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What is NBA Escrow Tax?

The exorbitant salaries that NBA stars seem to make soon fade once taxes and fees are applied. One of the more curious ones is the NBA’s escrow tax. We didn’t have any idea what it was either, so we found out.

What is NBA Escrow Tax? NBA Escrow Tax is a financial mechanism created within the NBA’s Collective Bargaining Agreement (CBA) to protect the balance of money earned in wages by players each season. The CBA states that 51% of Basketball Related Income (BRI) should be received by active players in the form of contracted salary. BRI is projected ahead of the season to set the salary cap and maximum wage contract figures for that year. The NBA holds 10% of all players salaries in escrow for the season. Once both BRI and player wages are a confirmed figure after the season, any monies owed to players will be paid to them to ensure that the 51% figure of wages is met. NBA Escrow’s main purpose is to protect the NBA owners in seasons where BRI falls short and wages are higher than projected. The escrow clause was initially agreed to in the 1998-99 CBA negotiations.

That was the basic, simple and dull answer. Below we explore the details and some real world application of this tax and how it affects NBA stars.

Why does the NBA have an escrow tax?

The reason for the NBA escrow tax is because the CBA states that players are collectively entitled to exactly 51% of Basketball Related Income (BRI), however it cannot be known what the BRI figure will be until the season is over and audited. Following the publication of the final earnings figures for the season, if player salaries (including money paid into escrow) end up higher than 51%, money is deducted from escrow to make it exactly 51%. Anything left in escrow goes back to the players on an individual basis. So if only 20% of the total escrow was required to make up the players share of BRI to 51%, each player would get paid out 20% of their annual salary from escrow with the other 80% of the escrow going back to the teams respectively.

This ensures that while teams contract up and often above the salary cap to ensure players get their fair share of the money generated off the back of their talent, the owners are protected in potential down years, ensuring a buffer is in place.

Our research indicates that in general, players get paid out 100% of the escrow money each season. There are however a few exceptions.

Do NBA players get all of their escrow money back each season?

In a normal NBA season the BRI projections are good, salaries are within expectation and the league performs well financially, mostly off the back of its guaranteed Broadcast contract money. So at the end of the day players get paid the majority of the money they paid into NBA escrow back at the end of the year once all the beans have been counted. However there have been exceptional years. The most recent being the 2019-20 NBA season.

The emergency shutdown of the NBA and the world in general due to the COVID-19 pandemic caused the NBA and NBPA to make a number of adjustments to the CBA in order to get the league through the crisis. The league was eventually able to finish the 2019-20 season in the Orlando Bubble, crowning the Lebron James led LA Lakers NBA Champions  at no point in the pandemic was this a certainty to happen.

Ultimately due to some excellent negotiating, decision making and the perseverance of all involved to finish out the regular season. Entering a “bubble” in Disney World Orlando, the players, coaches, support teams and media were quarantined away from the world. They played 8 regular season games each, which brought most teams to around 71 games played in total, around 11 short of the scheduled 82 games. The crowning jewel of the NBA playoffs went off without a hitch, and with the absence of anything else to do in the wider world and the players being absolutely locked in, it produced great interest and was one of the best postseason in recent memory.

This success all meant that the NBA was able to pay back around $400 million to the players from the escrow account. As reported by Woj for ESPN this was around $13 million per team and was divided out based on the 10% of salary each player had paid in.

The other occasion players have had money withheld from the escrow accounts at the end of the season was the 2011-12. This was a lockout shortened season, as the NBA and NBPA negotiated a new CBA the season ended up being shortened to just 66 games. This meant that only $160 million was returned to the players at the end of the season. Even getting this had been a battle, the owners had initially planned to retain the entire escrow pot for the season. After lawsuits were filed by the CBA the NBA eventually acquiesced, agreeing to return the contracted portion of the money and putting out the following statement.

“That cash could ease or delay the point at which some players begin to feel financial hardship from the lockout. Based on the “average” NBA salary of $5.7 million, the escrow rebate would be worth $456,000. A minimum-salaried player, $473,604, would be due $37,888 while a $16 million superstar could expect $1.28 million coming back.”

What is the NBA’s Force Majeure rule?

Both the occasions outlined above show the result of excellent negotiation and compromise on all sides. Working together to get a good, if not great, outcome for everyone involved. After all, it’s in everyone’s interest to keep the NBA gravy train rolling! The NBA does have through the CBA a nuclear option it can impose if it feels the situation warrants it. In the case of the 2019-20 Pandemic affected season, it almost did. This measure is called “Force Majure”.

Force majeure can be defined as “unforeseeable circumstances that prevent someone from fulfilling a contract”. Outlined in Article 39 of the NBA’s CBA, the force majeure clause permits the NBA to terminate the CBA and reduce Franchise obligations to pay players for games that are canceled on account of a qualifying cataclysmic event.

It states that the NBA has 60 days from the beginning of a cataclysmic event to notify the NBPA that it will declare force majeure. If enacted the measure would reduce players’ pay by 1/92.6th for each lost game. The 92.6th denominator is derived from teams playing five exhibition games, 82 regular season games and, on average, 5.6 playoff games, totalling 92.6 contracted games.

In the case of the coronavirus pandemic enacting this measure would have resulted in players losing around a fifth of their pay for the 2019-20 season if a way had not been found to host some of the regular season games and post season.

In the end the players agreed to give up 25% of their remaining pay to escrow and work towards a solution to finish the season. This was attained and as stated above, the players in good faith received a large chunk of that escrow money back.