This article was first published in “Western Ways” the Newsletter of the Western Arts Alliance – Spring 2008
N.B. I am an entertainment lawyer, not a tax lawyer, but my clients and colleagues are confronted with the issues presented by this article on a regular basis. I recommend talking to a tax attorney whenever questions about taxation arise.
In recent years, state and federal taxing authorities have implemented new or revised programs designed to ensure the collection of taxes on earnings of athletes and entertainers who travel to reach their audiences. According to the IRS, “These individuals, and those associated with arranging their appearances…are typically high income individuals”. While this may be true for many professional athletes and certain headline-level entertainers, it is anything but true for the average performer, producer or manager. These new tax laws and regulations place a tremendous strain on the already limited resources of the arts organizations who must comply, and have a demonstrated chilling effect on such presenters’ use of international and out-of-state talent. Foreign artists, already faced with the realities of a weakening U.S. Dollar, now have even less incentive to share their offerings, as Uncle Sam dips so deeply into the already shallow pool of funds for such visits.
The Tax Rules
Generally speaking, the tax rules appear deceptively simple, but it is in their implementation that the true burdens appear.
At the Federal level, the Internal Revenue Service requires that, unless there exists an applicable tax treaty with a foreign artist’s home country, any U.S. organization that makes payments to such an artist for ‘independent personal services’ (which covers most arts activities) must withhold tax at a rate of 30%. These payor organizations are referred to as “Withholding Agents”. Even when payments are made through a U.S. agent or manager, if the Withholding Agent knows that the payee is acting on behalf of a foreign person, it must treat the payment as made directly to that foreign person, and must withhold tax at the 30% rate. A Withholding Agent that fails to comply with the requirements will be liable for the amount required to be withheld, or the tax actually due, whichever is less.
Compounding matters, a number of states have implemented similar tax withholding requirements. One example, California, requires withholding at a rate of 7% of gross payments made to nonresident entertainers unless the California Franchise Tax Board approves a different withholding rate. Massachusetts, Connecticut and several other states have similar withholding requirements. Rates vary from state to state.
All of this makes the U.S. a rather unfriendly host for foreign artists, and only slightly more attractive to U.S. performers who earn a living on the road. On the other side of this equation, the potential downside for presenters and arts organizations makes hiring foreign performers a daunting proposition.
Various foreign countries have entered into tax treaties with the U.S. Under these treaties, compensation paid to artists from signatory countries may be exempt from U.S. income tax when the services are performed during a limited period of temporary presence in the U.S., and the pay is within the limits established by the applicable treaty. Such exemptions are available for both employees and independent contractors, but since exemptions may depend on factors that can’t be determined until year’s end, it will often still be necessary to withhold at the statutory rates. The Artist will then have to submit the appropriate claims and/or tax returns before taxes withheld can be refunded.
Only the “beneficial owner” of the income in question is permitted to make the tax treaty claim, which presents a problem where a group of foreign entertainers presents a joint performance. Unless the group is officially organized as a corporation or other entity in its home country, the ‘group’ is not the beneficial owner of the income, and each individual performer must make his or her own tax treaty claim.
The various states do not individually have treaties with foreign nations. Whether a U.S. tax treaty preempts state taxation schemes likely depends on the specifics of the treaty in question.
Central Withholding Agreements
The IRS has implemented a system whereby a foreign entertainer may apply for a so-called “Central Withholding Agreement”. Essentially, under a CWA, provided that an artist designates a central withholding agent, provides details about all of the engagements to be covered by the agreement (including copies of contracts, details about lodging, transportation, advertising, accompanying personnel, and a proposed budget for the tour or appearance), and agrees to file timely statements and U.S. tax returns, the IRS may approve a reduced tax withholding rate for each nonresident artist covered by the CWA. This is a time-consuming and unwieldy process. The application must be submitted at least 90 days in advance of the agreement’s proposed effective date (i.e., 90 days prior to arrive in the U.S.), and must be signed by each artist, the withholding agent, and a representative of the IRS.
State withholding rules may also be subject to agreements adjusting the withholding rate. Each state’s rules are different, and should be checked carefully to ensure eligibility, etc. For a performer touring the U.S., the prospect of dealing with the government both at the Federal level, and in each State where performances occur ,is daunting to say the least.
Problems and Issues
Obviously, these withholding requirements present challenges to artists, managers and presenters alike. For artists, the burden of either applying for a Central Withholding Agreement, or making a tax treaty claim, combined with increased record-keeping, administrative time, and the cost of professional tax advisers, essentially mean that many will be forced to accept payment at 70% of the quoted fee, until a tax return is filed and a refund issued. Even then, the accountants’ fees may exceed the amount of an expected refund. More likely, foreign entertainers will simply increase their fees to make up for the withheld sums.
For booking agents and managers, particularly the smaller operators common in the dance, classical and world-music arenas, the representation of foreign artists is rapidly becoming untenable. The administrative burden of identifying applicable tax treaties, applying for Central Withholding Agreements, and sometimes serving as a central withholding agent) significantly compound their existing challenges of obtaining visas, arranging transportation. Moreover, as costs to artists drive performance fees higher, booking jobs becomes more difficult.
For presenters, the withholding requirements impose significant additional record-keeping, administrative, accounting and other costs. Additionally, some artists may prefer to simply increase their performance fees, and forget about filing tax returns, treaty claims and CWAs. These increased expenses, coupled with the potential of liability for inadequate withholding have a chilling effect on the presentation of art and culture from overseas. Essentially, tax burdens on these types of speech effectively suppress diverse, minority voices.
State and Federal tax withholding requirements on nonresident and foreign entertainers place a tremendous burden on artists and those who employ them. Significant administrative burdens and cost has the effect of discouraging presenters from hiring foreign talent and presenting culturally diverse programming. In the end, we must ask whether the tax revenues gained by enforcement of these requirements really justify the cost of decreasing the diversity of voices in the American marketplace of ideas and culture.
1. Contracts must provide for the presenter’s right to deduct and withhold applicable taxes. Where a contract is silent on the question, an artist may be justified in claiming the full contract price, leaving the presenter/employer holding the bag for tax withholding.
2. Contracts must provide for the Artist to cooperate fully with the Withholding Agent in filing of treaty claims and applications for waivers, exemptions and the like.
3. Forms and information about tax withholding, treaties, exemptions, and the like should be included as part of the booking agreement packet, and completion should be made a condition of the agreement taking effect.
4. Artists, Presenters, Managers and Arts Organizations may wish to join forces to lobby Congress to take this situation out of the hands of the administrative agency (IRS) by crafting a comprehensive solution to the issues presented by the current tax scheme.
5. Finally, those affected by these rules must consider attacking them in the Courts on grounds that the withholding requirements threaten free speech protected by the First Amendment, and that state tax structures are preempted where U.S. Tax treaties are in effect.