It's been a bad year for the NFL. Sure, they generated over $9 billion of revenue in 2013, but consider the scandals and controversies of the past year alone - Ray Rice, Adrian Peterson, the Washington Redskins, concussions and player safety, the fact that the Jacksonville Jaguars are being used to try and convert Europeans into fans of American Football - it's clear that the NFL has an image problem. Compounding this problem is the fact that the NFL, a supposedly tax exempt organization, pays its commissioner a $44 million salary.
The issue of the NFL's tax exempt status is brought up during every major scandal. It's an easy target, and provides a prime opportunity for sportswriters, fans, and politicians alike to take a moral stand against a high-profile organization.
The narrative, as it's commonly presented, is that the NFL is a multi-billion dollar industry doing what multi-billion dollar industries do best: finding loopholes to avoid taxes. It's a bunch of millionaires getting paid to play a game that makes even more money for their billionaire owners. Meanwhile, the government doesn't see a cent, and the middle-class fanbase is stuck paying $40 for parking and $8 for a beer inside a stadium built with their tax dollars. It's a compelling narrative, and it's easy to see why it generates such widespread outrage. The problem is, it's not entirely true. The NFL is not tax exempt.
The NFL League Office is tax exempt. The NFL as a whole is not. This may sound like just a technicality, but it's significant. There are three important entities in play here:
- NFL Teams (subject to taxation): Each of the 32 NFL teams generate revenue and incur expenses on an independent basis. If you buy a ticket to Gillette Stadium, that becomes revenue for the New England Patriots. The Patriots use this revenue to pay expenses, such as Tom Brady's salary. Any remaining profit is subject to taxation.
- NFL Ventures (subject to taxation): NFL Ventures is the arm of the NFL that works to benefit, and profit, the league as a whole. When the NFL signs TV broadcast deals with NBC, CBS, and FOX, that money is funneled through NFL Ventures and then split up and distributed to each individual team. NFL Ventures is also responsible for other revenue league-wide revenue generation, such as sponsorship deals and the NFL Network.
- NFL League Office (tax exempt): The League Office handles the more administrative aspects of running the league. The League Office is responsible for planning the Super Bowl, organizing the draft, and negotiating contracts with referees. It also engages in research around player safety and makes charitable contributions to groups such as Play60. Since none of these activities actually generate revenue, the League Office is funded via 'membership dues' paid by each individual team. In the eyes of the IRS, this qualifies as a 'trade association.'
(A brief caveat: I'm not an expert on taxation, and the NFL does not publicly release its financials. The above chart is my best effort at piecing together information from various public sources)
Does the NFL League Office deserve to be tax exempt? Probably not. But it's not nearly as egregious as commonly presented. Further, the way the NFL is set up, it's questionable whether or not the IRS would have anything to gain from revoking the status. As shown above, the League Office isn't where the NFL makes its money. Major League Baseball had a similar tax exempt structure but abandoned it in 2007, explaining that the exemption provided no monetary benefit.
There's no consensus on how much is at stake for the NFL. According to the Congressional Joint Committee on Taxation, removing tax exempt status from professional sports leagues would yield an extra $109 million in tax revenue over the next 10 years, but that includes eliminating the exemption for the NHL, PGA, and various smaller leagues as well. $109 million over 10 years is nothing to sneeze at, but it's not even a drop in the bucket that is the government budget, and clearly not highway robbery as its commonly perceived. In fact, some experts suggest the tax exemption is actually costing the NFL money, as it prevents them from claiming certain deductions.
Overall, the vast majority of the billions of dollars generated by the NFL as a whole are subject to normal taxation. Sure, the league office's exemption is questionable, but it's not something that should bring your blood to a boil. Save that for the fact that Jeff Triplette is somehow still allowed to officiate games.
Primary Sources for further reading:
- NFL League Office Form 990 Tax Filing (2012): http://990s.foundationcenter.org/990_pdf_archive/1...
- NFL League Office leaked financial statements (2010): http://edge-cache.deadspin.com/deadspin/nflleagueo...
- NFL Ventures leaked financial statements (2010): http://edge-cache.gawker.com/deadspin/nflventures.pdf
- Carolina Panthers leaked financial statements (2012): http://edge-cache.deadspin.com/deadspin/richardson...