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Entertainment, Media & Sports Alert >> Cleveland’s Jock Tax is Ruled Unconstitutional

May 28, 2015

A number of states and cities in the United States impose income taxes, known as “jock taxes,” on the earnings of athletes who participate in sporting events in their jurisdiction. Formulas used by these jurisdictions to allocate the income of an athlete to a particular jurisdiction include the “duty days” method or the “games played” method.

Duty Days Method
Most jurisdictions employ the “duty days” method. Under this approach, the portion of an athlete’s income for the year that is allocable to the particular taxing jurisdiction is determined by multiplying the athlete’s total income by a ratio of the number of duty days spent within the jurisdiction to the total number of duty days of that athlete. Generally, for these purposes, duty days include all practice days, game days, and travel days from the beginning of the team’s official preseason training through the last game in which the term competes, including post season play. Typically, the numerator of days spent within a particular jurisdiction includes not just the game day within that jurisdiction, but also days spent there for required practice or meetings. Travel days in which there are no required activities typically are not apportioned to any particular state, but are included in the total number of duty days.

Games Played Method
However, the city of Cleveland has allocated income of a visiting player for purposes of Cleveland’s income tax using a “games played” method. Under this approach, the city of Cleveland allocates the income of an athlete based on the total games played in Cleveland during the season to total games played. Under this methodology, a visiting football player who traveled to Cleveland for a single game out of a 20-game season would have one twentieth (or 5%) of his income allocated to Cleveland. However, had a duty days approach been used, the income allocated to Cleveland would have been only slightly more than one percent.

Hillenmeyer v. Cleveland Board of Review
In Hillenmeyer v. Cleveland Board of Review, a former member of the Chicago Bears football team challenged the law asserting that the method that Cleveland uses is an unlawful method of computing the amount of his compensation that is subject to Cleveland’s income tax. The player’s reasoning was that this method dramatically overstates his Cleveland income as it includes earnings not only for games, but for training, practices, and strategy sessions not taking place in Cleveland.

The Ohio Supreme Court first addressed Hillenmeyer’s contention that by allowing Cleveland to tax his income at all conflicts with Cleveland’s law that addresses non-athletes who work in Cleveland for less than 12 days and whose income is exempt from Cleveland income tax. It was argued that this violates the Equal Protection Clause of the U.S. Constitution. However, the court ruled that excluding entertainers and athletes from Cleveland’s 12-day grace period does not violate the equal protection guarantee on the basis that:

1) Professional athletes are typically highly paid and their work is easy to find; and

2) A legislature can rationally find that professional athletes and entertainers and their events incur much larger burdens relating to police protection and traffic and crowd control than those caused by occasional entrants.

The Ohio Supreme Court ruled unanimously in favor of the football player, ruling that Cleveland’s method of allocating income based on a games played method violates the Due Process Clause of the U.S. Constitution since it imposes an extraterritorial tax in violation of this clause.

In the court’s view, the games played method reaches income for work that was performed outside of Cleveland. Consistent with the rule that a taxing authority may not collect tax on a nonresident’s income outside its jurisdiction, the court determined that the “duty days” method properly includes as taxable income only that compensation earned in Cleveland by taking into account all the work for which the National Football League player is paid, rather than merely the football games he plays each year.

The Ohio Supreme Court remanded the case to the lower court for a recalculation of the football player’s income based on the application of the duty days method. Cleveland has filed a motion for reconsideration of the court’s decision. However, it is not expected that the court will reconsider its decision, and Cleveland has not yet announced what new method it will adopt.

The Bottom Line

While the “jock tax” likely is not going away any time soon, courts are willing to find that states and cities can push too far in using professional athlete salaries to raise revenue. Professional athletes in the United States are faced with different methods of allocating their income to the states in which they compete, with the most common method being the “duty days” method. The Ohio Supreme Court recently ruled that the “games played” method, which the City of Cleveland had been using, is unconstitutional and required that the duty days method be followed instead. Armed with this decision, athletes and sports businesses should look for more challenges to methods of allocating income that vary from the duty days method.