Cleveland’s Taxes on NFL Players Ruled Unconstitutional
April 30, 2015
Two professional football players – Jeff Saturday and Hunter Hillenmeyer – won their cases in the Ohio Supreme Court in opinions released this morning.
The former Colts center and the former Bears linebacker had similar complaints against the Cleveland Board of Revenue. Both took issue with the city's use of the "games played" measure for determining the amount of taxable income earned at away games in Cleveland. By the "games played" measure, a player owes tax on a portion of his income equal to the portion of games played in the city. For example, if Hillenmeyer is paid for four preseason games and sixteen regular season games, and one of these twenty games is in Cleveland, then Cleveland can tax five percent of his income.
The problem with this method, as the players successfully argued, is that players do not just work on game days. They attend practices, meetings, and many other team functions. These are elements of the job, every bit as much as games are. While Hillenmeyer played five percent of his games in Cleveland, he spent far fewer than five percent of his total work days in the city. A key passage from one of the opinions, by Justice Judith A. Lanzinger, describes this:
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.
Saturday's case was arguably even stronger. Saturday was actually taxed by Cleveland for a game that he did not even play due to injury. He did not travel with the team, instead remaining home in Indianapolis. The idea that he owes tax to a city he did not visit is somewhat absurd.
These issues are important because tax authorities have strong incentives to try to "export" tax burdens to out-of-state payers. However, authorities that reach beyond their jurisdictions to interfere with out-of-state commerce cause legal and economic problems.