composite tax reports without legislative approval?

NC's Existing Tax Statutes Already Reached Visiting Pro Athletes; Game or Duty-Day Apportionment Needed by Rule (NC AG, December 8, 1994)

Plain-English summary

The North Carolina Department of Revenue asked whether existing law could tax nonresident professional athletes on income earned in the state and require their employers to withhold tax. The AG said yes. G.S. § 105-134(2) reached nonresident team athletes paid wages for work in North Carolina and self-employed athletes paid for events there. The opinion specifically identifies stock car drivers' and golfers' prize money as reportable business or professional income.

For team athletes, employers had to withhold North Carolina tax on compensation for services performed in the state. Because only part of a nonresident athlete's income was reportable to North Carolina, the AG said it would be appropriate for the Secretary to adopt regulations prescribing a basis for withholding, such as games played or duty days. The rules had to reach only income fairly apportioned to North Carolina. The opinion did not choose a particular formula or say one had already been adopted.

The Department also asked whether it could contract with a private company to file composite returns and reports for teams and athletes without legislative approval. The AG said no: existing statutes authorized tax-coordination agreements with the federal government and other states, but did not authorize this private arrangement. The opinion recommended express legislative approval and said the Secretary would still need to reserve audit and challenge authority.

Finally, the Secretary could not administratively exempt classes of nonresident athletes and entertainers from income tax. The opinion says any exemption would need to come from the legislature and satisfy constitutional uniformity requirements.

Currency note

This opinion was issued in 1994. Check current nonresident income tax, withholding, and apportionment rules for a present filing question. The opinion describes the statutes then in effect and does not prescribe a filing method under later law.

Background and statutory framework

The AG distinguished the tax on North Carolina income under G.S. § 105-134 from employers' duty to withhold tax on employee wages under G.S. § 105-163. The opinion cited Massachusetts' games-played and California's duty-day methods as examples for possible regulations. It required any North Carolina rule to stay within the constitutional limit on taxing income earned from in-state activity.

The proposed private composite-filing arrangement was a separate question. The opinion describes a company called Team Tax that would compile records and submit reports for multiple taxpayers. It found no existing authority for the Department to contract with that company for this work and recommended that the legislature decide whether to authorize it.

Common questions

Does North Carolina tax visiting team athletes on their whole salary?

No. The opinion says only the part of income fairly apportioned to services in North Carolina may be taxed. It suggests games played and duty days as possible bases for a regulation, without choosing one.

What about stock car drivers and golfers?

The opinion says monetary prizes from North Carolina events are business or professional income that nonresident recipients must report on annual returns.

Could a team use California's duty-day formula while waiting for North Carolina rules?

The opinion does not advise teams on interim filing, reasonable-basis defenses, penalties, or audit exposure. It mentions California's formula only as an example the Secretary might consider when adopting North Carolina apportionment regulations.

Could the Department contract with Team Tax without legislation?

No. The AG found no existing authority for the proposed private composite-filing arrangement and recommended express legislative approval. Even with authority, the Secretary would have to retain the power to audit and challenge submitted tax data.

Could the Secretary exempt a class of visiting athletes?

No. The opinion says the Secretary lacked administrative authority to exclude classes of athletes or entertainers. Any exemption would require legislative action and a classification consistent with constitutional uniformity.

Source

• Landing page: https://ncdoj.gov/opinions/taxation-of-nonresident-professional-athletes-withholding-upon-wages-and-salaries/

Citations

• N.C. Gen. Stat. § 105-134 (nonresident income tax)
• N.C. Gen. Stat. § 105-152, 155 (returns and filing)
• N.C. Gen. Stat. § 105-163 (withholding requirements)
• N.C. Gen. Stat. § 105-163.1 (definitions: employee, employer, wages)
• N.C. Gen. Stat. § 105-163.2(h) (nonresident employer withholding compliance)
• N.C. Gen. Stat. § 105-268.1 (interstate and federal tax-cooperation agreements)
• N.C. Const. Art. V, § 2(1) (no surrender of taxing power)
• N.C. Const. Art. V, § 2(2) (uniformity of income tax)
• Shaffer v. Carter, 252 U.S. 37 (1920)
• Hajoca Corp. v. Clayton, 277 N.C. 560 (1970)
• In re Assessment of Taxes Against Village Publishing Corp., 312 N.C. 211 (1984)
• II J. Hellerstein and W. Hellerstein, State Taxation, ¶ 20.05[4] (1992)

Original opinion text

1. Are present laws adequate to tax nonresident athletes upon income earned within North Carolina, and to require "withholding" by their employers, where employee-employer relationships exist?

