By: Zach Winter
On October 29, 2019, the NCAA voted unanimously to allow student athletes to receive compensation for their image rights. The specifics of this new profit-allowing arrangement with the NCAA must still be worked out, but this vote is a significant departure from the long-standing policy that prohibited college student athletes from receiving compensation.
One issue that requires addressing, although not by the NCAA, is what the tax implications will be from this new policy. Obviously, the income student athletes receive from their image rights will be taxable; nobody is disputing this. However, some issues are more open for debate: should a scholarship be taxable income if a student athlete accepts endorsement money? Can the NCAA deduct the money paid to student athletes as business expense? Will this new policy affect the NCAA’s tax-exempt status?
In general, a student athlete’s athletic scholarship is not considered income for federal income tax purposes. Should this presumption change if the student athlete is receiving endorsement money from a third party? A recent tweet by Senator Richard Burr (R-NC), made on the same day the NCAA announced this major rule change, suggests so, stating “[i]f college athletes are going to make money off their likenesses while in school, their scholarships should be treated like income.” Senator Burr’s position on the issue may even be consistent with the guidelines the NCAA intends to follow in implementing this new rule, which states “student athletes are [to be] treated similarly to non-athlete students unless a compelling reason exists to differentiate.” Should Congress decide to tax student athletes who receive endorsement income on the value of their scholarship, a few interesting issues arise.
First, this policy will require student athletes to consider exactly how much income they will be receiving from their endorsements. If the student athletes receive less income from endorsements than the taxes owed on their scholarship, they may have difficulty coming up with the means to pay their tax liability. The student athlete cannot simply have their endorser pay the excess tax liability, as that would also be taxable income. The most likely outcome from this scenario is that student athletes who are likely to receive a minimal amount of endorsement money will decide not to receive the endorsement money at all, thus, in theory, maintaining the tax-free nature of their scholarship.
This issue is amplified at universities with a higher tuition, as the scholarship will constitute a larger amount of taxable income. For example, a student athlete receiving a full-ride scholarship at Dartmouth, where tuition is over $55,000, will be looking at a much larger tax burden than a student athlete who receives a full-ride athletic scholarship to the University of Texas El Paso, where tuition is less than $6,000. This could result in student athletes at high tuition universities being unable to accept endorsements, due to their inability to pay the taxes on their scholarship, that their counterparts at lower cost universities are able to accept.
Classifying scholarships as taxable income for student athletes who accept endorsement payments may have another interesting outcome: more student athletes staying in state. The reasoning is similar to the example above. A student athlete who receives an in-state scholarship will have less income, should they choose to accept endorsement payments, than if they accepted a scholarship to an out-of-state school, where the tuition is likely to be much higher. If the endorsement money is enough to cover the student athlete’s tax burden from their in-state scholarship, but insufficient to cover the tax burden, we may see more student athletes choose to attend in-state universities as a result of this tax.
The NCAA rule change is clearly still in development and we will not know its full effect for some time. However, if Congress does decide to tax scholarships received by student athletes who accept endorsement payments, as Senator Burr has suggested, there will likely be a lot more factors for student athletes to consider when choosing what university to attend.