On November 9, the U.S. Supreme Court declined to hear a last-ditch appeal by the City of Cleveland concerning its “jock tax” on visiting professional athletes. The Supreme Court’s decision not to take on the case solidifies a lower court victory for former Chicago Bears linebacker Hunter Hillenmeyer and former Indianapolis Colts center Jeff Saturday.
In separate lawsuits in Ohio state court, Hillenmeyer and Saturday claimed that Cleveland unconstitutionally imposed against them a 2% municipal income tax or “jock tax.” The Ohio Supreme Court had ruled unanimously that Cleveland should base the tax on the number of days professional athletes worked, not the number of games they played.
Under Ohio law, local governments cannot charge most out-of-town workers municipal income tax unless they work there for more than twelve days per year. However, the law excludes visiting pro athletes and entertainers from that ban. Hillenmeyer was taxed about 5% (for one game in Cleveland) in 2004, 2005, and 2006. In Saturday’s case, Cleveland taxed him in 2008 for a game his Colts played against the Cleveland Browns, even though Saturday stayed in Indiana because of an injury.
Cleveland argued that the “games-played” method is fair because athletes are paid for one thing: to play in games. Additionally, the City argued that it had the power to make its own decision about how to charge taxes, as long as its policies are reasonable.
The Ohio Supreme Court held that Cleveland’s tax scheme improperly served to tax income that the players earned outside the city, and that the City had thereby deprived them of due process. The due process clause of the U.S. Constitution prohibits a tax authority from collecting taxes on a non-resident’s income earned outside the taxing authority’s boundaries. The “games played” method violates due process because it does not take into consideration the time spent in pre-season training, exhibition games, practices, and other obligations a professional athlete must perform as part of his/her compensation. The Court articulated:
Due process requires an allocation that reasonably associates the amount of compensation taxed with work the taxpayer performed within the city. The games-played method results in Cleveland allocating approximately 5 percent of Hillenmeyer’s income to itself on the basis of two days spent in Cleveland. By using the duty-days method, however, Cleveland is allocated approximately 1.25 percent based on the same two days. By using the games-played method, Cleveland has reached extraterritorially, beyond its power to tax. Cleveland’s power to tax reaches only that portion of a nonresident’s compensation that was earned by work performed in Cleveland. The games-played method reaches income for work that was performed outside of Cleveland, and thus Cleveland’s income tax violates due process as applied to NFL players such as Hillenmeyer.
While Hillenmeyer and Saturday sought refunds of only $5,062 and $3,294, respectively, initial estimates indicate that Cleveland could pay out as much as $2.4 million to NFL players who have played in Cleveland during the past three years. This figure was calculated by Ryan Losi, the executive Vice President of PIASCIK, a Virginia-based sports accounting firm. Further, this figure does not include any refund claims by players in any other professional sports. It remains to be seen how many players will request refunds; however, the City could be hit for several million dollars in refunds.