Clearing Up The Confusion With Houston’s Luxury Tax Situation

UPDATE 8 April 2019: I have not heard back from the NBA or Players Association with regards to the official interpretation of this rule, but a few very smart people have reached out to me to push back on my interpretation of the clauses laid out in this article.


Should Clark not be exempt from this adjustment to his salary for the luxury tax calculation, then there’s another answer to the question of how Houston will eventually duck the tax. My next working theory surrounds Zhou Qi, who was waived in December for a dead money hit of $506,134, but might be subject to some set-off at the end of the year if his next salary is sufficiently high. I calculate that his salary with his CBA team, the Liaoning Flying Leopards, would have to be at least US$1.5 million in order for the Rockets to be granted enough set-off to duck the tax. There’s been no public reporting that I could find as to what Zhou’s salary is with Liaoning, but CBA Commissioner Yao Ming (a former Rocket himself!) did make it clear that Zhou is ineligible to play in the CBA this season, so it would seem odd to me if Liaoning decided to pay him US$1.5 million if he wasn’t eligible to play for them this season. The Flying Leopards are currently in the semifinals of the CBA playoffs and are strong contenders for the championship, so using a roster spot or significant cash on Zhou when he can’t play doesn’t seem entirely likely. That said, I’m in no way an expert on the CBA salary cap (if there even is one) or how roster moves work in their league.


Word spread over the weekend that the Houston Rockets’ publicly-reported luxury tax numbers aren’t exactly correct and that they’re not in danger of going over the tax line if Clint Capela hits $1.5 million of his bonuses for this year.

There’s been no public explanation of how David’s source came to his conclusion, and David himself has said that he’s not sure how the math works, only that he trusts his source and that it’s accurate.

The problem is that nobody on the outside can figure out how this can be true. Based on my previous understanding of their numbers, they were $1,425,085 from the luxury tax line, before accounting for any bonuses earned by Capela. If he were to earn $1.5 million of his bonuses, that would take them over the line, but this is apparently no longer the case.

Others have speculated on exactly where they are in relation to the tax line, with slightly different numbers here and there, but nobody has been able to figure out how they were going to save enough to get out of the tax if Capela hits those bonuses. However, I believe I’ve found the answer.

(If I’m wrong and you’re a Rockets’ or NBA employee and would like to correct me, please email me at earlybirdrights@gmail.com)

With no inside knowledge of my own, my theory is that this has to do with Gary Clark’s contract. Clark went undrafted in the 2018 NBA Draft, then was signed to a Standard Contract in July, then converted to a Two-Way Contract before the season, THEN signed to a three-year contract using their Taxpayer Mid-Level Exception, for the minimum across all three years. That final transaction is key, because it’s what establishes his current contract.

As a result of that signing, his prorated rest-of-season minimum salary is $596,872, based on the December 6 signing date and the fact that he has zero years of service in the NBA. Normally, when an undrafted free agent signs with a team, his salary for tax purposes is adjusted upward via section VII.12.f.2 of the Collective Bargaining Agreement, which states, in part:

…the Salary attributable to a Contract between a Team and a Free Agent with zero (0) Years of Service or one (1) Year of Service shall be deemed to be the greater of (x) such Salary or (y) the Minimum Player Salary that would be applicable to a player with two (2) Years of Service, or in the event such player’s Contract is terminated during the Regular Season, the Minimum Player Salary that would be applicable to a player with two (2) Years of Service, reduced pro-rata to reflect the player’s post-termination Salary.

For many players, this clause in the text makes it so that the teams who sign these players incur an additional tax penalty, but players who are drafted in the second round (and are therefore not classified as Free Agents) do not. It’s a small incentive toward second-round picks that make them slightly more valuable than undrafted free agents.

Under this clause, Clark’s contract would count for $1,076,767, with that extra $479,895 coming from prorating the two-year veteran’s minimum for his time on the team from December 6 to the end of the year. However, that adjustment isn’t applicable in this situation, due to some quirks with the definitions of the above clause.

The clause specifically mentions “a Contract between a Team and a Free Agent”, which brings up the question: What is a Free Agent?

From section 1.1 of the CBA, a Free Agent is defined as such:

(i) a Veteran Free Agent; (ii) a Rookie Free Agent; (iii) a Veteran whose Player Contract has been terminated in accordance with the NBA waiver procedure; or (iv) a player whose last Player Contract was a 10-Day Contract and who either completed the Contract by rendering the playing services called for thereunder or was released early from such Contract.

Does Clark fall into any of these designations to be a Free Agent? The immediate answer might be that he’s a Rookie Free Agent, as he was undrafted and signed with the Rockets initially in July 2018. However, that contract was later converted to a Two-Way, then he and the team signed a new contract to bring him up to the 15-man roster. The technicality here, in my view, is that Clark was not a Free Agent when he signed his new contract, which terminated his previous Two-Way deal. Under his initial deal, before being converted to a Two-Way, he would have been a Rookie Free Agent and been adjusted upward as any other Rookie Free Agent would be, including new teammates Chris Chiozza and Michael Frazier are, but he no longer qualifies as a Rookie Free Agent because of the precise sequence of transactions.

This is confirmed in section II.11.h, which states:

(i) During the term of a Two-Way Contract, the Team that is the party to the Two-Way Contract shall be the only Team with which the Two-Way Player may negotiate or sign a Standard NBA Contract.
(ii) The Team and the Two-Way Player who are parties to such Two-Way Contract shall have the right to negotiate and agree to a Standard NBA Contract in accordance with the terms of this Agreement. Notwithstanding anything to the contrary in this Agreement or the Uniform Player Contract, upon execution of the Standard NBA Contract, the prior Two-Way Contract between the Team and player will immediately be rendered null and void and of no further force or effect.

Since he was on a Two-Way contract, Clark was not technically a Free Agent when he and Houston came to terms on his current contract and the Rockets held exclusive negotiating rights for a Standard NBA Contract, which they agreed to and signed on December 6, 2018.

Piecing these three clauses together, my interpretation is that Clark was not a Free Agent when he signed his current contract in December and therefore, the adjustment to his salary for tax purposes is not necessary. With that adjustment off the books, the Rockets move to $1,904,979 from the luxury tax line, meaning that even if Capela hits his free throws and the team makes the Western Conference Finals, they’re in no danger of paying the tax.

Elsewhere in the league, this logic applies to Deonte Burton in Oklahoma City, which means that $121,878 comes off their Team Salary for tax purposes, saving them $517,982 in luxury tax penalties. Similarly, Miami will see very slight savings on their luxury tax, as Yante Maten is set to be signed before the end of the year to a multi-year contract. Since his rest-of-season salary is so small, it won’t be a large difference. Toronto will also benefit from this quirk in the rule, as Chris Boucher was signed by this same method. The $55,328 that disappears from the Raptors’ Team Salary for tax purposes will save them a total of $138,321.

Other players signed off Two-Ways this year include Jaylen Adams in Atlanta, Edmond Sumner in Indiana and Danuel House in Houston, but there are no luxury tax savings for those teams: the Hawks and Pacers aren’t anywhere near the tax this year, and House already had two years of service in the NBA before this season, so there wasn’t an adjustment in any case.