Legally Speaking: Why State Income Tax Doesn’t Matter to Free Agents

“Oh how wonderful it is to root for a hockey team in a state like Tennessee, where there’s no such thing as a state income tax. Free agents maximize their contractual worth here! A $6m contract in Toronto is worth only $4m but, here, without state income tax, a player gets that whole $6m contract! What free agent wouldn’t want to play here?”

Look, you all came here for sportswriting, not a tax treatise. The two however do overlap sometimes in the hockey world, especially in a state like Tennessee where there is no such thing as a state income tax. Many talking heads across the hockey world have claimed teams may gain an advantage in free agency from this legal phenomenon.

They’re wrong.

Alaska, Florida, Nevada, South Dakota, Texas, Washington, Wyoming, New Hampshire, and Tennessee all lack a state income tax. As such, it would be the Florida Panthers, Tampa Bay Lightning, Vegas Golden Knights, Dallas Stars, and the Nashville Predators benefiting from lack of income taxation. Additionally, the new Seattle franchise would supposedly benefit from Washington not having state income tax.

Focusing on the Nashville Predators, it seems like they have been linked with every player under the sun. Even John Tavares was supposedly impressed with the Predators over a phone call before ultimately going to Toronto. Although a winning culture, stable management, and a chance to win Lord Stanley’s Cup are undoubtedly the core reasons for such rumors, the issue of state income tax has regularly appeared.

Nonetheless, lack of a state income tax does not create a true fiscal advantage for the Nashville Predators and other teams. Although the Tennessee Investment Tax is a substantial reduction from a standard state income tax and could benefit American NHL players, the jurisdiction of where games are played levels the field a little bit. Furthermore, for Canadian and American players, there are even further tax concerns that make this difference between Nashville and other markets negligible.

The Tennessee Investment Tax

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Although players for the Nashville Predators do not have to pay a state income tax, they will have to pay an investment tax on saved earnings (formerly known as the Hall income tax). This tax rate is 3% and only taxes interest and dividend income. Meanwhile, the 2017 average state and local tax rate of 9.9% nationwide according to USA Today.

But what exactly is the investment tax? As many Tennesseans know and as its name suggests, this is a tax on dividend and interest income. So, unless Filip Forsberg is spending all of his $6m of earned income on Fortnite skins and boosts, his saved salary will be accruing interest, which will in turn be taxed.

Let’s say Filip spends $5m of his earned income on Fortnite and gaming software. He then has $1m, which he invests in a bond. The bond gains at a 5% rate, earning him $50,000. That money will be taxed at the 3% interest tax rate. That means he will be taxed $1,500 on the year. Alternatively, if he played in California, his $6m would be flat taxed 13.3%, meaning he would pay $798,000 in taxes.

Is $1,500 versus $798,000 in taxes substantial? Absolutely. That’s a difference of $796,500. Is it still this amount in practice? Of course not. This is tax. It gets way more complicated.

Every Game is a Taxable Event...in the Jurisdiction Where the Game is Played

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Continuing with Filip Forsberg, the superstar left winger plays 41 home and 41 road games per season, plus whatever may come in the postseason. Obviously, when he plays inside Bridgestone Arena on Broadway, he is working in the state of Tennessee. After the game, Filip boards a flight to Los Angeles, where he has to play a grueling three-game road trip against the Los Angeles Kings, Anaheim Ducks, and San Jose Sharks. Two days later when the first period in the Staples Center begins, he is no longer working in the state of Tennessee.

That’s right: even though he’s still the employee of a Tennessee business, he is working in another state and is in turn subject to California’s state income tax laws, not Tennessee’s.

At the end of the season, Filip Forsberg is talking with his financial adviser, who first suggests spending less money on Fortnite. Filip says “Hey, at least I didn’t pay any state income tax,” but then his adviser tells him that he was actually taxed at a 13.3% rate for his three games in California. In fact, Filip paid state income tax on every game outside of Tennessee, save for those played against the teams located in Florida, Nevada, and Texas.

As a result, that $796,500 from earlier is going to be significantly smaller. Sure, that number will still be larger for players of the Predators for other teams but, as we’ll see when international rules come into play, only non-Canadian Nashville players are really going to reap that benefit.

