Gabelli Sports Business Initiative

00;00;07;29 - 00;00;55;27
Mark Conrad
Hello and welcome to the Sports Business Podcast with Prof C, the podcast that explores the world of professional, collegiate, amateur, and Olympic sports. I’m Mark Conrad, or Prof. C from Fordham University’s Gabelli School of Business, where I serve as Professor of Law and Ethics and the Director of the Sports Business Initiative. As many of you know, Juan Soto, probably the most coveted baseball free agent in the offseason, jumped from one New York City team to another, signing a 15-year $765 million contract to play for the New York Mets.

00;00;55;29 - 00;01;22;03
Mark Conrad
He jumped from the New York Yankees, where he played last season, and helped lead his team to the American League pennant. But he will be a Met and play his home games at Citi Field in Queens, and Mets fans are hoping he will lead the team to its first World Series title in 38 years. The contract has an average annual value of $51 million.

00;01;22;05 - 00;01;49;05
Mark Conrad
It contains an opt out clause if Soto wishes to test the free agency market after five seasons and a signing bonus of $75 million. It is the signing bonus and its tax considerations that will be the focus of this episode. And with us to explain the tax issues is one of our most popular guests, the tax expert Robert Raiola.

00;01;49;07 - 00;02;26;11
Mark Conrad
Many of you know and are familiar with Robert from previous podcasts. And if you are not, I would urge you to listen to them. Check out Season 1 Episodes 5 and 6 on January 22nd and February 13th, 2024, which are found by searching our Podbean page. That's fordhamgsb.podbean.com. I'll spell that out: Fordham F-O-R-D-H-A-M-G-S-B.podbean.com.

00;02;26;13 - 00;02;49;01
Mark Conrad
Robert is the Director of the Sports and Entertainment Group in the firm of PKF O'Connor Davies in Cranford, New Jersey. He has 30 years of experience in both the public and private sector, and has worked with over 100 professional athletes in the five major sports. Robert, welcome back to the Sports Business Podcast.

00;02;49;04 - 00;02;51;25
Robert Raiola
Thank you, Mark. Happy New Year and a pleasure to be with you.

00;02;51;27 - 00;03;18;24
Mark Conrad
And Happy New Year to you. So let's talk about this massive contract. Unlike the deal between Shohei Ohtani and the Dodgers, Soto's salary is not deferred. So the Mets will have to shell out about the same amount each season for the life of the contract. So, Robert, am I correct in saying that Soto will have to pay New York State and New York City taxes from his income?

00;03;18;26 - 00;03;37;19
Robert Raiola
I'm not 100% correct. He will pay New York State tax, but he won't pay New York City tax because New York City is only taxing players or people, executives that are residents. So he beats the 4% because he's not a resident of New York City. It's been reported that he is a resident of Florida.

00;03;37;21 - 00;04;06;05
Mark Conrad
That's interesting. So now he is a resident of Florida. So that adds something to the mix, doesn't it? [Raiola: Yes.] So being a resident of Florida, he would save 4% of his income per year for the [Raiola: the whole contract.] life [Raiola: Yes]. Right. But now let's talk about that signing bonus because $75 million is not chicken feet. And does he have to pay the 4% on the $75 million signing bonus?

00;04;06;07 - 00;04;30;22
Robert Raiola
He does not have to pay the 4% on the $75 million signing bonus. Also, he would not pay any state taxes everywhere. The jock tax and the New York State tax. The top rate in New York State is 10.9%. So if you multiply that by the size of the bonus, which you correctly alluded to, 75 million, that's $8.2 million he saves by receiving a signing bonus.

00;04;30;25 - 00;04;39;07
Robert Raiola
Now, one might say why not get a higher bonus? But that's what Boras got for him, and Boras did a good job making sure that was done the proper way.

00;04;39;09 - 00;04;44;18
Mark Conrad
When you say the proper way, you say it was not possible to get a higher signing bonus.

