Multimedia Rights Contracts in a New Era of Revenue Sharing

As athletic departments prepare for a future in which revenue sharing with their student athletes becomes permissible under NCAA guidelines, many departments may engage in multimedia rights deals with NIL (name, image and likeness) components.

Knowing the distinctions between advertising and qualified sponsorships is crucial for ensuring IRS compliance, optimizing financial strategies and supporting student-athletes — without inadvertently generating taxable advertising revenue.

Understanding the Basics: Advertising vs. Qualified Sponsorships

The distinction between advertising and qualified sponsorships is crucial for tax-exempt entities, particularly regarding higher education and athletics. These classifications have significant implications for tax treatment and compliance with IRS regulations.

Advertising

Advertising involves promoting or marketing a trade, business, service, facility or product. This includes any message or material that endorses or induces the purchase or use of a sponsor’s products or services. Advertising typically includes elements like:

• Comparative or qualitative language
• Price information
• Calls to action
• Endorsements
• Inducements to purchase, sell or use products or services

From a tax perspective, revenue generated from advertising is considered unrelated business income for tax-exempt organizations. As such, it is subject to unrelated business income tax (UBIT).

Qualified Sponsorships

Qualified sponsorships, as defined under IRS regulations, refer to payments made by a business or entity to a nonprofit or educational institution without expectation of a substantial return benefit. Key characteristics of a qualified sponsorship include:

• Non-promotional content
• Acknowledgment of the sponsor’s contribution without explicitly promoting their products or services
• Can include logos, slogans, locations, phone numbers, URLs and general product descriptions if they don’t include qualitative or comparative language

Significantly, qualified sponsorship payments are not subject to UBIT and are considered tax-exempt income for the receiving organization.

Multimedia Rights Deals and Athlete Compensation

As athletic departments prepare to begin paying athletes directly (through revenue sharing under the pending House vs. NCAA settlement or “true NIL” activities), they might explore new strategies for their multimedia rights (MMR) agreements. These strategies could include requiring MMR partners to enter into NIL agreements with the university’s student-athletes or structuring agreements to include a revenue share component with the athletes. Departments need to exercise extreme caution when revising existing contracts or drafting new agreements to avoid potential tax and legal pitfalls.

Sharing multimedia rights deals is just one of many approaches athletic departments can consider for revenue sharing with athletes. Each method could have significant impacts on the university or related 501(c)(3) organizations (like booster clubs and athletic foundations) that could become involved in payments to athletes.

Each revenue-sharing approach will require careful legal and tax analysis to ensure they don’t have unintended consequences. For example, in the case of multimedia rights deals, there’s a risk of inadvertently creating advertising revenue and UBIT.

Other revenue sharing payments could unintentionally create private benefit payments, which could jeopardize the tax-exempt status of a 501(c)(3) organization. These considerations underscore the complexity of implementing revenue-sharing models in college athletics — and the need for thorough due diligence in structuring these arrangements.

Key Considerations for Universities

Contract Clarity

Multimedia rights contracts should be carefully drafted to ensure sponsorships terms remain non promotional. Universities need to avoid language that could be construed as advertising, such as endorsements, calls to action or any content that promotes a sponsor’s product or service.

Guidelines for Student-Athlete NIL Activities

It’s essential to establish clear guidelines for student-athletes on how they promote sponsors in connection with shared multimedia rights deals. For example, while athletes can acknowledge a sponsor, their posts or endorsements must avoid language that encourages purchases or uses promotional slogans.

Monitoring and Compliance

Universities should implement monitoring systems to review and approve content associated with multimedia rights deals. This can include pre-approving public content that mentions the university or its athletes to ensure it adheres to IRS guidelines and does not cross into advertising territory.

Educational Initiatives

Educating both sponsors and student-athletes about the differences between advertising and qualified sponsorships can prevent unintentional violations. Workshops or written guidelines can help clarify what constitutes promotional content and what does not.

Protective Clauses in Contracts

Including clauses in sponsorship agreements that require adherence to non-promotional content standards can safeguard the institution. This protects the university from potential tax liabilities associated with UBIT and ensures the revenue stays classified as qualified sponsorship income.

Taking Action

If your athletic department is considering strategies around involving your athletes in your multimedia revenue partnerships, start putting measures in place now to proactively manage the agreements and ensure compliance with IRS regulations.

Safeguarding against unintended consequences becomes paramount as you structure multimedia rights arrangements. By taking these steps, institutions can protect their financial interests, support their student-athletes effectively, and maintain the integrity of their sponsorship programs while maximizing the benefits of sponsorships and NIL payments.

Staying informed and seeking specialized guidance is important to manage your risks as you start to develop strategies. Our collegiate athletics CPAs and consultants are committed to helping you navigate these complexities with confidence and clarity, ensuring that your institution is well-positioned for success in this new era of college athletics.

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