The Ohio Supreme Court dealt a pair of blows to Cleveland’s so-called “jock tax” in separate decisions issued on April 30th.  Although neither decision called into question a locality’s power to tax non-resident athletes and entertainers for income earned in the jurisdiction, the two cases significantly constrained the application of such taxes.

Saturday, et al. v. Cleveland Bd. of Review, et al.

In the narrower of the two cases, former Indianapolis Colts center Jeff Saturday petitioned Cleveland for a full refund of taxes he paid as a result of the Colts’ 2008 regular season game in Cleveland against the Browns.  Because Saturday was injured, he did not travel to Cleveland with his team.  Instead, he remained in Indianapolis participating in team-mandated injury rehabilitation.

The Ohio Supreme Court emphasized that taxing statutes must be strictly construed against the state and that taxing jurisdictions cannot impose a tax extraterritorially.  It therefore held that Cleveland’s “jock tax” did not permit taxation of Saturday’s income because he was not present in Cleveland for the game.  The Court suggested the outcome might differ had Saturday traveled to Cleveland with his team, even if he did not play due to injury.

Hillenmeyer v. Cleveland Bd. of Review, et al.

In the more wide-ranging decision, former Chicago Bear Hunter Hillenmeyer sought a partial refund of municipal income taxes levied against him under the same Cleveland tax.  Unlike Saturday, Hillenmeyer played a game in Cleveland during each of the 2004, 2005, and 2006 tax years.  But he argued that Cleveland’s computation method overstated his Cleveland income.

Cleveland calculates an athlete’s tax liability using the “games-played” method.   Under that method, Cleveland bases an athlete’s taxable income on the proportion of games played in Cleveland versus the total number of games the athlete played in the tax year.  For instance, Cleveland would tax five percent of Hillenmeyer’s total income if he played one of twenty total games in Cleveland (assuming four preseason games, a sixteen-game NFL regular season, and missing the playoffs).  Hillenmeyer argued that this methodology overstated his Cleveland income, as an NFL player’s income derives from sources other than games played (including compensation for training, practices, strategy sessions, and promotional activities).

In contrast, Hillenmeyer argued for the methodology employed in many other municipalities—a “duty-days” approach that taxes only that portion of a taxpayer’s income attributable to the proportion of work days spent in the city.  For instance, Hillenmeyer had 168 duty days working for the Chicago Bears in 2006, and he spent only two of them in Cleveland for the game against the Browns.  Under the “duty-days” methodology, Cleveland could tax only 1.19% of Hillenmeyer’s income from the Bears (2/168), not 5% (1/20).

After rejecting Hillenmeyer’s statutory challenge, the Ohio Supreme Court held that Cleveland’s decision to exempt from taxation most “occasional entrants” who work fewer than twelve days in the city—but not professional entertainers and athletes—did not violate the Equal Protection Clause.  The court pointed to two rational bases for Cleveland’s treatment of athletes and entertainers.  First, they tend to be highly paid for easily identified work, so Cleveland could generate significant revenue with relative ease.  Second, Cleveland could rationally conclude that professional athletes and entertainers impose greater burdens on the public fisc in the form of police protection, traffic and crowd control, and other public services.

After rejecting Hillenmeyer’s first two arguments, however, the court held that Cleveland’s “games-played” calculation methodology violated the Fourteenth Amendment’s Due Process Clause.  Noting that due process requires a reasonable relationship between the amount of income taxed and the work performed in the taxing jurisdiction, the court rejected Cleveland’s “games-played” methodology because it foreseeably reached income for services performed outside the city.  The court remanded the case for calculation of Hillenmeyer’s tax liability under the “duty days” methodology.

Although Cleveland’s “jock tax” survived, these decisions significantly constrain Cleveland’s ability to generate revenue through taxing non-resident athletes.

Note: Cleveland tax administrators have asked the Ohio Supreme Court to reconsider its rulings.