A little bit of righteous indignation goes a long way, especially in this age of viral social media. The NFL, which was incorporated as a nonprofit when two frontrunner leagues merged in the 1970s, is under siege with public outrage over its 501(c)(6) status recently brought to a boil via an online petition and media scrutiny.
The league recently got roughed up with bad publicity over its concussion problem, which may well cost the league over $1 billion in settlement with the players association, and it's on the defensive again. The proposed Congressional PRO Sports Act seeks to end such nonprofit status for rich sports leagues, although it was drafted with the NFL in mind.
The bill has triggered a debate with perturbed opposing camps. On one side are accountants and league officials who assure the NFL's not-for-profit status costs taxpayers nothing. The other side is weird mix of social activists, non-sports taxpayers, and legislators, including the United States Joint Committee on Taxation, which asserts that all such sports league exemptions cost taxpayers $10 million a year. Standing on the sidelines in this debate are several prominent publicly held companies that make a lot of money from the NFL.
The religion of football
Underlying this issue is a cultural phenomenon that grants the most profitable sports league in the country – a reported $9 billion plus in total revenues in 2012 – non-tax paying status more commonly granted to a local church or university. This quandary seems to dispel any doubt that, for many, football is a religion. The fact that the NFL pays its top five executives almost $60 million (half going to the CEO) just seems counter-intuitive to the intent of the nonprofit moniker. But this is where things get murky.
There are 29 different types of non-profit organizations, according to Wikipedia – only one of which, the 501(c)(3), is exclusively tax deductible with most deductions falling into this classification (there are a few exceptions). Many sports leagues – such as the NHL, PGA, the U.S. Curling Association, and the U.S. Chess Federation, are also organized as nonprofits. The NFL argues that they pay taxes through each individual team, which are for-profit entities. The NFL in essence acts as a trade association. Yet the central office still posted $255 million profit in 2011, although it lists losses associated with its stadium-building program. The NFL protests it has nothing to hide with its 501(c)(6) status. However, according to the Center for Responsive Politics, since 1998 the NFL has spent more on lobbying than any other sports league – $12 million.
Local tax deals far costlier than federal tax loss
Critics also argue that the NFL's nonprofit status has created a climate of entitlement that costs taxpayers much more than any income that goes untaxed. According to Gregg Easterbrook, who writes for ESPN and The Atlantic Monthly and has served as a commentator for ESPN and the NFL Network, many of the NFL's 32 teams and their billionaire owners force tax breaks for new facilities that make unpaid federal taxes look like chump change.
For example, he reported that Washington state taxpayers will provide $390 million of the $560 million price tag for the Seattle Seahawks' CenturyLink Field by the time the note is paid. Owner Paul Allen pays the city about $1 million a year in rent in return for revenues from ticket sales, concessions, parking, and broadcasting totaling about $200 million a year. Easterbrook notes that the Dallas Cowboys have a pro football facility valued at $1 billion that under normal circumstances would yield $6 million a year in property taxes. But the club pays no property taxes, leaving local county taxpayers to make up the difference. The nonprofit NFL, it turns out, knows how to cut a profitable deal.
Many companies add to balance sheet through NFL ties
Many well known publicly held companies benefit from the NFL's business model, such as Nike (NYSE:NKE), Verizon (NYSE:VZ), Electronic Arts (NASDAQ:EA), and Microsoft (NASDAQ:MSFT). If the NFL were legislated into paying higher taxes, such companies might pay more in licensing fees fees from the NFL and realize lower profits. Nike makes a reported $750 million a year from NFL merchandise; Verizon just renewed its contract with the NFL for $1 billion to broadcast games on phones and mobile devices and to conduct its own merchandising; Electronic Arts is in its 25th year of the very profitable Madden NFL video games; Microsoft just agreed to a new Xbox partnership worth $400 million over five years. As legislation makes for-profit companies less profitable, the PRO Sports Act currently in play is no doubt about as welcome as a holding penalty in a first and goal situation.
Business as usual likely
The only things Americans might like better than seeing their sports teams win is paying as little as possible in taxes. For pro football fans, higher taxes probably seem like an acceptable trade-off.
That's good news for fans, not so much for other taxpayers. It is unlikely the IRS nonprofit laws will change at the federal level or that politicians will get more backbone at the state level to demand better deals. For a league that has a stated goal to increase profits to $25 billion by 2027, the pittance more the PRO Sports Act would cost if it does get through the NFL's prevent lobbying defense hardly seems much to worry about for the moneyed league.
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John Mitchell has no position in any stocks mentioned. The Motley Fool recommends Nike. The Motley Fool owns shares of Microsoft and Nike. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.