For esports players, the tax man cometh

Nidal "Mama Im Dat Man" Nadal, from California, sits ready at his video station for his team Blazers Gaming during the NBA 2k League (NBA2KL) professional esports playoffs last year. Photo / AP

Ask a professional gamer how they'd label their occupation and they may have several suggestions, not particularly caring which you choose. But someone does care how they are classified, and that someone is starting to pay more attention to the ever-rising sums of prize money, as well as the uptick in interstate competitions in esports leagues. That someone is the tax man.

Article I, Section 8 of the United States Constitution permits states to tax nonresidents on personal income. However, it was not until states needed more money that they started to increase enforcement against athletes, taxing them as they entered their state to perform work, i.e. play a game. Thus the so called "jock tax," as it is often referred to, may include training, practices and team meetings that take place in the nonresident state, leading up to the game itself.

While professional athletes in the NFL, MLB, NHL and NBA - and entertainers - have been an attractive target to state tax collectors due to their public schedules and high salaries, gamers have been performing under the radar, until now.

According to Jeffrey Johnson, Communications Director at the Pennsylvania Department of Revenue, the "department is aware that esports is a new industry and that is growing in popularity." Furthermore, Johnson believes, in general, "the department has programs to help the emerging industry to understand and improve their tax compliance."

When further pushed on his guess on how many competition hosts are complying with the law, Johnson added that he does not have an estimate at this point, "but Pennsylvania's Education and Outreach Committee is considering brainstorming plans for outreach" to the esports industry.

With the recent move to franchise type models for The Call of Duty League, Overwatch League and the NBA's 2K League, states are becoming more aware of when these esport competitions will take place within their borders, which teams have won big prizes, and more importantly, where the players are located.

For example, in February of 2020, the Overwatch League will launch with teams taking up residency in multiple states (before 2020, all teams were in California). All the competition locations, including those outside the US borders, like France and Canada, maintain a tax on moneys earned by nonresident athletes, except for the state of Texas and Washington, D.C.

One prominent player, Jay, "Sinatraa" Won apparently discovered this fact after winning the Overwatch League's Grand Finals in Philadelphia in 2019, tweeting that 55 per cent of his prize money for that event would be taken in taxes.

Conversely, in the NBA 2K League, the athletes reside in home markets around the US but fly into New York City to compete in league play each week of the season. Thus, athletes residing in Florida, like the Magic and Heat Check teams, will enjoy no state tax for streaming money earned while at home, though they will have to pay New York a nonresident tax on all their winnings (and earnings) while performing in the New York NBA 2K studio. (In the 2019 season, two tournaments were held outside of the New York studio).

Andrew Gordon, president of the Chicago-based Gordon Law Group, believes teams and/or publishers have been "late to the table in withholding taxes" from players' paychecks. "This is partly due to the fact that gamers, early on, were mostly labeled independent contractors."

The landscape remains ambiguous. In conversations with The Post, major esports organisations described taking different approaches regarding payment to players, talent and other employees involved in these tournaments.

Spectators take in the International Dota2 Championships at Rogers Arena, Vancouver. The prize pool was more than US$$11,200,000. Photo / AP

Asking for anonymity in exchange for sharing internal business practices, a co-owner from one international-based organisation with teams in some of the most visible leagues said the organisation does not withhold any taxes, and instead provides players with accountants.

A senior-level executive from a top US-based organisation, with teams competing in several games, who asked for anonymity since he was not cleared to speak with media on this topic, said the organisation withholds state taxes for salaries in the state and for winnings earned in other states.

On the talent and production side, The Post reviewed pay documents for a production team member who was paid by a major video game publisher for work on broadcasts. Those documents showed state tax withholding for all states in which production for the broadcast took place. Still, for casters and players with contractor status, the teams and leagues themselves would not have been required to do so.

With the franchise model coming into vogue, Gordon sees a recent "trend to move the gamers to an employee status," which will require the teams/employers "to begin to withhold taxes from gamers."

Outside of a traditional franchise model, things become a bit dicier. For example, Riot Games, owner of League of Legends, is one of the largest esports leagues. Instead of a traditional franchise model, Riot holds various tournaments around the world and only maintains some of its players as employees. Thus, how diligent Riot is in withholding taxes from its players is something Gordon questions.

He believes "the more these types of competitions become more visible, the more states will begin to enforce tax upon the gamers." However, "in general, there is a lack of consistency across teams and even across games, as a whole, when it comes to withholding taxes." Remember, Gordon adds, "the tax code applies to all, regardless of size or model."

Roger Quiles, founding partner of Quiles Law, a New York based esports agency, also can see a day where performances and competitions that solely take place on the Internet will begin to draw the attention of state tax collectors as well.

"For the gamers that use a loan-out structure, incorporating themselves as an LLC for tax purposes and pay themselves a salary, it is possible that the gamer, while away from home, that is streaming or competing from a state that maintains a nonresident tax might trigger the state's tax law."

While Quiles admits determining earnings "will be a nightmare," he would not be surprised if someday, based on one's IP address, the state "could track your exact location when streaming and determine your earnings while in their backyard."

While this might seem far-fetched, Erica York, an economist from the Tax Foundation, a nonpartisan tax policy focused nonprofit in Washington, D.C., believes that the online earnings could go beyond pure winnings and "eventually include online ads and sponsorships."

"As the revenue grow, no matter the source, the states will perk up and begin to pay attention," York said.

Quiles agrees. "This is why I am seeing more and more tax accountants, lawyers and financial planners getting into the esports space."

The real question is just how far back these states will go, in years, to collect on taxes they believe to be past due from an industry that is just starting to get on its feet.

- Zavian is a professor of Sports Law at George Washington University. Noah Smith contributed reporting to this story.