Nobody gives up a tax-exempt status and decides to pay taxes without a good reason. The NFL, arguably the most successful sport league in America today, announced last week that it is relinquishing its status as a non-profit organization and is now eligible to pay taxes on its income. Why would such a successful enterprise agree to this move? Like everything else in the business world, it is a decision on economy, value, and public relations.
The league office has been classified as a 501(c)(6) non-profit organization since the 1940s, putting it in line with other business and trade groups that promote their enterprises and do not engage in for-profit activities. The NHL and PGA offices also operate as non-profits, whereas the NBA, NASCAR, and Major League Baseball offices do not. Note that this action only refers to the NFL league office; all 32 individual NFL teams are for-profit organizations and taxed accordingly.
As a non-profit, the NFL league office must disclose certain details that they would have preferred to keep private — most prominently, salaries. NFL Commissioner Roger Goodell was paid $44 million in 2012, and according to the Washington Post, six other Executives in the NFL office drew over $1 million in annual salary while almost 300 employees made over $100,000 (also 2012 salaries).
Every time the NFL runs into controversy — and there has been no shortage of that lately — the tax-exempt status and salaries come into scrutiny, even though they usually have nothing to do with the matter at hand. Goodell decided the tax-exempt status was a "distraction" and mentioned in a letter to Congress and NFL team owners about retracting the status that it has been "mischaracterized repeatedly." Further, public knowledge of Goodell's salary probably does not make the collective bargaining agreements with the NFL Player's union any easier.
In essence, the NFL is paying taxes as a combined privacy hedge and public relations insurance. It is a smart move given the overall perspective. The league office revenues in 2013 were approximately $327 million, while a Congressional committee in 2013 estimated the league's annual tax bill would be a little over $10 million. The NFL's annual revenue exceeds that tax bill by a factor of more than 1,000. Since the NFL league office gets its money from the 32 clubs, in the same way that union offices survive on union dues from their members, they can afford a $10 million hit.
Why would Congress have tax estimates? Senator Tom Coburn (R-Okla.) had his eye on the NFL office tax exemption as an example of taxpayer waste. Coburn's efforts failed at the time, yet continuing Congressional scrutiny is surely part of the reason why the NFL office gave in.
A few special issues with revenue are unique to the NFL and will have to be worked out by lawyers during the transition. Television contract money is a prime example. Currently, revenue from the national TV network package is brought in through the league office and distributed among the 32 teams, where it is taxed at the club level. Provisions will have to be made to avoid double taxation (once at the league office level and once at the club level). Interest-free loans made by the NFL to teams that build new stadiums pose another tax challenge.
We have no doubt that the league will find a way to construct this taxation to their advantage. Rest assured the NFL did a cost-benefit analysis on this move. Perhaps their tax bill will wind up filed under Public Relations expenses.