00;04;44;21 - 00;05;14;20
Robert Raiola
I'm not sure it wasn’t possible. I wasn't privy to the negotiations, but that's what he negotiated. I think he's going to get the bonus sometime soon. I think he intentionally didn't take it in December or November this year. He's in the top bracket either way, but maybe he did want to turn around and pay the tax instantaneously. Used to be in the old days that they used to report the bonuses as 1099, which he's used to be able to take expenses against. That’s no longer the case, but the signing bonus works.

00;05;14;23 - 00;05;21;01
Robert Raiola
I'm sure you'll see it on Pete Alonso's deal when he signs, who’s also reported to be a Florida resident.

00;05;21;03 - 00;05;43;20
Mark Conrad
Just for those who may not know, 1099 income is not the same as what's called W-2 wage income and 1099 income from most of us mortals is usually something that's freelance work or a business on the side. So let's say I'm working with Robert. Robert says, “hey, can you put together a conference for me? It's a one time thing and I'm paying you X dollars.”

00;05;43;22 - 00;05;54;23
Mark Conrad
They'll be on the 1099 form. And then you can take expenses because it becomes something like a business. I don't want to usurp your expertise, but that's, you know, the way I'd understand it.

00;05;54;24 - 00;05;55;22
Robert Raiola
Very good. Ron.

00;05;55;29 - 00;05;57;09
Mark Conrad
You know, please let me know.

00;05;57;10 - 00;05;58;12
Robert Raiola
No good explanation.

00;05;58;12 - 00;06;04;10
Mark Conrad
But to actually put that as a 1099 would have been very interesting. But I guess that is no longer the case.

00;06;04;12 - 00;06;31;02
Robert Raiola
The other situation is, professor, being that the players are now on their W-2, they can't deduct the agent fee paid on the contract. I think I read somewhere where Boras will make 38 million off this contract. Soto will get zero deduction for that. You are allowed, however, to take a business expense for agent fees paid against his endorsement income, his gloves, his batting gloves, his spikes.

00;06;31;05 - 00;06;41;13
Robert Raiola
You know, all that kind of stuff. He's allowed to take that fee. But the loss of the agent fee, you know, you're paying 38 million and you got a great contract, but you're not getting a deduction for the 38 million.

00;06;41;15 - 00;07;02;19
Mark Conrad
And that's a lot of deductions, no question about it. So it goes to show you that, you know, the interpretation and the technicality of this is not just for, you know, people who are into accounting. It actually has a huge effect on employees on that level. Of course, [Raiola: Yup] young professional athletes, you know, on an elite level are one of those types of employees.

00;07;02;21 - 00;07;18;12
Mark Conrad
But it also opens up the general question of, you know, let's call it forum living. So if you're a professional athlete, what state would you recommend the athlete live in, at least for most of the year when he or she's not playing?

00;07;18;15 - 00;07;39;22
Robert Raiola
Right. There's there's about 6 or 7 states that don't have a state tax. Most recently - which state was it? One of the states changed the rule. But Nevada doesn't have a state tax. State of Washington doesn't have a state tax. Obviously, Florida, Washington D.C., similar to New York City, only taxes residents. You really got to live there.

00;07;39;23 - 00;08;01;26
Robert Raiola
In other words, Soto, when he's done playing, hopefully late in October with the Mets in the World Series, he's got to get out of New York City to be below the 183 day count, meaning if he spends more than 183 days in New York, he would be deemed to be a resident. Now, the good thing for him, they spend a lot of time on the road so that time counts out of New York State or New York City.

00;08;01;29 - 00;08;09;05
Robert Raiola
So he wouldn't have a problem with the day count. Even if they go far, he's still going to have half of those six months will be on the road.

00;08;09;07 - 00;08;11;27
Mark Conrad
And not only that, but spring training, of course, is not gonna be in NY.

00;08;11;27 - 00;08;13;02
Robert Raiola
Exactly, Mark.

00;08;13;04 - 00;08;41;03
Mark Conrad
And that's a good amount of days. And you think about how often 81 games worth, a baseball player is on the road. So he wouldn't make that domicile argument. He wouldn't be able to get that, you know, 100, whatever, 80 days a year being in New York or New York City. So that makes it easier. And do you find that based on your experience, more and more professional athletes are moving to Florida or Texas or Arizona?

