state tax notes

Pro Athletes Shut Out Cleveland Jock Tax at Home

by Jonathan Nehring
Jonathan Nehring works with the state and local tax
department of a Big Four accounting firm and has written
about sports-related state and local tax issues since 2012.
In First and 1040, Nehring examines two recent Ohio
Supreme Court rulings against Clevelands method of apportioning the income of professional athletes on visiting
teams for taxation purposes. He says that while the courts
rulings were correct, they are unlikely to spur future refund
claims because the amount of money involved is relatively
small.

After suffering setbacks in the first two matches, visiting

professional athletes in Cleveland scored a come-frombehind victory. In an all-too-familiar result to Clevelanders,
it was the home team that lost.
On April 30 the Ohio Supreme Court ruled for the
athlete taxpayers in two cases regarding Clevelands taxation
of professional athletes overturning two prior rulings that
both favored the city. Before discussing how Cleveland taxed
professional athletes, it is important to understand how
professional athletes are taxed.
I. What Everyone Else Is Doing Right
Like all U.S. citizens, professional athletes are subject to
federal, state, and local income taxes in the jurisdictions
where they reside. Also, typical of any state or municipality,
individuals who are not residents of a locality (nonresidents)
are subject to that localitys taxes if they earn income in that
locality. However, unlike a plumber or electrician crossing
state lines for work, professional athletes work schedules
and salaries are easily attainable. That enables state and local
taxing authorities to with very little cost increase
enforcement of tax liabilities on those high-income, nonresident taxpayers when they come to town for a game.
Because that increased enforcement has generally been used
against the sports industry, many state and local taxes enforced on nonresident professional athletes have become
commonly known as the jock tax.
As with any nonresident taxpayer, for a locality to determine how much income was effectively earned in its area, it
must apportion the taxpayers income earned during the tax
year among the various income-earning locations. As we will
see in this column, there has not always been a uniform
method to apportioning the jock tax. However, the jock tax
generally uses the duty day method, which apportions a

pro athletes income by multiplying his yearly salary by the

amount of duty days he spent in the locality over that
athletes total duty days during the tax year. See the formula
below for an example of this method.
Income Earned in Locality X =
Annual Salary x
(Duty Days in Locality X/Total Duty Days in Tax Year)

A duty day is typically any day the professional athlete

works for his team including games, practices, team
meetings, team media appearances, and any other teamrelated activities.
Localities also account for team travel days under the
general approach that that duty day is assigned to the
locality where team events occurred for the day. So, for
example, the NBAs Chicago Bulls played the San Antonio
Spurs in Chicago on January 22 before playing the Mavericks in Dallas the following evening. Regardless of whether
the Bulls were to travel to Dallas right after their home game
against the Spurs or the following morning, it is likely the
Bulls players would have assigned January 22 as a duty day
in Chicago and January 23 as a duty day in Dallas. That is
because regardless of how much of each day was spent in
each location, the activity the players are being paid for
occurred in those two locations during those two days.
The number of duty days vary significantly for each
athlete. For instance, athletes on playoff teams or players in
all-star games will have more total duty days than others in
their sports. While variations occur, the table shows the
typical number of duty days on which a professional athlete
performs services per season in a specific sport.
League

Duty Day Estimate

MLB

218

MLS

195

NBA

194

NFL

157

NHL

215

II. Where Cleveland Went Awry

As noted, the duty day method is the most common
approach for apportioning professional athletes income.

