Luxury Tax Explained

The luxury tax is a mechanism that helps control team spending. It is paid by high spending teams -- those with a team salary exceeding a predetermined tax level. These teams pay a penalty for each dollar their team salary (with a few exceptions, see below) exceeds the tax level determined at the beginning of the season.

Teams pay an incremental tax rate based on their team salary as of the team's last regular season game, and whether the team is a "repeat offender" -- whether they were also taxpayers in at least three of the four previous seasons (not including the most recent season):

Team Salary above Tax Level	Non-Repeater Tax Rate	Repeater Tax Rate
$0 - $4,999,999	$1.00	$3.00
$5,000,000 - $9,999,999	$1.25	$3.25
$10,000,000 - $14,999,999	$3.50	$5.50
$15,000,000 - $19,999,999	$4.75	$6.75

* This table continues to expand for each $5,000,000 increment, with an additional $0.50 being added to the tax rate for each increment.

Example: A team with a team salary $12 million over the tax level that is not a repeat offender pays a tax of $18.25 million. The first $5 million is taxed at a rate of $1.00 per dollar, resulting in $5 million total. The second $5 million is taxed at a rate of $1.25 per dollar, resulting in $6.25 million total. The last $2 million is taxed at a rate of $3.50, resulting in $7 million total. Altogether, this adds up to $18.25 million.

How is the Tax Calculated?

The calculation of team salary is slightly different for the luxury tax than it is for the salary cap. The following adjustments are made:

1) Cap holds and exceptions are ignored
2) For players who signed as free agents (i.e., not draft picks) and make less than the minimum salary amount for a two-year veteran, the minimum salary for a two-year veteran is used in place of their actual salary
3) For minimum salary players whose salary is partially paid by the league only the amount paid by the team (the two-year minimum salary) is taxed

What Is the Difference Between the Luxury Tax and the Apron?

You may have noticed in the thread detailing important cap figures that there is a luxury tax along with two apron levels that are both sequentially higher. If you are above the luxury tax threshold but below both apron levels, your only penalty is paying the league the money owed at the tax rate detailed above. However, the following additional penalties kick in for the respective apron levels:

1st Apron
1) You cannot acquire a player via sign-and-trade
2) You cannot use any portion of the bi-annual exception
3) You cannot use the full non-taxpayer mid-level exception, you can only use the smaller tax-payer mid-level exception^a
4) You cannot sign a player who was waived during the current season if his previous salary exceeded the amount of the non-taxpayer mid-level exception
5) Salary matching in trades is limited to the amount you're sending out in the deal (i.e. you cannot take back more money than you receive) until you get below the apron
6) All trade exceptions cannot be used until you get below the apron
7) Salary matching in trades is limited to 100% of the amount you're sending out (i.e. you cannot take back more money than you receive)

2nd Apron
1) All of the penalties from the 1st Apron apply
2) You cannot use the tax-payer mid-level exception
3) You cannot aggregate player salaries in trades until you get below the apron
4) You cannot send out cash in trades until you get below the apron
5) You cannot send out a player in a sign-and-trade until you get below the apron
6) Your first-round pick seven years in the future, if still owned, is frozen and cannot be traded -- it can only be unfrozen by being under the 2nd Apron three out of the next four seasons
7) That frozen first-round pick, if still owned, is moved to the end of the first round if you remain in the second apron for two out of the next four seasons

Notes:
a - This also means that you cannot match an offer sheet signed by one of your restricted free agents worth the full non-taxpayer mid-level exception.

Where Does the Luxury Tax Money Go?

Roughly 50% of all money paid by luxury tax teams will be divided evenly and distributed to teams that did not pay the luxury tax that season and are above the salary floor.

Is There a Hard Cap?

By default, there is no hard cap to abide by. With that said, if you do any of the things that teams above a certain apron level wouldn't be allowed to do, you are automatically hard-capping yourself at that apron level. For example, if you are below the 1st Apron and use the full non-taxpayer mid-level exception, you are then hard-capped at the 1st apron because teams above this apron level would not have been allowed to use this exception. This applies to all the penalties above that do not come with the caveat "until you get below the apron".

When Do Penalties Kick In?

When it comes to the penalties enacted for teams over the Aprons, those are in effect immediately following crossing the respective apron level. The money taken out of your team bank account will be removed at the end of the season.