00;08;41;05 - 00;09;03;20
Robert Raiola
Yup. I think you saw Corbin Burnes just signed with Arizona, coincidentally has a low tax. 2.5% is a flat rate. But also he's from Arizona and he's got his family there and he didn't want to move his family. So maybe one of the other teams like Toronto or whoever else was involved in discussions with him, maybe they offered more money.

00;09;03;27 - 00;09;23;01
Robert Raiola
But I've also said on your show, Mark, the best gross deal may not be the best net deal, meaning that he may have been offered more by the Blue Jays and other teams, but he decided to take or look at the best net deal and and don't - you know, it's not a small thing that he'd be able to not have to move his family.

00;09;23;04 - 00;09;34;11
Mark Conrad
And back to the bonuses though, why don't more players and more leagues utilize this bonus system as a way to limit tax liability?

00;09;34;13 - 00;10;03;28
Robert Raiola
They should, Mark. I think what it is, is when you sign a contract as big as Soto did, 15 for $765 million, you know, whatever signing bonus you could get, somebody is going to put out there. A lot of guys on the one year deal, they maybe get a small signing bonus, but it's not publicized. I think more and more athletes are going to move to Florida and to try to take advantage of not being taxed as a resident in the state in which they play.

00;10;04;00 - 00;10;18;13
Mark Conrad
And that could also be Texas [Raiola: Yup] and also could be Arizona. So the so called low tax states or so called [Raiola: Right] red states will be even more attractive in the future as these kinds of moneys are just being paid to athletes.

00;10;18;21 - 00;10;43;06
Robert Raiola
Yeah. You mentioned spring training, Mark, what would happen there was Arizona wanted a couple of teams to move from Florida spring training to Arizona spring training. So they negotiated with Arizona to say, look, you can't tax our guys during spring training. You can tax and during the season when they play there, but not during spring training. And they agreed to do that because they know it would be worthwhile for their teams to come out to Arizona.

00;10;43;09 - 00;11;01;15
Mark Conrad
So basically we're seeing this trend happening, but in other leagues, we should talk about some of the restrictions on the signing bonuses, and if you think in the future that could change. Not every league allows the kind of signing bonus that Major League Baseball does.

00;11;01;22 - 00;11;21;04
Robert Raiola
Right. So the NHL does allow the signing bonus, and you can use the same technique. The most recent was the Ranger goalie Shesterkin. He signed a huge contract, and I'm sure he got a big signing bonus. So he would take it out of New York. I'm sure I would bet he's not a New York resident. The NBA doesn't allow signing bonuses.

00;11;21;04 - 00;11;43;17
Robert Raiola
I don't understand why. Because when guys get drafted, they're not - they don't have much money when they're drafted. So what happens is they take an advance, which is really a signing bonus, you know, in the summertime. So that they’re good until October; hopefully good until October. And then NFL, it doesn't work ‘cause the language in the contract.

00;11;43;20 - 00;11;57;20
Mark Conrad
All right. And the whole system the NFL has is really unique, and extremely intricate and difficult to implement. So we can see that. But could you see in the future that this could be a very attractive way to save on taxes?

00;11;57;22 - 00;12;19;04
Robert Raiola
It is. And it sort of would equalize the teams like the California teams that play in the high tax. Hey, you got to remember, Mark, in the NFL, if you play if you play in a taxable state and you get wages, you're on a home game that weekend. You're paying tax on all that week's pay to California.

00;12;19;06 - 00;12;33;20
Robert Raiola
If you got a road game you're still paying taxes on 5/7 of the week to California. So that's a big disadvantage to the California teams. And often you see, when these big contracts, guys will try to get out of the state that they're playing in.

00;12;33;22 - 00;12;43;21
Mark Conrad
And that's something that's not really publicized. But do you think that a factor involving, say, football players in signing with different teams can be the tax consequences?

00;12;43;24 - 00;13;04;15
Robert Raiola
I think it is. It's not number one on the list, but it certainly should be part of your list of concerns that you may have. And if you're not doing that, you're making a mistake because you least want to be able to use that against a team that's in a taxable state and try to get away to move up their offer to you by getting more money to make up for the high tax state.