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FIRST AND 1040

First and 1040

So, for example, an NFL player who doesnt reach the

playoffs will play four preseason games and 16 regular
season games per season. Under games-played apportionment, if an NFL player played a game in Cleveland, Cleveland would calculate that 1/20 of his games were played and,
subsequently, 1/20 of his income was earned in Cleveland.
That is a significant difference in income deemed earned in
Cleveland when compared with the same facts under the
duty day method. Under the latter, a typical NFL player
playing a game in Cleveland would have earned 2/157 of his
income in Cleveland.
That example is similar to the facts of Hillenmeyer v.
Cleveland Bd. of Rev., which the Ohio Supreme Court
decided in April.2 Then-Chicago Bears linebacker Hunter
Hillenmeyer played one away game against the Cleveland
Browns in the 2004, 2005, and 2006 NFL seasons. For each
of those tax years, Cleveland applied its 2 percent income tax
on 1/20 of Hillenmeyers annual salary. Hillenmeyer filed
refund claims (and subsequently lawsuits) disputing Clevelands apportionment method.3 Hillenmeyers arguments
against Clevelands games-played method of apportioning
income were that it was contrary to both Cleveland and
Ohio law and violated the due process and commerce
clauses of the U.S. Constitution.
III. Where Cleveland Pushed Its Luck
In addition to Hillenmeyer, the Ohio Supreme Court
concurrently decided another case involving Clevelands
taxation of professional athletes.4 This case involved former
Indianapolis Colts center Jeff Saturday, who was taxed under the same Cleveland games-played method when the
Colts visited Cleveland in 2008.5 But Saturday was back in
Indianapolis rehabbing an injury and never traveled to
Cleveland with the team. Cleveland asserted throughout the
litigation process that it had the authority under municipal
legislation to tax individuals who had never set foot in the
locality. It was no surprise to anyone that this forced pass was
intercepted by the Ohio Supreme Court.6

Central Collection Agency Regulation 8:02(E)(6).

Hillenmeyer v. Cleveland Bd. of Rev., slip op. 2015-Ohio-1623.
3
Id., at 2-3.
4
Saturday v. Cleveland Bd. of Rev., slip op. 2015-Ohio-1625.
5
As noted in Ohio Supreme Court Justice Paul E. Pfeifers opinion,
More than 72,000 other souls attended the Colts dismal 10-6 victory
over the Browns.
6
Saturday also argued Clevelands games-played method of apportionment, but the Ohio Supreme Court resolved this matter under
Hillenmeyer and referred to that opinion when deciding Saturdays
case.
2

IV. Justices Taking Their Talents Elsewhere

A. Hillenmeyer
The Ohio Supreme Court held that Clevelands taxation
of Hillenmeyers earnings under the games-played method
did not violate Cleveland or Ohio law because his earnings
qualified under the proper definitions of taxable income for
wages provided in remuneration for employment.7
However, while the taxation was allowable under applicable state and local law, the court went on an all-out blitz
and ruled that games-played apportionment violated the
due process clause. The matter in which the court executed
its blitz was a bit surprising. This case seemed more aligned
to be in violation of the commerce clause, but because the
court found for due process violation, the more expansive
commerce clause argument was not ruled on.
The due process clause, which affords that no state can
deprive any person of life, liberty, or property, without due
process of law, was opined by the court to guard against
extraterritorial taxation.8 The court further reasoned
through application of U.S. Supreme Court opinions that
the due process clause places two restrictions on a States
power to tax income generated by the activities of an interstate business.9 Those two restrictions are:
to require some definite link, some minimum connection, between a state and the person, property or
transaction it seeks to tax;10 and
that the income attributed to the State for tax purposes must be rationally related to values connected
with the taxing State.11
To that point, the Ohio Supreme Court seemed to be
executing the play as called; however, it appears an audible
was called. The court reasoned that due process requires an
allocation that reasonably associates the amount of compensation taxed with work the taxpayer performed within the
city.12 In essence, the court stated that the games-played
method violated the second prong of the due process clause.
Following that reasoning, the games-played method doesnt
rationally relate to values connected with [Cleveland].
It seems more rational that Hillenmeyers case should
have been decided under commerce clause interpretation in
Complete Auto Transit Inc. v. Brady. Under Complete Autos
four-prong test, for a tax to be constitutional under the
commerce clause, the state tax must be applied to an

