During his NBA playing career, former Philadelphia 76ers point guard Allen Iverson was known as The Answer. He famously minimized the importance of practice compared to official games, making it clear that he was compensated for playing in games, not for practicing. For income tax purposes, the City of Cleveland agrees with Mr. Iverson, taxing athletes based on the ratio of game days spent in Cleveland to all game days.
In two City of Cleveland income tax refund cases currently pending before the Ohio Supreme Court, Hunter Hillenmeyer and Jeff Saturday, retired professional football players who played for the Chicago Bears and Indianapolis Colts, respectively, question The Answer. Mr. Hillenmeyer claims a Cleveland income tax refund of $5,062 for the tax levied on his salary for the one game in each of the 2004, 2005, and 2006 seasons that the Bears played in Cleveland against the Cleveland Browns. Mr. Saturday claims a refund of $3,294 for the Cleveland income tax assessed against his salary for the one game in the 2008 season that the Colts played in Cleveland. Mr. Hillenmeyer was on the Bears active roster and played in each of the games at issue in Cleveland; Mr. Saturday, however, was injured and did not play in the 2008 game in Cleveland or travel with the Colts to Cleveland for that game.
State and local income taxation of professional athletes is hardly uncommon, so what is the source of contention here? Cleveland stands apart from the states (including Ohio) and other cities (including Cincinnati and Columbus) that tax the compensation of professional athletes. These states and other cities divide a player’s compensation by the total number of “duty days” the player has during the year – games, practices, and other obligations – to determine the portion of the player’s compensation that is attributable to the game (or games) played in the taxing jurisdiction. By contrast, Cleveland uses the Allen Iverson approach – it divides each player’s compensation solely by the total number of games the player’s team has in the season to determine the portion of each player’s compensation that is attributable to the game (or games) played in Cleveland. The smaller denominator used by Cleveland leads to a significantly larger income tax base compared to those of the jurisdictions that tax the compensation of professional athletes based on the larger “duty days” denominator.
Although the Cleveland income tax imposed on any individual professional athlete in a given year is often nominal, the aggregate Cleveland income tax imposed on all players is annually in the seven figures – an amount that in no small part funds services provided by the City and secures tax-advantaged debt issued by the City (pdf). With a significant aggregate amount of Cleveland income tax at issue, and a strong desire to have no other jurisdictions adopt Cleveland’s allocation methodology, the respective unions that represent players in Major League Baseball, the National Basketball Association, the National Football League, and the National Hockey League are each supporting Messrs. Hillenmeyer and Saturday (that the NHL players union joined an amicus brief (pdf) filed with the Ohio Supreme Court indicates the importance of this issue to professional athletes, given that the NHL hasn’t had a franchise in Cleveland since 1978).
After his retirement from the NFL, Mr. Saturday joined ESPN as an analyst. Chris Berman, Mr. Saturday’s colleague at ESPN, has long predicted the results of NFL games as “The Swami.” In a nod to Mr. Berman, I’ll make my predictions of what the Ohio Supreme Court will hold in Messrs. Hillenmeyer’s and Saturday’s cases.
Mr. Hillenmeyer contends that Cleveland’s method of allocation conflicts with Ohio law. The Ohio Board of Tax Appeals, the body from which Mr. Hillenmeyer is appealing, held that Cleveland’s method of allocation does not violate Ohio law, because the State has not acted to proscribe Cleveland’s “games played” method of allocation. The Ohio Supreme Court is unlikely to reverse this decision, given its recent holding (pdf) that, consistent with the home rule provisions of the Ohio Constitution, where the Ohio General Assembly has not acted to limit a city’s taxing power, the city can exercise that power (subject to other, applicable constitutional constraints).
Mr. Hillenmeyer further contends that Cleveland’s method of allocation violates the Equal Protection clauses of the United States Constitution and the Ohio Constitution and results in a disproportionate allocation of income to Cleveland, in contravention of the U.S. Constitution and Ohio Constitution. The Ohio Board of Tax Appeals did not decide these arguments, because it is without jurisdiction to pass on constitutional issues. The Ohio Supreme Court will very likely find Mr. Hillenmeyer’s constitutional arguments unavailing and will be as accommodating as a depleted defensive secondary in determining whether a rational basis exists to validate the disparate treatment of which Mr. Hillenmeyer complains. This is the same Court, after all, that held in the face of an Equal Protection challenge that the City of Brook Park, a suburb of Cleveland, had a rational basis to apply two different parking tax rates to two different parking lots (pdf). It likely won’t strain too hard to conclude that Cleveland’s games-played allocation method has a rational basis (an administratively efficient source from which to collect tax revenue on significant employee compensation and a proper matching of that compensation with the costs incurred by the City for game-day police protection and crowd control are two potential bases). For similar reasons, the Court is unlikely to conclude that Cleveland’s games-played allocation method results in an unconstitutionally disproportionate allocation of income to Cleveland. In short, the Ohio Supreme Court will in all likelihood play Joe “Turkey” Jones to Mr. Hillenmeyer’s Terry Bradshaw in holding for the City of Cleveland.
Mr. Saturday makes the same assertions as Mr. Hillenmeyer, but Mr. Saturday further argues that he lacked any taxable nexus with Cleveland under the U.S. Constitution and Ohio Constitution, because, as a result of his injury, at no time did he travel to Cleveland or perform employee services there. This latter argument will very likely hit pay dirt. Allowing a city to tax the wages of an employee who performs no services in that city would be an unprecedented expansion of the concept of taxable nexus and would be without basis in the current jurisprudence of the Due Process and Commerce Clauses of the U.S. Constitution.
So, Swami sez that the Ohio Supreme Court will find that The Answer is correct regarding the compensation of professional athletes and render a split decision in these cases – sustaining Mr. Saturday’s refund claim but rejecting the claim of Mr. Hillenmeyer.