TAX EXEMPTION OF NIL EARNINGS FOR COLLEGE ATHLETES: FAIR OR FOUL?

Author: Noah Banks, Senior Editor

The world of collegiate athletics has seen a tremendous change since name, image, and likeness (“NIL”) compensation was implemented. As collegiate athletes start to make money off of their own names, images, and likenesses, lawmakers have recently begun discussing the tax ramifications of those profits.[i]  Included in this debate of tax implications has been a possible exemption of NIL profits from tax penalties, which, if passed, could have significant ramifications for players, academic institutions, and the current landscape of college athletics.[ii]

Recent Legislation

Bills to exempt NIL earnings from state income taxes have been discussed by several state legislatures in recent months.[iii] For instance, proposed Alabama House Bill 240 (“HB 240”) would exempt NIL earnings from state income tax.[iv] The state argues in support of HB 240 by contending that the bill would not only encourage athletes to finish their education, but it would also keep Alabama's post-secondary institutions competitive in luring top athletes to their programs.[v] In contrast, opponents of the bill argue that the income received from NIL earnings is nevertheless standard income, and athletes should not be granted an exemption that the common taxpayer is not eligible for.[vi]

Judicial Influence

NIL disputes in the world of collegiate sports are still influenced by the 2021 United States Supreme Court's decision in NCAA v. Alston, which invalidated limitations on collegiate athletes’ access to education-related benefits.[vii]  In Alston, the Court unanimously affirmed a lower court’s finding that prior NCAA restrictions on education-related benefits for student-athletes violated federal antitrust law under the Sherman Act.[viii] Specifically, the Court’s decision ruled that the then-existing limits on education benefits constituted an unreasonable restraint on trade in the market.[ix] The Court’s ruling in Alston sparked the recent legislative movements towards NIL compensation, which has now snowballed into a legislative push for tax exemptions.[x] The goals of the proposed tax exemptions can be viewed as in line with the Court's decision in Alston, which was widely interpreted as a call for student-athletes to have more financial parity and autonomy among students, taking a true capitalism approach.[xi]

Potential Implications

As with everything, there are advantages and disadvantages to the possible tax exemption of NIL earnings. Supporters argue that the proposed tax exemptions would help relieve student-athletes of financial difficulties so they can concentrate on their studies and sports performance rather than worrying about tax obligations.[xii] Additionally, supporters of the proposed legislation argue that passing the legislation would result in a more equal system where athletes are not punished by aggressive income tax penalties for earnings derived from the likeness of their personal brands[xiii].

On the other hand, the proposed tax exemption’s detractors contend that, if approved, the exemptions will further exacerbate already-existing social and economic disparities between athletes and non-athletes, adding further complications to the tax code in general.[xiv]  Additionally, critics are concerned that tax breaks would unjustly benefit more prominent players due to the unjust compensation that these players receive, thus adding to already-existing inequalities in university athletics.[xv] Lastly, if the exemptions were to be instituted, some state budgets and finances may be impacted by the loss of tax revenue, meaning the wider economic ramifications must be carefully considered.

 Conclusion

The recent push by lawmakers to exempt collegiate athletes’ NIL earnings from tax penalties represents a significant shift in the way that athlete compensation is seen and managed. Even while such exemptions have clear potential benefits, it is crucial to carefully weigh the challenges and wider implications that they might entail. Lawmakers must create regulations that promote sustainability, equity, and fairness in the evolving collegiate athletics landscape to counteract this. The future of NIL compensation and collegiate athletes’ place in the sports industry will almost certainly be shaped by the results of these current legislative initiatives.

[i] Nathan Goldman & Christina Lewellen, The Tax Bill for NIL, POOLE THOUGHT LEADERSHIP (Sept. 5,2024), https://poole.ncsu.edu/thought-leadership/article/the-tax-bill-for-nil/.  

[ii] Id.

[iii] Michael McCann & Robert Raiola, Georgia, Alabama, NIL Bills could face legal challenges, SPORTICO (Feb. 16, 2025), https://www.sportico.com/law/analysis/2025/georgia-alabama-nil-tax-exempt-legal-1234828497/.

[iv] Id.

[v] Id.

[vi] Id.

[vii] Sherman Act-Antitrust Law-College Athletics-NCAA v. Alston, 135 HARV. L. REV. 471 (2021).

[viii] Id.

[ix] Id.

[x] Id.

[xi] Id.

[xii] Amanda Christovich, Why push to cut NIL taxes creates ‘prisoner’s dilemma’, FRONT OFFICE SPORTS (Feb. 27, 2025), https://frontofficesports.com/push-cut-college-nil-taxes-creates-prisoners-dilemma/.  

[xiii] Id.

[xiv] Id. 

[xv] Id.