International Income Tax Complications

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Obviously, free agents want to maximize their income. However, international concerns can come into play when deciding between playing in the United States and Canada since there are differences in federal tax rates. Ultimately this will only be a factor for American and Canadian players, but a strong factor nonetheless.

Countries want to tax their residents on worldwide income and aliens earning money in their boarders on domestic income. Sometimes this can result in double-taxation from countries, simultaneously taxing the same income. To avoid this due to the close proximity between the two countries, the United States and Canada have a tax treatise in place to avoid this doubling down on one’s worldwide income.

Worldwide income is of course total income earned everywhere, while domestic income is only income earned in a specific country.

To start, the United States taxes both citizens and residents on their worldwide income. That citizens are taxed is unique to the United States. No other country taxes their citizens; rather only their residents. While a citizen is easy to define, a resident is someone with a green card or who is physically present in the United States for 183 days within a year. If one is not a citizen, one is an alien. If one is not a resident, they are a non-resident. If one is a non-resident alien, the United States will only tax domestic income, or income made within the United States.

Returning to Filip Forsberg, he is likely going to be claimed as an alien resident by the United States. Therefore, he has to pay worldwide income to the United States. Furthermore, if he also has a permanent address in Sweden, they may also claims him as a resident, also taxing his worldwide income. Filip will then have to pay both the United States and Sweden taxes on all of his income.

However, this does not matter much for what we are trying to determine because Sweden does not have an NHL team. Filip Forsberg would face that double taxation in any NHL city. Rather, it is a treaty between the United States and Canada that creates the complex nuances.

Canada, like most countries, taxes their residents on worldwide income. However, what a resident is under Canadian law is murky since it uses a subjective standard. Accordingly, one could be considered both a resident of the United States and Canada, or a citizen of the United States and a resident of Canada. In either case, only one country will be able to tax that individual’s worldwide income, so how is it determined who gets to collect the tax?

Let’s use P.K. Subban as our example here. He is an alien to the United States, but is he a resident? He likely spends more than 183 days of the year on American soil, so the United States will claim him as a resident. He probably has an address in either Toronto or Montreal, so Canada may also claim him as a resident. When both Canada and the United States claim Subban as a resident, the Internal Revenue Service and the Canadian Revenue Agency go into a “tiebreaker” procedure to determine who collects.

The first tiebreaker is where one’s permanent home is. Now, one can have multiple permanent addresses. Perhaps P.K. owns property in Montreal and Nashville. He could elect for either property to be his permanent home, and likely will do so based off of which country has the favorable federal tax rate. However, if both countries claim that they are P.K.’s permanent home, they go to the second tiebreaker, which is to consider the individual’s center of economic interest. Despite his philanthropy and other Canadian income, the bulk of P.K. Subban’s income is coming from his contract with the Nashville Predators. Therefore, he likely pays taxes on his worldwide income to the United States. However, although Canada cannot tax P.K. on his worldwide income, Canada can still tax P.K. on any income he generates within Canada.

Accordingly, depending on federal tax rates, it can be more favorable for Canadian and American players to be playing in one country or the other. Furthermore, for Canadian players in the United States that are considered Canadian residents, their NHL contract will be double taxed. Assume P.K. was considered a Canadian resident. Canada would collect on worldwide income, while the United States would still get to collect on domestic income, including all income regarding his contract with the Nashville Predators. Therefore, although ultimately the rates are still going to be the driving factor, Canadian players do have a slight incentive to play in Canada if they are considered a resident of Canada.

This of course goes the other way too with American players having incentive to play in America if they are considered an American resident. Kyle Turris, if considered an American resident while playing for the Ottawa Senators, would be being taxed domestically by Canada on his contract with Ottawa, while the United States would collect on his worldwide income, including that Canadian NHL contract. Now in Nashville, Turris does not have to worry about the Canadian Revenue Agency also taxing his contract.

This could go much further in depth but, for the sake of brevity and avoiding much more intense complications, we’ll stop here knowing that there are already a whole host of taxation issues.

Conclusion

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While the Tennessee investment tax is minuscule compared to the state income tax of other states, the heavy travel in a hockey season and international concerns mean that the difference between Nashville and other markets is not as significant as it may seem. Numerous tax issues negate the apparent tax advantage that catches peoples’ eyes. In practice, tax concerns are probably not that important for free agents when choosing between signing in different cities.