Pity the poor folks of Cleveland, Ohio. I actually went to a baseball game at old Municipal Stadium, or the Mistake on the Lake. Today the Ohio Supreme Court dealt the city of Cleveland two losses–and the NFL season won’t begin for five months.
It’s perhaps apropos that on the eve of the NFL draft the tax cases of Jeff Saturday (formerly of the Indianapolis Colts) and Hunter Hillenmeyer (of the Chicago Bears) were decided by the Ohio Supreme Court. Cleveland, like many municipalities and states, imposes a “Jock Tax” on nonresidents. This impacts everyone from athletes to professional poker players. If you’re a resident of, say, Florida but you have income from Cleveland, you get to file a Cleveland tax return.
Both Mr. Saturday and Mr. Hillenmeyer challenged how Cleveland imposed its tax. Cleveland used a games-played method rather than a duty-days method. Cleveland said one game represents one-twentieth of your income (16 regular season games and four preseason games); thus, you owe that times your salary times Cleveland’s tax rate.
Mr. Saturday’s case was the more egregious of the two. During 2008 “More than 72,000 other souls attended the Colts’ dismal 10-6 victory over the Browns.” Mr. Saturday didn’t step foot in Cleveland; he was injured and attended physical rehabilitation in Indianapolis. Mr. Saturday contended that Cleveland has no authority to impose its tax on the income of a nonresident who did not work within Cleveland’s city limits during the taxable year.
Amazingly, when Mr. Saturday appealed his case at the city level (through the Central Collection Agency, Cleveland’s tax administration authority, the Cleveland Board of Review) and at the Board of Tax Appeals (the state level for tax appeals), he lost. Luckily, the Ohio Supreme Court used some common sense.
The second potentially significant passage in the regulation is the part that describes the ratio for allocating income to Cleveland for tax purposes. Both in constructing the numerator and the denominator for the games-played calculation, the regulation includes games the athlete “was excused from playing because of injury or illness.” Cleveland argues that because Saturday was “excused from playing” the Cleveland game, the tax applies to him under this provision.
This argument is unavailing for the simple reason that nothing in the regulation addresses the additional significant fact of Saturday’s complete absence from the city of Cleveland at the time of the game (and at every other time during the year). Had Saturday traveled to Cleveland with the team and been “excused from playing,” the language of the regulation might support imposing the tax. But here, Saturday was not even present at the game, and the regulation says nothing about what to do when the athlete is not even in the city where the game is being played. Thus, the regulation is at best ambiguous as to whether the tax is levied on Saturday.
At least two canons of construction militate against Cleveland’s expansive interpretation of the city’s income-tax law, given that the record here shows not only that the taxpayer was not in Cleveland on game day but also that he was performing job duties in another city on that day. First, it is a central tenet of tax jurisprudence that “a statute that imposes a tax requires strict construction against the state, with any doubt resolved in favor of the taxpayer.” Second, Cleveland’s interpretation violates the “implied condition of all statutes relating to taxation that they have no extraterritorial effect.” Quite simply, Saturday’s absence from Cleveland and his performance of duties elsewhere on the same day raise a strong suggestion that the imposition of Cleveland tax would constitute extraterritorial taxation. [citations omitted]
Mr. Saturday will be getting a full refund of his tax.
Mr. Hillenmeyer’s case is a bit different; he played in games in Cleveland in 2006, 2007, and 2008. The question is not whether Cleveland can tax him (he definitely earned income working in Cleveland); rather, it’s how the tax should be calculated.
Being a professional football player involves lots more than just showing up at games.
Hillenmeyer’s statements were corroborated by the affidavit testimony of Cliff Stein, senior director of football administration and general counsel for the Chicago Bears. Stein confirmed that under the NFL standard player contract and from the time that Hillenmeyer joined the Bears in 2003, he was required to “provide services to his employer from the beginning of the preseason through the end of the post-season, including mandatory mini-camps, official preseason [sic] training camp, meetings, practice sessions, and all preseason, regular season, and post-season games.” Stein also stated that “[t]he compensation Hillenmeyer receives from the Bears is paid for all of these services and not only for games played” and that “[f]ailure to comply with these contractual requirements would subject Hillenmeyer to termination pursuant to Paragraph 12 of his NFL Player Contract and/or fines under Article VIII of the Collective Bargaining Agreement.”
Though Mr. Hillenmeyer challenged the right of Cleveland to tax him (he lost that argument), he challenged the games-played method as a violation of his constitutional rights. The Ohio Supreme Court agreed:
Although we decide that Cleveland has the power to tax nonresident professional athletes without allowing them the benefit of the 12-day grace period, we hold that the games-played method of determining the tax base fails to afford due process when applied to NFL players like Hillenmeyer.
The Due Process Clause of the Fourteenth Amendment to the U.S. Constitution states that “[no] State [shall] deprive any person of life, liberty, or property, without due process of law.” 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 that was performed outside of Cleveland, and thus Cleveland’s income tax as applied is extraterritorial.
In guarding against extraterritorial taxation, “[t]he Due Process Clause places two restrictions on a State’s power to tax income generated by the activities of an interstate business.” The first is to require “ ‘some definite link, some minimum connection, between a state and the person, property or transaction it seeks to tax.’ ” The second restriction is that “the income attributed to the State for tax purposes must be rationally related to ‘values connected with the taxing State.’ ”…
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.
Mr. Hillenmeyer will get a refund of the differential between the games-played method and the duty days method.
So it’s already been a bad day for Cleveland, and (as I write this) it’s two hours until the NFL draft and it’s five months before Browns fans can start chanting (as usual) “Wait until next year.”
Cases: Saturday v. Cleveland Bd. of Rev., Slip Opinion No. 2015-Ohio-1625 and Hillenmeyer v. Cleveland Bd. of Rev., Slip Opinion No. 2015-Ohio-1623
