The NCAA’s proposal to allow big-time university and college sports programs to pay salaries to their athletes has me wondering what it will take for Congress to require those schools to pay taxes on income produced by their athletic departments. Directly paying players just adds to the long list of practices that make the link between education and major college sports ever-more remote.   

Both tax-exempt and public colleges technically are subject to the Unrelated Business Income Tax (UBIT) that applies to activities “not substantially related” to the school’s tax-exempt purpose. Which is, last I checked, was education and not producing content for television.  

Recent events make it increasingly difficult to see how the billions of dollars major college athletic programs make by selling television rights to their events are exempt from UBIT.

Cheering For Old ESPN?

As Duke law professors Richard Schmalbeck and Lawrence Zelenak wrote in 2018, there are several related tax issues surrounding college sports. Should colleges pay tax on ticket sales to intramural sports events? Should they be taxed on revenues from games played in their 80,000 seat football stadiums?

Perhaps attending The Big Game promotes school spirit among students and faculty and, thus, may be distantly related to education. But selling your football games to ESPN, where the vast majority of viewers have no academic connection to the teams they are watching, looks more like a business than an educational venture. How many viewers of the upcoming Rose Bowl will even know what city the University of Alabama is located in?

Failing The Duck Test

You know the old line, “If it looks like a duck, quacks like a duck, and walks like a duck, it is a duck?” Well, big-time college sports is one massive duck.

Ducking also is what the IRS has been doing for years. Its 1980 Revenue Ruling (80-296) concluded that “[T]he educational purposes served by exhibiting a game before an audience that is physically present and exhibiting the game on television or radio before a much larger audience are substantially similar. Therefore, the sale of the broadcasting rights and the resultant broadcasting of the game contributes importantly to the accomplishment of the organization’s exempt purpose.”

That was naïve even in 1980, when broadcast rights were limited to local TV and radio stations. And it’s entirely irrelevant in 2023, when TV revenues are orders of magnitude larger and vast audiences have no plausible connection to the teams they are watching.

From NIL To Salaries

That brings us to the NCAA’s recent decision. Long before it greenlighted straight-up player salaries, it encouraged universities to turn sports into huge revenue-generating businesses. By one estimate, the so-called Power Five sports conferences and their member schools are receiving $25 billion in multi-year television contracts.     

The "student-athletes" are far more athlete than student. They often miss class, their graduation rates are poor (depending on whose data you believe), and they enjoy special housing. Millionaire coaches are paid handsomely to win games, not encourage education.

In 2020, after losing multiple court cases and facing new state laws that allowed college athletes to monetize their reputations, the NCAA permitted athletes to supplement their income with Name, Image and Likeness (NIL) payments.

These started as compensation for promoting goods and services but have morphed into a tool for boosters to funnel cash to the stars of their favorite college teams through so-called collectives.

Now, the NCAA says it may allow schools to directly pay salaries to their athletes without the need to launder the funds through middleman boosters.

What Should Be Taxed?

While the IRS has long exempted athletic scholarships from tax, it seems highly likely that athletes would be taxed on these new direct payments, which seem indistinguishable from wages and salaries. They ought to be subject to both income and payroll tax.   

Of course, schools that are taxed on their TV revenues should be permitted to deduct their costs of doing business. While that inevitably will create opportunities to game the system, sports programs do come with expenses. In 2018, Schmalbeck and Zelenak figured fewer than 75 schools would pay UBIT on their athletic income.

Congressional Republicans, who are sharply critical of “elite” universities, imposed a new tax on very large college endowments in 2017 and may try to expand that levy. But wouldn’t it make more sense to tax unrelated income? 

It really is simple: Professional sports teams that their sell product to TV owe corporate tax on their income. The players who now will get paid salaries will owe individual income tax on that compensation. And the athletic departments that pay them should owe tax on their net TV revenues from a product that has no credible connection to their university’s tax-exempt purpose. If the IRS won’t make them pay pay under current law, Congress should change the law.