Municipal Income Tax: Cleveland’s Method of Imposing “Jock Tax” Struck Down by Ohio Supreme Court

UPDATE (7/9/15): The Ohio Supreme Court denied the City of Cleveland’s motion for reconsideration.

Historically, Cleveland has taxed compensation of visiting professional athletes under the “games-played” method based upon the ratio of games played in Cleveland to all games played that year. Unlike the “duty-days” method, used by most states and municipalities, the “games-played” method ignores all other activities the athlete is required to report to work for, such as training camp, practice, meetings, etc. Hunter Hillenmeyer, formerly of the Chicago Bears, and Jeff Saturday, formerly of the Indianapolis Colts, challenged Cleveland’s games-played method contending it violated the players’ Due Process rights, among other objections. Hillenmeyer v. Cleveland Bd. of Review, 2015-Ohio-1623; Saturday v. Cleveland Bd. of Review, 2015-Ohio-1625.

“Due process requires an allocation that reasonably associates the amount of compensation taxed with work the taxpayer performed within the city.” Hillenmeyer, at ¶46. The players contended that they earned their compensation for several activities in addition to playing in games, including mandatory minicamps, training camp, meetings, and practices. For visiting players, they performed these services for their employer outside Ohio. An NFL Players Association representative testified before the Cleveland Board of Review that the players were contractually obligated to work these additional days and, if they did not report to work, they faced fines and termination. The City of Cleveland argued that the players were paid solely for games played, not practice and other activities, and, accordingly, the city could tax the athletes based on the games-played ratio.

The Supreme Court held that Cleveland’s method of taxing visiting athletes violated their constitutional Due Process rights because the player was being taxed on compensation earned while working outside Cleveland. In Hillenmeyer’s case, the games-played method resulted in 5% of his salary being taxed by Cleveland – 1 game played in Cleveland during the 20 game season (4 preseason games and 16 regularly season games). However, under the duty-days method, Hillenmeyer was present in Cleveland for only 2 of the approximate 160 days he was required to report to work each year. Thus, only 1.25% of his salary was earned in Cleveland and subject to tax. Accordingly, Hillenmeyer will be granted a refund of approximately 75% of the Cleveland income tax withheld by the team.

Saturday’s case was even more egregious. He was injured for the one game the Colts played in Cleveland in 2008 and reported to work in Indianapolis that Sunday to rehab his injury. Cleveland argued Saturday was still paid based upon the game played in Cleveland and attempted to treat it as a sick day. However, Cleveland income tax is only imposed on compensation earned for work done or services performed or rendered in the city. Since Saturday did not perform any services in Cleveland that year, and actually reported to work in Indianapolis on gameday, the Court ruled that the tax was not authorized under Cleveland’s income tax ordinances and regulations. Accordingly, Saturday was granted a full refund.

In Hillenmeyer, the Court also considered whether the exception for professional athletes and entertainers under the occasional-entrant rule (former R.C. 718.011(B)) violated constitutional Equal Protection. This occasional-entrant rule exempts individuals from municipal income tax on their wages if they worked less than 12 days in the municipality. Applying a more liberal standard, the Court found that because the events for which the athletes and entertainers are paid require a much higher public burden, such as for police protection, traffic, crowd control, and other public services, the city had a rational basis for treating these taxpayers differently. Accordingly, the exception from the occasional-entrant rule did not violate the player’s Equal Protection rights.

Cleveland faces significant fallout from these decisions as professional athletes who paid Cleveland income tax on the games-played method should all be filing refund claims. Players for teams visiting the Browns will be entitled to a refund similar to Hillenmeyer of approximately 75% of the tax paid. But even Browns players who are not Cleveland residents have a significant refund opportunity. Presumably, these players have paid Cleveland tax on 50% of their revenue because half the games played were in Cleveland. Converting to the duty-days method, the player would owe Cleveland tax for days reporting to the Browns practice facility in Berea, which presumably would be significantly more than 50% of the total days the player reported to work.

Lastly, Justice Pfeifer, who wrote the opinion in Saturday, must have spent his fair share of Sundays at the Factory of Sadness. In referencing Saturday’s absence from the game, the opinion notes that “[m]ore than 72,000 other souls attended the Colts’ dismal 10-6 victory over the Browns.” Your Honor, we share your pain.

If you have any questions regarding the Court’s recent decisions, please contact Steve Dimengo, Rich Fry, or Casey Davis.

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