Yes. G.S. § 105-134(2) in pertinent part taxes every nonresident "deriving income from a business, trade, profession or occupation carried on" in North Carolina. The statute applies to nonresident team athletes who receive wages as employees as well as self-employed athletes who receive compensation from single athletic events in which they participate in North Carolina. Monetary prizes awarded successful stock car drivers and golfers constitute business or professional income which recipients must report to the Department of Revenue upon their annual returns pursuant to G.S. §§ 105-152 and 155.

North Carolina's withholding laws apply to salaries paid nonresident professional athletes. G.S. § 105-163(2)(a) requires employers to deduct and withhold from wages of employees North Carolina income taxes payable by the employee on the wages. An "employee" is an individual, regardless of residency, "who performs services in this State for wages," and an "employer" is "a person for whom an individual performs services for wages." G.S. § 105-163.1(4) and (5). North Carolina adopts the federal definition of the term "wages," and as expected, the definition is expansive. G.S. § 105-163.1(15). A nonresident employer's compliance with North Carolina withholding responsibilities "is not deemed to be evidence that such nonresident is doing business in this State." G.S. § 105-163.2(h).

The statutory scheme unambiguously requires professional teams visiting North Carolina for games and events to withhold taxes upon compensation paid their employees. Current statutes set forth specific tables for determining proper withholding amounts. However, they may not provide the most appropriate methods for calculating withholding for nonresident team athletes since only a portion of their income is reportable to North Carolina. Consequently, it would be appropriate for the Secretary to administratively promulgate regulations specifically prescribing the basis for compliance with withholding requirements, such as upon a "game" or "duty-day" basis.

For instance, Massachusetts taxes nonresident athletes in part upon a "games played" basis, while California utilizes a "duty day" formula. II J. Hellerstein and W. Hellerstein, State Taxation, ¶20.05[4], pp. 20-15/20-18 (1992). Recently promulgated regulations from the Connecticut Department of Revenue distinguish between professional athletes who are members of a team, and athletes and entertainers who receive income from services performed in the state. CCH, "State Tax Review," Vol. 55, No. 45 (7 November 1994).

Regulations must be carefully drawn so as to extend to only income fairly apportioned to North Carolina. A state's taxing power over nonresidents is restricted to property, trades and professions carried on within the jurisdiction, "and the tax is only on such income as is derived from those sources." Shaffer v. Carter, 252 U.S. 37, 57 (1920).

2. May the Department of Revenue without specific legislative approval enter into agreements with third parties providing for the filing of composite tax returns and reports on behalf of professional teams and individual athletes?

No. Some professional sports leagues have tentatively engaged a private entity, "Team Tax," to coordinate with affected states for purposes of compiling tax data on behalf of teams and players for filing with taxing officials. Team Tax on a state by state basis would file withholding reports, prepare W-2 forms and maintain payroll and wage records. The company would submit composite returns which would reflect on a single report pertinent data for many taxpayers, individual and corporate.

Although these activities appear worthwhile, existing statutes do not authorize the department to engage in such undertakings. While G.S. § 105-268.1 enables the Secretary to enter into agreements with the federal government and other states in order to coordinate and collect taxes, the law is conspicuously silent as to the Secretary's ability to contract with non-public, private sector bodies. The proposal is fraught with secrecy problems, and its alliance with private enterprise represents a marked philosophical shift with respect to tax administration. We recommend express legislative approval.

Even with specific authority, the Secretary must under all circumstances ultimately reserve the right to audit and challenge the correctness of any tax data tendered. The Constitution of North Carolina, Art. V, Sec. 2(1), prohibits the state from surrendering or contracting away the power of taxation.

3. May the Secretary exclude classes of nonresident athletes and entertainers from the income tax?

No. The constitution also requires that the income tax be applied uniformly. N.C. Const., Art. V, Sec. 2(2). Hajoca Corp. v. Clayton, 277 N.C. 560, 568 (1970) (rule of uniformity applies to trades and professions). Administratively, the Secretary is not empowered to exempt classes of persons or professions from the scope of the income tax. Any deviation from the levy would need to emanate from the legislature, and such a preferential classification would need to bear "some rational relationship to a conceivable legitimate interest of government." In re Assessment of Taxes Against Village Publishing Corp., 312 N.C. 211, 221 (1984). Until directed otherwise by the General Assembly, the department must enforce the income tax against all persons deriving income from trades and occupations carried on in the State. G.S. § 105-134.

We hope the foregoing provides assistance.

Reginald L. Watkins
Senior Deputy Attorney General

George W. Boylan
Special Deputy Attorney General