Back in 1991, the Chicago Bulls beat the Los Angeles Lakers in the NBA Finals. The Franchise Tax Board (California’s income tax agency) didn’t like the idea that the Bulls took the money and ran, so they implemented the first Jock Tax. This tax impacts non-resident entertainers and athletes. Illinois didn’t like the idea of California getting money without getting some of its own, so they retaliated with a Jock Tax of its own. Today, most states which have an income tax have a Jock Tax.
So where does poker fit in? Poker players who win $5,000 or more receive a W-2G. Suppose a resident of say, Ohio, goes to Iowa and wins $50,000 in a poker tournament? The lucky winner will receive his cash, and a W-2G noting his winnings. The IRS will get a copy of the record, the winner will include the winnings on his Ohio (and city, if applicable) income tax returns, and all will be well. Right?
Well, the IRS has data-sharing agreements with every state but Nevada. So the Iowa Department of Revenue will also get a copy of the lucky winner’s W-2G information. One, two, or three years down the road the lucky winner will get a notice from the Iowa Department of Revenue noting his requirement to file an Iowa tax return. With penalties and interest, of course!
Is Iowa correct about the need to file the return? Under current law, yes. The income was sourced from Iowa and, according to the Supreme Court, Iowa has a right to tax it. But I’m a resident of Ohio and this is double taxation, you think. Well, it isn’t fair but you can avoid double taxation. All states (with a state income tax) have a credit available for when you pay income tax to another state on income also taxed by your home state. In that way, you pay the higher of the two states’ income tax rates. (Note: Sometimes the credit is taken on the other state’s tax return.)
I’ve recently received a couple of inquiries from poker players hit by the Jock Tax. In both cases, the individuals received the notices years after the win. The Tax Foundation has an excellent study on this issue. Until the Jock Tax goes the way of the dinosaur, poker players who win a tournament outside of their home state may have to pay additional state income taxes.
Hi Russ,
A few quick questions, if you have a chance:
1) Is this tax something that “technically” applies to all gambling winnings? Notably, cash game wins and small tournament cashes? It seems like it’d be a huge mess for a traveling cash game specialist to have to keep track of winnings in each state and file returns for each of those states — though I’m sure few people actually do this when W-2Gs are not given, is it something they should be doing? Is a casual poker player on a trip to Vegas really an “athlete” or “entertainer” in any sense?
2) If this is a tax that applies to athletes and entertainers, does that imply that either poker is “a sport” or that poker players are entertainers? It seems like either of these would run counter to the usual unfair rules in place for the way poker income is taxed. How is this reconciled, or is it just a standard unfair discrepancy?
Thanks and Best Regards,
Mike
1. Does this apply to all gambling winnings? Absolutely. But it’s difficult for states to go after gambling winnings without proof of the winnings. With tournament poker and W-2Gs, there is proof. Nevada is a non-issue as there is no income tax in Nevada.
2. Poker players are impacted through what I consider collateral damage. The law is written so that non-residents owe tax if they have income in (say) California. The law is written to cat as large a net as possible and obtain as much income as possible for the states involved. Thus, whether or not poker is a sport is irrelevant for this issue. As to the fairness of this tax, there are few taxes that are fair.