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Cleveland asks Ohio Supreme Court to reconsider jock tax ruling
SHERRY KARABIN
Special to the Legal News
Published: June 19, 2015
Cleveland officials are asking the Ohio Supreme Court to reconsider the recent jock tax ruling that determined nonresident visiting professional athletes were being excessively taxed because an illegal formula was being used to determine what they owed.
In April, the Ohio Supreme Court struck down the city’s use of the games-played method in which the city calculates the taxable portion of a professional athlete’s income based on the number of games the athlete played in Cleveland in relation to the total number of games played that year, levying a 2 percent municipal tax on that piece of the person’s compensation.
“Athletes have been fighting this formula for years because it distorts athlete income and shifts income earned elsewhere to the city of Cleveland,” said Stephen Kidder, a partner at Hemenway & Barnes, who represented retired NFL football players Hunter Hillenmeyer and Jeffrey Saturday in all stages of their lawsuits against the city.
In Hillenmeyer’s case, the former Chicago Bears linebacker sought refunds on the income taxes he paid to Cleveland in 2004, 2005 and 2006, challenging the method the city used to compute the portion of his compensation that was subject to income tax.
In each of those seasons, the Bears played one game in Cleveland and Hillenmeyer spent two days in the city. During those years, Cleveland used its “games-played,” method to determine his taxes.
Using this formula, a visiting football player who travels to Cleveland for a single game out of a 20-game season would have 5 percent of his income allocated to Cleveland and pay a 2 percent tax.
After Hillenmeyer’s 2007 request for refunds was denied by the Central Collection Agency (CCA), Cleveland’s tax administration authority, he appealed to the City of Cleveland Board of Review and later the Board of Tax Appeals (BTA). The case went to the Ohio Supreme Court, which rendered a decision on April 30, 2015.
Hillenmeyer argued that Cleveland should use the “duty-days” method, in which it would look at the number of days the players work in their city, including practices, appearances etc., and compare that to the total number of overall days worked each year to come up with the percentage of income that should be allocated to the city.
Hillenmeyer had at least 157 duty days in 2004, 165 in 2005 and 168 in 2006. Using the total number of duty days, Cleveland would have been allocated about 1.27 percent of Hillenmeyer’s income in 2004, 1.21 percent in 2005 and 1.19 percent in 2006. Thus, he argued he was due refunds of $253 for 2004, $359 for 2005 and $4,450 for 2006.
“Other cities use this method (duty days),” said Kidder. “The Federation of Tax Administrators, the organization of state tax departments, developed this model regulation and virtually all states and cities that tax visiting athletes have adopted it.
“The city is using their formula to grab extra tax dollars from the athletes.”
“Our argument was essentially that the city has the power to make its own decisions about how to charge taxes, as long as policies are reasonable,” Daniel Ball, assistant director of media relations for the Cleveland mayor’s office, explained in a statement. “The tax was assessed on amount of games played in the city rather than time spent in the city.”
In the end, the court came down on Hillenmeyer’s side stating, “Cleveland’s games-played method imposes an extraterritorial tax in violation of due process, because it foreseeably imposes Cleveland income tax on compensation earned while Hillenmeyer was working outside Cleveland.”
The court ordered that tax refunds be awarded to Hillenmeyer based on his duty days and that he receive appropriate interest.
The other suit was filed on behalf of Jeffrey B. Saturday, a former center for the Indianapolis Colts, who was taxed for a single game in 2008. However, because of an injury, he never played in or attended the game. Instead, he spent the day in Indianapolis so that he could undergo physical rehabilitation. Nevertheless, the Colts withheld an amount of Cleveland municipal income tax from Saturday’s 2008 compensation and paid it to the city.
Saturday and his wife, Karen, who filed joint income-tax returns, argued the city had no authority to impose the tax since he was not a resident and did not work in the city in 2008.
On Dec. 18, 2009, the Saturdays sought a total refund of the taxes paid in 2008 from Cleveland’s Central Collection Agency. The Colts had attributed $178,878 or about five percent of Saturday’s income that year to Cleveland using the “games-played” method and he paid $3,594 as a result.
The CCA determined there had been a computation error and ordered a $322 refund, but denied the request for the return of all the monies. The Saturdays filed an appeal with the City of Cleveland Board of Review, the BTA and later the Ohio Supreme Court.
“The city argued that he owed the tax anyway since it applied to all games even those in which the athlete was excused because of an injury or illness even though Mr. Saturday never stepped foot in the city of Cleveland at any time during the tax year,” said Kidder.
The Ohio Supreme Court held that “Cleveland lacked authority under its city ordinance and its regulations to impose a tax on Saturday’s income, given that none of the services for which he was compensated were performed in Cleveland during 2008.” The court reversed the BTA’s decision, ordering that Saturday be granted a full refund, along with proper interest.
“The case has much bigger implications since visiting players within the last three years can file for a refund,” said Richard Fry III, a partner at Buckingham, Doolittle & Burroughs, who focuses on state and local tax matters. “It also has implications for future tax revenue that will not be collected. It’s estimated that the decision will result in a $1 million loss of tax revenue each year for the city of Cleveland.”
Fry said the two other Ohio cities that charge a jock tax are Cincinnati and Columbus, but they levy taxes based upon the duty-days method.
“There is a 12-day occasional entrant rule in Ohio,” said Fry. “This rule exempts a person from municipal income tax if he/she works less than 12 days in the municipality, but does not apply to professional athletes and entertainers. The Supreme Court held that treating professional athletes differently in this situation was constitutional because of the additional financial burden endured by the municipality due to their presence through additional police protection and crowd and traffic control.”
A jock tax would apply to minor leagues athletes if they visit places where such a tax is in effect, however the potential benefit to a municipality would be a lot less since their salaries are not as high, said Kidder.
“The takeaway here is that even though states and municipalities often have wide latitude in determining their income tax methods, these methods must relate to the amount of compensation received for the services performed in the municipality and they must be reasonable,” said Fry. “And Cleveland’s method of doing so for professional football players was not.”