00;13;04;18 - 00;13;24;06
Mark Conrad
Now, when a client would come to you regarding taxes, is it really proactive or after the fact? Because what you're saying could be very good advice in working, say with an agent or not? Or if the players said, look, I now play for the Jets or I play for the Mets, you know, here's my taxes, do my taxes, please.

00;13;24;08 - 00;13;32;01
Mark Conrad
You know, it's a fait accompli. So how do you see someone like you in your role evolving in this environment?

00;13;32;03 - 00;13;52;03
Robert Raiola
Sure. We did recently, two years ago, a player on the Denver Broncos. What happened was he was with the Arizona Cardinals, and he wanted to sign somewhere else. Now Arizona, Arizona didn't have the money to pay him. So he wound up signing in Colorado, which got a 4% tax, much better than where he was from in Connecticut, which I think is about seven.

00;13;52;05 - 00;14;14;01
Robert Raiola
So I do see this evolving more and more. What we alluded to, but we didn't get into, Mark, is you have to have three conditions present for the signing bonus to be taxable in the right fashion. It's got to be payable separately from salary. It always is. It's got to be nonrefundable. It should be. And it's not predicated upon subsequent performance, which is where football trips up.

00;14;14;03 - 00;14;24;01
Robert Raiola
[Conrad: Correct.] But if you have those three conditions present and it may not be in the uniform contract in any sport, but you should be able to add that paragraph in as an addendum.

00;14;24;03 - 00;14;30;29
Mark Conrad
Yeah. Great points, great points. Anything else you'd like to say about Soto’s contract or anybody else's contract?

00;14;31;02 - 00;14;53;09
Robert Raiola
I think you really - it's fun for us when we get involved in negotiations before the player signs. So again, he may have been looking at the Blue Jays and when you look at the Blue Jays, you got to first consider the US Canadian treaty. Regular wages are taxable in Canada, Province of Toronto, Ontario, at 53.53%, which is ludicrous.

00;14;53;12 - 00;15;13;03
Robert Raiola
It's it's that's really the federal state, but it's still very high. It beats all U.S. rates except for California. And then pursuant to the US Canadian treaty, signing bonuses are only taxed at 15% in Canada. So then you would get the full credit of the US for the 15% and not get screwed by playing up in Canada.

00;15;13;05 - 00;15;35;12
Mark Conrad
But nevertheless, that Ontario tax is very high. [Raiola: Yes, it is.] The provincial tax and also in Quebec, I should say, as well, where there's many Canadians say that funds their medical system to a great extent, the more state run medical system. But it is very high for US players. And also they are paid in US dollars, at least in the [Raiola: Right.] National Hockey League.

00;15;35;12 - 00;15;58;23
Mark Conrad
So that part is settled so we don't have to worry about the exchange rate. But I suspect that, yeah, many of the agents [...] working with people like you are calculating this for the future where seeing this continued spiral of free agents’ salaries, and in the National Hockey League will probably go up, too, because the salary cap is going to go up fairly substantially.

00;15;59;00 - 00;16;20;29
Robert Raiola
Right. And I don't have the exact numbers on Shesterkin, but I know a great portion of his contract every year was deemed to be signing bonus. So that's clearly, to me, doing two things. One, if there ever was a lockout, you still got to get paid. But second of all, you know, equally as important is that you were able to move those wages outside of New York State in New York City, which is a big savings.

00;16;21;01 - 00;16;25;21
Robert Raiola
And I would bet you he’s a resident of a non taxing state.

00;16;25;23 - 00;16;46;17
Mark Conrad
Okay. Sounds great. And on that note, on behalf of Fordham University, the Gabelli School of Business and the Sports Business Initiative, we want to thank you, Robert Raiola, for again coming on to share your expertise on this podcast, and you're welcome to come back any time in the future to discuss any other issues that may come up.

00;16;46;20 - 00;16;48;06
Robert Raiola
Thanks for having me, professor.

00;16;48;08 - 00;17;04;06
Mark Conrad
And thanks to my producer, Victoria Ilano, for her continued great work. And thanks to all of you for listening in. For the Sports Business Podcast at Fordham's Gabelli School of Business, I’m Mark Conrad or Prof. C, have a great day.