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Brian Gordon, CPA, is the Director of State and Local Taxes at Sanders Thaler Viola & Katz, LLP. Previously, Brian was with the NYS Department of Taxation and Finance as the District Audit Manager in Manhattan and Brooklyn. He is a member of the NYSSCPA New York, Multistate & Local Taxation Committee and writes and speaks on various tax issues. He can be reached at 516-704-7130 or 516-510-6041 and email: bgordon@st-cpas.com.

Cleveland Can’t Win on the Football Field, or in Tax Court

By Brian Gordon

The City of Cleveland took two football players involved with two separate cases before the Ohio Supreme Court in order to try to collect tax on a portion of their earnings based on games played in Cleveland.

The City of Cleveland requires non-resident professional athletes to allocate part of their salary to Cleveland based on the percentage of the total games their team plays in Cleveland. If there are 20 games (including pre-season) and there is just one game played in Cleveland, the allocation would be 1/20 of the player’s salary.

New York State law is different (New York City does not have a tax on non-residents). Several years ago, New York used the same methodology as Cleveland, but beginning with tax year 1995 they expanded the review from games played, to what is referred to as duty days. New York duty days comprise all days a professional athlete is required to be in New York for work purposes, including practices, travel, team meetings and any other day that the professional athlete is required to be “at work.” Total work days, or the denominator of the formula, are all of the days during the taxable year, from the beginning of the professional athletic team’s official pre-season training period through the last game in which the team competes or is scheduled to compete. Days spent in New York by injured players not providing services, or not conducting rehabilitation activities in New York, are not considered New York duty days, however these days are considered work days for the denominator of the formula.

The first Ohio Supreme Court decision:
In Hillenmeyer v. Cleveland Board of Review, the court held that Cleveland’s method of allocating a non-resident professional athlete’s income to Cleveland by game formula only, violated the Due Process Clause of the U.S. Constitution. Hunter Hillenmeyer, a Chicago Bears linebacker, argued that the games-played method overstated his "Cleveland" wages because he earned his wages not only for playing in games but also for training camp, practices, meetings, promotional activities and more. In other words, he was arguing for a duty-days allocation.

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 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. The court ordered Cleveland to issue Hillenmeyer a refund in accordance with a duty-days allocation.

In the Second Ohio Supreme Court decision:
Jeff Saturday of the Indianapolis Colts was taxed by the City of Cleveland for a game that his team played, while he was in Indianapolis rehabilitating an injury. This was according to the game-day formula that is in Cleveland’s regulations and was previously used in New York as discussed above.

The court rejected Cleveland’s contention that Saturday’s wages relative to the game against the Cleveland Browns football team were the equivalent of "sick pay" and therefore taxable under Cleveland’s regulations. They found that Saturday’s participation in "team-mandated" rehabilitation constituted the performance of services for his employer in Indianapolis. Cleveland could not tax the wages Saturday received for performing services in Indianapolis.

The court ordered Cleveland to issue Saturday a refund of all tax withheld, plus statutory interest.

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