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Why the NFL decided to start paying taxes

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The NFL's league office will begin to pay taxes, relinquishing a strange exemption that had been in place since 1942.

Matthew Emmons-USA TODAY Sports

After over 70 years, the NFL has reportedly given up its nonprofit status and will begin paying taxes, starting with the 2015 fiscal year.

Commissioner Roger Goodell explained the decision to the NFL's owners in a memo tweeted by Bloomberg's Scott Soshnick, calling the league's tax-exempt status a "distraction."

It's a bit confusing why the NFL is tax-exempt in the first place. Normally, we associate the concept of a "nonprofit" with charities, religions, and schools -- organizations that are supposed to value making the world a better place rather than earning cash. Meanwhile, the NFL is a billion-dollar behemoth that has almost perfected the art of money-making and pays its commissioner almost $50 million.

Why was the NFL tax-exempt -- and why on earth would they relinquish that cushy status? We'll try to explain.

Wait, the NFL makes all that money and hasn't been getting taxed?

Not quite. Most of the money the NFL as a whole makes is taxed and always has been. Any revenue an individual team makes -- ticket sales, jersey sales, their split of the league's massive TV deals -- is the revenue of that team. The NFL's teams are not tax-exempt. They have been paying their share of the huge amounts of money they make.

However, the league's main office -- the administrative arm of the league, the people in charge of setting the NFL's rules, organizing its events and such -- is considered tax-exempt. In comparison to the vast sums of money the NFL's teams reel in, the NFL's league office makes a pretty small slice of the pie, mainly through the membership teams each NFL team pays.

The NFL as a whole made a reported $10 billion in revenue in 2013. The NFL's league office reported a revenue of $326 million in 2012.

That's what's been exempt. The league said that after $317 million in expenses, its total income for the year was just $9 million.

Why isn't the NFL's league office taxed?

The NFL has been tax-exempt since 1942, when the league was classified as a trade association by the IRS.

A trade association is an organization that provides standard business practices and leadership for a certain field. Have you ever seen an ad on TV for a generic product, like the "Got Milk" commercials, or those ads for avocados? Those are the work of trade associations.

However, a whole lot has changed since 1942. As the league began to look less and less like a trade association, it wanted to make sure it wouldn't lose its tax-exempt status. In 1966, as the NFL and AFL merged and added a pension fund for its players, the IRS added a specific provision to section 501(c)(6) of the tax code to make "professional football leagues" tax-exempt:

Yes, there are four specific types of businesses exempted, and "professional football leagues" is one of them.

However, other sports leagues have been exempted under the "trade association" clause. The NHL remains tax-exempt. Major League Baseball voluntarily gave up its tax-exempt status, like the NFL is doing now, in 2007. Golf's PGA Tour and tennis' ATP World Tour are tax-exempt, while the NBA has never sought tax-exempt status.

Why would the NFL voluntarily agree to pay taxes?

In the past few years as public criticism of the league has heightened, a few congressmen from states without NFL teams have tried to get the NFL to justify their tax-exempt status. Senator Tom Coburn of Oklahoma introduced the PRO Sports Act in 2013, which would prevent sports leagues with a revenue of more than $10 million from being listed as nonprofits. After his retirement in 2014, Republican Utah congressman Jason Chaffetz took charge. He most recently introduced the proposed legislation in January.

The attention the league's tax-exempt status has received, has led to exclusively negative PR. The PR could get even worse if the league had to testify in front of grandstanding congressmen as to why it shouldn't pay taxes. The league has apparently decided fighting this fight wasn't worth the trouble. From Goodell's memo:

As you know, the effects of the tax exempt status of the league office have been mischaracterized repeatedly in recent years. ... The change in filing status will make no material difference to our business. As a result, the (NFL's) Committees decided to eliminate this distraction.

How will this change things?

Quite frankly, not very much. A 2013 report by Congress' Joint Committee on Taxation estimated the league would pay $109 million in taxes over 10 years. This is essentially nothing to the NFL.

The one major difference is that we will probably never again know Roger Goodell's salary. We know Roger Goodell made $44 million in the fiscal year ending in March 2013 because nonprofits have to report their executive pay to the IRS in a publicly available filing. This led to ridicule, because, jeez, Roger Goodell makes $44 million to run a nonprofit?

MLB reportedly gave up its tax-exempt status so it wouldn't have to reveal its executive's salaries. Considering Goodell's exorbitant salary, this likely factored into the NFL's decision as well. We will eventually learn Goodell's 2014 salary, but its unlikely we'll ever hear anything after that.

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