The Ohio Supreme Court recently ruled on two cases brought by former NFL players who sought repayment of taxes that were originally paid under Cleveland's "games played" method for taxing non-resident professional athletes who compete in Cleveland. The Court found that the "games played" method, cynically dubbed the "Jock Tax," overreached in that it effectively delved into player income that was not earned in Cleveland. As a result, the Ohio Supreme Court found that this method of taxation violated the Due Process Clause, and was therefore unconstitutional.
Prior to these two cases, Cleveland was the last remaining city in the country that relied on the "games played" method of taxing professional athletes. Under this method, the number of games played in Cleveland was divided by the total number of games in the season to determine the percentage of the athlete's game income that would be assessed the 2% Cleveland income tax. However, this method operates under the false premise that all income is earned only through games. Other cities have long abandoned this method for the more equitable "duty days" calculation, which takes the number of days worked in the city and divides that by the total number of "work days" over the year. This includes practice days, workouts, meetings, as well as actual game days.
In the first case, former Chicago linebacker, Hunter Hillenmeyer argued, and the Ohio Supreme Court agreed, that the "duty days" calculation resulted in a more equitable tax. The Court ultimately ordered repayment of taxes paid in 2004, 2005, and 2006 with interest. In Hillenmeyer's case, under the "games played" method, by playing 1 out of 20 total games in Cleveland each of those three years, 5% of his income was subject to Cleveland taxes. However, under the "duty days" method, his taxes would be substantially reduced to 1.27, 1.21, and 1.19 percent taking into account 154 days of work in 2004, 165 in 2005, and 168 in 2006 respectively.
In reaching the Court's decision, Justice Lanzinger found that "[d]ue process requires an allocation that reasonably associates the amount of compensation taxed with work the taxpayer performed within the city," she reasoned. "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."
The second case, brought by former player Jeff Saturday, similarly challenged Cleveland's "games played" tax calculation, but also challenged taxes he was required to pay as a result of his team playing in Cleveland despite the fact that he had not traveled with the team due to injury. The Ohio Supreme Court ultimately found that the city had no statutory basis for assessing this tax since Saturday never actually set foot in Cleveland. Like Hillenmeyer, these taxes were ordered to be repaid with interest.
These cases represent a clear victory for any professional athlete who does not live in Cleveland, but competes here over the course of the season. This decision is not exclusive to the NFL, and would apply to athletes in other sports as well. However, as the Ohio Supreme Court did not order Cleveland to rewrite its tax code, but simply to repay the taxes to these two players, the situation remains fluid. Professional athletes and their representatives alike, should monitor the situation to see whether Cleveland develops an entirely new method of calculating taxes or whether it decides to adopt the commonly used "duty days" method endorsed by the Ohio Supreme Court in these two landmark cases.
It is important to note that the statute of limitations for disputing these taxes is three-years. Therefore, professional athletes could potentially contest taxes going back to 2012 in cases brought this year. Representatives of professional athletes should begin reaching out to their clients in order to determine whether they could potentially be affected by these rulings, and whether they may be entitled to seek a refund for taxes calculated under the old "games played" method. Though it is difficult to determine exactly, it has been estimated that Cleveland could potentially be required to refund nearly $3 million in taxes to professional athletes going back to 2012.
If you have any questions regarding these specific cases or any other tax issue, please call one of our Corporate & General Business or Sports and Entertainment Practice Group Members.
This has been prepared for informational purposes only. It does not contain legal advice or legal opinion and should not be relied upon for individual situations. Nothing herein creates an attorney-client relationship between the Reader and Reminger. The information in this document is subject to change and the Reader should not rely on the statements in this document without first consulting legal counsel.
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