Should the NFL Really Have Tax-Exempt Status?

Benjamin Franklin said it best, so I’ll just go right ahead and let him say it for me to save us all the time.

Our new Constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes.

— Benjamin Franklin, in a letter to Jean-Baptiste Leroy, 1789 

Acknowledging and openly accepting the permanency of death is a somewhat somber and unsavory exercise, which only strengthens the parallels between taxation and expiration. Trying to escape either is as futile as it is depressing, because it just can’t be done. The new year marked the beginning of tax season, and if you stick your head outside the window and tilt it to just the right angle you can actually smell the confusion and misery in the streets, all of which will stick around until the taxman closes his books sometime in the spring. All must pay…rich, middle-class, and poor; The Wal-Mart the size of two parking lots and the independently owned coffee shop down the street. Yes, everyone’s going to open up their checkbook and see how much they owe the government. Well, almost everyone. Nonprofit organizations, such as churches, charities, homeless shelters, soup kitchens, and internationally famous professional sports leagues are exempt from most business taxes.

Yea, let me run that one back for you again.

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The NFL, the NHL and the PGA tour are global sports brands, based in the United States, with fans from all over the country and the world. Despite the fact that they collectively bring in billions of dollars in revenue every year, the IRS only stops by for a chat and spares the complementary mugging that usually follows. They're required to file their taxes so the government is aware of their financial situation, but exempt from actually paying most of what they would if they were categorized as a business. How did this happen, and does any of it really matter? That depends entirely on whom you ask.

This whole mess begins with the NFL in 1966. After a campaign of successful lobbying in Washington, the tax-code was changed in order to ease the merger of the NFL with the AFL (American Football League). The new league kept operating under the NFL brand but the entity that the merger created was filed under Section 501(c)6 of the tax code, which officially classified it as an ‘industry association’. What this means is that although the NFL doesn’t fall under the ‘charity’ label, it does operate as a nonprofit organization.

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On the surface, this seems like an outrageously poor lie designed to save the NFL some cash. On paper though, it actually makes some sense. The NFL is only the organization that standardizes and oversees the rules, regulations, and businesses deals for the 32 teams who comprise membership of the league. Each team is independently owned, but operates as a franchise of the NFL. The large majority of the revenue doesn’t run through the central office of the NFL (the tax-exempt organization in question) but rather stays with the individual teams. In that sense, the NFL actually does operate in its assigned capacity as an ‘industry association’. So, from a taxation and legal standpoint, the NFL’s tax-exempt status is perfectly legitimate. Those who defend the tax-exempt status of the NFL often point at other large, nonprofit organizations that fall under the 501(c) label, such as Harvard University. Harvard regularly pulls in revenues around the billion-dollar mark, but like the NFL, gets to skip out on tax season (although it must file and declare all earnings and losses).

Outside of their taxation status, the NFL and Harvard have little in common. One gives back to the world in research and development; the other gives back weekly entertainment. Once you step back outside the world of legal loopholes and official designations, things get a little dicey. The NFL brings in $9 billion in revenue each season; does that sound like the description of a nonprofit organization? Although most of the money in the league doesn't run through the NFL itself, they still collect a substantial amount in fees & dues. Not only does the NFL avoid federal taxes, but the teams that play in the league often use publicly subsidized stadiums as their home arenas. So, while the public pays to construct and maintain the stadiums that will play host to the league, the league itself gives back nothing to the public. MetLife Stadium, which hosted this year’s Super Bowl, was built with the help of public funds of the state of New Jersey. Unfortunately for the citizens of New Jersey, tickets to the game started at $2,600, making them somewhat unaffordable for the average Joe.

The NFL’s unique tax situation has not gone unnoticed by the public. Senators Angus King and Tom Coburn, an independent and Republican, respectively, recently tabled a bill named ‘Properly Reducing Overexemptions for Sports Act’, often referred to simply as the PRO Sports Act. What the bill aims to do is close the loophole in the tax code that allows the NFL (and other sports organizations) to avoid paying federal taxes. It would do this by amending section 501(c)6 to exclude any sports organization that grosses more than $10 million in revenue. In one swoop, the NFL, NHL, PGA Tour, and many other smaller (but not small) sports organizations would lose their tax-exempt status. Since the tabling of the bill a few weeks ago, the debate has been focused primarily on the NFL, but the implications would reach far beyond the football world and into all of the North American sports market.

Try and list all of the professional sports organizations that operate in North America. There’s the NFL, MLB, NBA, NHL, MLS, UFC, NASCAR, PGA Tour, and that’s just off the top of my head, I’m sure I’m missing some major ones. What makes the NFL/NHL/PGA Tour so special that they can avoid paying taxes? Does that not make for an uncompetitive business environment?  It can always be argued that these sporting leagues are not in direct competition with each other, since most people pick and choose the sports they follow themselves, but there’s no denying that there’s a certain degree of overlap for sports fans. The MLB had tax-exempt status until 2008, when it wilfully gave it up. The MLS has received no tax exemptions, despite the fact that it’s a young and growing organization. The NBA never received any offers for tax-exemption status in all its years of operations. The UFC and NASCAR also have no history of tax-exemption, although it can be argued they are more niche sports. The sports market is certainly unique, but at the end of the day it operates like any other market, and having a two-tiered system that arbitrarily favors certain organizations is inherently unfair.

On the other hand, there’s no denying that even if the proposed PRO Sports Act were to pass (which it doesn’t seem to have a very high chance of doing), the NFL and other organizations would simply engage in some very creative accounting in order to defer and minimize all taxes. As some tax analysts have pointed out online, the NFL hasn’t been turning a profit in recent years, since they’ve been so focused on financing expansion. So if the PRO Sports Act were effective as of last year, the NFL still wouldn’t owe any taxes. Still, that seems beside the point. The fact that this loophole is still in place, nearly 50 years after it was first created to jumpstart a new league that has since become the most successful sports business on the planet, seems absurd. The NFL should set an example to the NHL, PGA Tour, and other sports organizations using 501(c) to avoid federal taxes by voluntarily giving up their tax exempt status as the MLB did in 2008. Should they decide not to, then state governments should come out in the open and deny them any government subsidies to help build new stadiums. We all love sports, but just because it’s an entertaining business doesn’t give them the right to withhold money from the public coffers and then go asking for special treatment afterwards.

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