Hillenmeyer, at 8-10
Id., at 14.
9
Id., at 4-15 quoting Moorman Mfg. Co. v. Bair, 437 U.S. 267,
272-273, (1978).
10
Hillenmeyer, at 5 quoting Quill Corp. v. North Dakota, 504 U.S.
298 (1992), quoting Miller Bros. Co. v. Maryland, 347 U.S. 340
(1954).
11
Hillenmeyer, at 15 quoting Moorman Mfg. Co. at 272-273, quoting Norfolk & W. Ry. Co. v. Missouri State Tax Comm., 390 U.S. 317
(1968).
12
Hillenmeyer, at 16.
8

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However, Cleveland implemented a games-played apportionment formula.1 Under the games-played method, a
professional athletes income is apportioned based on the
percentage of games played in a locality compared with the
number of games played during the tax year.

First and 1040

B. Saturday
Regarding Saturdays case against Cleveland, the Ohio
Supreme Court deferred to Hillenmeyers opinion of overturning games-played apportionment.
The court went on to rule that Cleveland didnt even
have the authority to tax Saturdays earnings because they
were not taxable under Clevelands own ordinances and
regulations. The city imposes a tax on all qualifying wages,
earned and/or received . . . by nonresidents of [Cleveland]
for work done or services performed . . . within [Cleveland]
or attributable to [Cleveland].14 Because Saturday was
never in Cleveland, the court turned to the citys regulations
to determine whether Saturdays income was attributable to
Cleveland.
Clevelands regulations allow attribution of income to
Cleveland for the entire amount of compensation earned
for games that occur in the taxing community.15 The city
argued that regulation attributes an athletes income to
Cleveland if an athletes team plays a game in Cleveland.
Therefore, Cleveland argued that it had the right to tax
Saturdays income for the Colts game in its jurisdiction.
However, the state supreme court referred to its concurrent
Hillenmeyer opinion, which disallowed apportioning income on games alone. Thus, according to the duty day
method, Saturdays service to his employer encompassed
his rehabilitation activity in Indianapolis, so he did not
have any income attributable to Cleveland that tax year. By
reasoning Cleveland didnt even have the authority to tax,
the court didnt get to Saturdays constitutional arguments.
If the Ohio Supreme Court were a coach, it made its
postgame press conference loud and clear. In both cases, the
court could have reached the same result under less harsh

13

Complete Auto Transit Inc. v. Brady, 430 U.S. 274, 279 (1977).
Saturday, at 6 citing Cleveland Codified Ordinances 191.0501
(b)(1).
15
Saturday, at 6-7 citing CCA Regulation 8:02(E)(6).
14

reasoning. Instead, it adamantly called out the players on the

team who dropped the ball this season.
V. How Will Cleveland Move On?
Initially, Cleveland could stand to lose a substantial
amount of money. The citys statute of limitations for a
taxpayer to claim a refund on overpaid taxes is three years
from payment of tax.16 Because the state supreme court
invalidated the games-played method, professional athletes
will be able to recalculate their tax owed to Cleveland over
the past three years and seek a refund for any overpayment.
Hillenmeyers motivation seems to have been principle and
not money, as the ruling will net him a refund of only just
over $5,000. However, other players will stand to gain
substantial refunds. The difference between the tax owed to
Cleveland under the duty days method versus the gamesplayed method for Baltimore Ravens quarterback Joe Flacco
is nearly $40,000, before interest.
Depending on the number of pro athletes who file refund
claims, refund checks may not be Clevelands largest initial
expense. The NFL Players Association issued a statement to
all of its agents advising them on the Ohio Supreme Court
decisions and the opportunity for refunds. If this notice
leads players to seek refund claims, a conservative estimate
shows Cleveland could be dealing with more than 2,600
refund claims in the near future.17 This initial administrative burden could prove costly for the city. However, given
the little amount of income available in those refund claims,
many professional athletes will likely find that the cost of
filing multiple refund claims and amended federal returns
exceeds the refund amount from Cleveland.
In the future, Cleveland will argue that it will lose income
every year by this ruling. However, you cannot lose something until you rightfully own it. Regardless, in 2013,
legislation (HB 5) was proposed that would have changed
Clevelands games-played method to the duty days method.
The bills fiscal note estimated that the annual revenue losses
from visiting pro teams for Cleveland would be $1 million18
or approximately 0.18 percent of the citys annual budget.
The effect of the Ohio Supreme Courts ruling in Saturday will be quite minimal. Frankly, Clevelands cost may not
extend beyond the $3,294 plus interest they were ordered to
refund Saturday. Most injured players travel with the team,
therefore subjecting them to Clevelands taxing authority
even after Saturday. However, injured players may now

