Tax-free NIL payments to college athletes? One state hopes it will give its schools an edge.

By Weston Blasi

A bill exempting name, image and likeness earnings from state income tax has been signed into law in Arkansas

The fight in recruiting college athletes will now include taxes.

Colleges across the nation are locked in a constant battle over high school and college transfers to improve their sports teams, particularly in big revenue-generating sports like football and men’s basketball. Recruiting athletes is a tough endeavor, but colleges in Arkansas were just given a big edge.

Arkansas became the first state in the U.S. to enact a law that exempts name, image and likeness payments (NIL) from its state income tax. Arkansas Gov. Sarah Huckabee Sanders, a Republican, signed the bill into law in April, and it will be retroactive to Jan. 1, 2025 as part of the Arkansas Student-Athlete Publicity Rights Act.

Under the new law, all NIL and university revenue-sharing funds received by student athletes will be exempt from state income tax. The legislation also mandates that financial details concerning payments to athletes will be kept confidential and are not subject to the Freedom of Information Act.

“Income received by a student athlete from an institution of higher education as compensation for the use of his or her name, image, or likeness or as a percentage of institutional athletic revenue permitted by the institution of higher education’s governing athletic association or conference under this subchapter is exempt from state income tax,” the law states.

The top state income-tax rate in Arkansas for individuals is 3.9%.

Of course, this is a state-only law, and any income an athlete earns from NIL deals are still subject federal income tax.

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What will the implementation of this new law actually do? Experts said it’s mainly about recruiting players.

“A state would do this to really prioritize college athletics,” Daniel S. Greene, an attorney who specializes in business and NIL, told MarketWatch. “It’s all about recruiting and giving your schools the best chance to bring in the best kids any way you can.”

No state income tax could could help coaches and NIL collectives in their recruiting process, particularly to athletes who care most about maximizing earnings.

“I’ve followed state legislatures closely, and the states down south really care about college athletics, and they really want their football teams to be super competitive,” Green said. “They can say to their kids, ‘Hey come here, there’s also no taxes.'”

Tim Frith, a sports attorney at WLJ Sports Law, said this new regulation could be a “major recruiting tool for schools in Arkansas.”

But one lawmaker in Arkansas said that the new law won’t give Arkansas an unfair advantage over rivals – instead it will even the playing field. That’s because some nearby states that Arkansas competes with for top college athletes don’t have any state income tax at all.

The tax exemption will assist Arkansas schools in attracting athletes that bring “a significant amount of revenue to the state,” Arkansas Senate President Bart Hester said. And it also will help Arkansas schools “keep up with Tennessee and Texas and other states that do not have a state income tax,” he added.

In other states, such as Alabama, Georgia, Illinois and Louisiana, similar bills have been introduced but have not yet been signed into law.

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The move by Arkansas comes as the the NIL system surrounding college athletics is being stressed.

Top college football players are now earning millions annually through NIL deals. For instance, University of Miami quarterback Carson Beck’s NIL value is $4.3 million, and Ohio State wide receiver Jeremiah Smith’s is $4 million, according to On3.

The NCAA recently approved rule changes in April that could significantly alter college sports. These proposals involve revising NIL guidelines and establishing a revenue-sharing model where schools could distribute $20.5 million across all athletes in all sports.

In an unprecedented event this month, a college quarterback effectively held out for a better NIL contract, a tactic usually seen in professional sports. Former University of Tennessee quarterback Nico Iamaleava missed practice and subsequently transferred to UCLA due to discontent with his NIL earnings and his situation with the team.

“I’m not certain that this is going to become very common, as collectives have become wiser and craftier in the creation of their contracts, which tend to seek to avoid situations like this,” Darren Heitner, a lawyer who brokers NIL deals for student athletes, told MarketWatch about the holdout. “I have seen many such arrangements where collectives seek to claw back monies paid out or even receive liquidated damages, but I wonder whether athletes will be deterred unless/until a major action is initiated to enforce such language.”

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-Weston Blasi

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04-29-25 1806ET

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