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E-sports join NFL, other traditional games as jock tax target

Update, Nov. 26, 2022: E-sports are still popular, but according to a recent New York Times article, the sector isn't growing as quickly, or becoming as lucrative, as its aficionados had hoped. Still, you can bet that tax collectors will happily take their cut, regardless of size, from this still-niche sport.

Millions are watching NFL playoffs today. But millions of other e-sports fans enjoy competitions like this match between Dallas Fuel and New York Excelsior at the Blizzard Arena in Los Angeles last June, the second season of the Overwatch League. Among those also watching e-sports closely are state tax collectors. (Image by Dallas Fuel via Wikipedia Commons CC BY 3.0)

The world is focused right now on the 2022 World Cup. 

The tournament for the championship of International Federation of Association Football, or FIFA as it's known by its European acronym, obviously is the biggest global sporting event.

It's also a major economic force.

This year's futbol/soccer event being held in Qatar is the most expensive one to date, with a budget of $200 billion.

FIFA will dole out $440 million to the 32 national teams. That amount includes $9 million each to the 16 teams eliminated at the group stage, $13 million to teams knocked out in the round of 16, then escalating amounts that culminate with $30 million to the runner-up and $42 million to the winner.

Some of that money will go to various players. And in most cases, eventually to myriad tax collectors.

U.S. taxes on competitors: Even though players on the U.S. men's soccer team are earning their compensation in the Middle East, they still will owe the Internal Revenue Service.

The U.S. taxes its residents on their worldwide income. That means wherever the income is earned, it is subject to U.S. tax laws.

In domestic sporting competitions, state and local tax departments also get a cut. This is accomplished via the jock tax, the popular name for the collection of taxes from professional athletes and other entertainers when they make money in a particular tax jurisdiction, usually a state and some larger cities.

Since professional athletes and entertainment stars command so much public attention, states et al can collect these added taxes relatively easily. 

Gamers now under the tax gun: Of course, few folks are concerned about the taxes that highly paid professional athletes face, both from their home tax collectors and other states and cities under jock tax rules.

But another group of competitors who get less public attention now are finding they are popular state tax targets, too.

More and more state tax departments are coming after e-sports players.

E-sports, the shorthand name for electronic sports, are competitions using video games. They often are organized, multiplayer video game competitions, particularly between professional players, individually or as teams.

"While professional athletes in the NFL, MLB [Major League Baseball], NHL [National Hockey League] and NBA [National Basketball Association] — and entertainers — have been an attractive target to state tax collectors due to their public schedules and high salaries, gamers have been performing under the radar, until now," writes Ellen Zavian in The Washington Post.

"With the recent move to franchise type models for popular games like The Call of Duty League, Overwatch League and the NBA's 2K League, states are becoming more aware of when these e-sport competitions will take place within their borders, which teams have won big prizes, and more importantly, where the players are located," notes Zavian, a professor of Sports Law at George Washington University.

Growing gamer revenue: It could be big money.

Before this year, the Overwatch League was exclusively in California. Next month, it will launch with resident teams in multiple states. Most of the competition locations, including those outside the U.S. borders, like France and Canada, have statutes allowing them to collect jock taxes.

The only tax-safe places for the e-sports participants are Texas, with no income tax, and Washington, D.C., which is prohibited from collecting tax on nonresident earners.

One recent big e-sports winner found out just how big the tax bite on winnings could be.

Jay, aka Jay Won or @sinatraa on Twitter, took to that social media platform to bemoan that his take after winning the Overwatch League’s Grand Finals in Philadelphia in 2019 would be cut dramatically once taxes were withheld from his payout.

You don't need the mythical sarcasm font to know that Jay really doesn't think "getting taxed 55% of grand finals earnings" is "cool cool."

That 55 percent tax bite is this week's By the Numbers figure.

More players, more money, more tax collectors: Things likely will get worse from the tax perspective for e-sports players.

The whole field (which escapes me, but hey, OK, Boomer) is expanding.

The total e-sports audience is expected to grow 15 percent this year, to 454 million people watching others play fast-moving player-versus-player matches onscreen, either in person at tournaments or, more often, remotely through digital streaming services.

The estimated 2019 revenue of e-sports is expected to top $1.2 billion worldwide, six times more that reported just five years ago.

The pool of competitive video game players also is growing.

More U.S. middle and high schools are adding e-sports teams. Colleges and universities that field e-sports teams are offering millions of dollars in scholarships to those young players. At least a few of them will go on to play professionally and pay tax on their gaming proceeds.

Roger Quiles, founding partner of Quiles Law, a New York based e-sports agency, told Zavian that he can see a day where e-sports performances and competitions that solely take place on the Internet will begin to draw the attention of state tax collectors as well.

Who's really surprised?

Whenever money changes hands, either in old or very new ways, the tax collector generally is part of the transaction.

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That is a very high tax for people who rely on that money to make a living. The esports scene is not the same as the NFL. NFL players get serious contracts for their players while in esports some people barely make enough to live off of.

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