16
Cleveland Central Collection Agency Rules & Regulation Article
10 section 02.
17
This is an estimation of the number of NFL, NBA, and Major
League Baseball players who have played in Cleveland during the
statute of limitations period and been subjected to the games-played
apportionment method.
18
Central Collection Agency HB 5 Revenue Impact Analysis.

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activity with a substantial nexus with the taxing State, fairly

apportioned, not discriminatory against interstate commerce, and fairly related to the services provided by the
State.13 The Ohio Supreme Court decided whether Cleveland fairly apportioned Hillenmeyers income, the second
prong of Complete Autos test, yet reasoned under the due
process requirement for rational relation. To find irrational a municipality apportioning income of an athlete based
on games played seemed, well irrational.
Whether it is fair to apportion income on games alone
seems to be the question answered by the state supreme
court. Regardless of the process, it seems the court reached
the correct analysis. The games-played method does not
fairly apportion income under the commerce clause and, in
the courts eyes, doesnt even rationally relate to the income
earned in Cleveland.

First and 1040

Outside Cleveland, these cases are unlikely to have any

effect. This opinion is binding only in Ohio where only
Cleveland, Cincinnati, and Columbus host professional
sports teams. While persuasive in all other jurisdictions, the
ruling that the games-played method is unconstitutional
could give pause to any other jurisdiction considering
legislatively or judicially that type of apportionment.
However, Cleveland is one of the last jurisdictions not to
have converted to duty days apportionment.
If only the judicial league granted the team coming in
last the first overall pick next year.

IN THE WORKS
A look ahead to planned commentary and analysis.
Trends in state and local finances
(State Tax Notes)
Elliott Dubin examines trends in state and local
finances going back more than 50 years, noting the
ways state and local spending has shifted as well as
the continued struggles state and local governments
face to make ends meet, largely due to significant
increases in healthcare and pension expenditures.
Unfunded pension liabilities threaten states
sustainability (State Tax Notes)
Jonathan Williams discusses how states must address unfunded pension liabilities and argues that
low-tax states outperform high-tax states on economic issues.
Surprise! New rules require reporting of debt
modifications (Tax Notes)
Lee G. Zimet discusses how new information reporting rules under section 6045B apply to debt
instruments and require issuers to disclose debt
modifications on Form 8937.
A review of existing administrative guidance after
captive insurance companies make the Dirty
Dozen list (Tax Notes)
F. Hale Stewart and Beckett G. Cantley explain why
some captive insurance transactions appear on the
IRS Dirty Dozen list and how companies can ensure that their captive insurance transactions are
permissible.
Tax planning for immigration to Canada
(Tax Notes International)
Jack Bernstein writes about tax issues relevant to
new immigrants or residents in Canada, whether
temporary or permanent. He also discusses significant changes to tax laws over the last 12 months that
are applicable to new residents of Canada.
Voluntary disclosure in Germany
(Tax Notes International)
Thomas Kehr and Hagen Luckhaupt provide a brief
overview of recent changes to Germanys criminal
tax law regarding the voluntary disclosure of tax
evasion.

682

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begin to use that case as a way to negotiate a few extra days

home if they are unlikely to play on an upcoming road trip.