December 8, 1994
Janice H. Faulkner, Secretary North Carolina Department of Revenue Post Office Box 25000 Raleigh, North Carolina 27640
Re: Advisory Opinion; Taxation of nonresident professional athletes; withholding upon wages and salaries; N.C.G.S. §§ 105-163.1(4), (5) and (15)
Dear Secretary Faulkner:
The introduction of professional sports to North Carolina at the team and individual levels has raised several questions for which you seek our opinion. Moreover, these issues may affect bands and other entertainers who tour the state.
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, |á20.05[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