The Supreme Court of Ohio (the Court) handed down its ruling this week in Hunter T. Hillenmeyer v. City of Cleveland Board of Review and declared the City of Cleveland’s method of taxing nonresident professional athletes to be unconstitutional.
As we previously reported, the City of Cleveland imposed a so-called “jock tax” on professional athletes based upon the number of games the visiting team plays in the city divided by the total number of games in a season. In a unanimous decision, the Court held that the use of the games-played method violates due process and, therefore, is unconstitutional. The decision of the Board of Tax Appeals was reversed and the matter was remanded with instruction that tax refunds be awarded to Hillenmeyer.
The Court reasoned, “[d]ue 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 five 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.”
Instead of employing a games-played method for calculating the amount of taxes owed to the city, the Court ordered that the tax be recomputed using the duty-days method. Of the eight cities in the United States that impose this form of tax, all the cities, except for Cleveland, utilize the duty-days methodology. Under the duty-days formula, the tax is imposed based on the number of days the team spends in the city divided by the number of days which the athletes perform services for their team during the year.
Mr. Hillenmeyer is owed a refund from the City of Cleveland plus interest for the additional amount of tax collected under the games-played method as compared to the amount which would be owed under the duty-days method. While the Court declared the games-played method unconstitutional, they stopped short of invalidating the imposition of the tax altogether. During oral arguments, Hillenmeyer’s attorney argued that imposing the tax in the first instance violated the equal protection clause because other nonresidents who work 12 days or less in a city are not taxed by the municipality. However, the Court found that exclusion of professional athletes from the occasional-entrant rule does not violate equal protection.
Thus, Mr. Hillenmeyer is entitled to collect his refund for the excess taxes the City of Cleveland collected from him, and the City of Cleveland will conform its method of taxing professional athletes to the same method employed by seven other similarly situated municipalities. The City of Cleveland estimates that the ruling will cost the city approximately $1 million per year in lost tax revenue.