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Saturday’s Challenge to Cleveland Income tax for NFL Players

In 2015, two cases highlighted important victories for athletes in personal income tax cases. Athletes often make very comfortable salaries for performing at the highest level within their profession. Along with the success of the job, comes traveling and performing in many cities. Being that professional athletes get paid on a game by game basis, state income taxes can also become somewhat complicated. Should athlete’s get paid based on their home state or city? Should they get paid based on the number of games they play in a particular city or state? Or should some different formula apply?

The City of Ohio was in the limelight in 2015. In Ohio, the city collects a personal income tax, along with the state. IN addition, Cleveland uses the “games-played” method to calculate the amount of an athlete’s income attributable to Ohio. In other words, in order to calculate Cleveland income, the athlete divides the number of games played in Cleveland by the total number of games played. As a result, Cleveland gets its fair share of the tax. Seems fair right?

As an example, take a typical NFL season with 16 regular season games and 4 preseason games or 20 total games. If an athlete only played 1 away game in a particular season, typical of an NFL season, then the ratio would be 1 game in Cleveland divided by 20 games or 5 percent of each player’s annual income allocated to Cleveland.

Attribution of Nonresident Compensation to Cleveland

The first case involved legendary Colt, Jeff Saturday. In the Saturday case, the Colts made a trip to Cleveland in 2008. However, due to injury, Saturday did not make the trip. Specifically, he was not present at the game because he was performing mandatory rehabilitation exercises at the Colts’ training facilities. Pursuant to his NFL contract, material failure to follow a rehabilitation program may subject Saturday to a fine. Saturday claimed it was not fair that 20% of $3.5 million income be allocated to Cleveland, because he was not there. The Supreme Court of Ohio agreed because none of his services were formed in Cleveland. As a result of the case, Saturday may not just be known as Peyton Manning’s center and a ring of honor inductee, but also a professional athlete that altered the nexus taxing schemes of states for professional athletes.

Games-Played Method Unlawful
In the second case regarding professional athletes, Hillenmeyer, a Chicago Bears linebacker, argued that the “games-played” method was unconstitutional. He argued that NFL players are compensated for more than just the games played. In addition to the games played, Hillenmeyer argued that the games-played method dramatically overstated his Cleveland income, because NFL players are compensated for training, practices, strategy sessions, and promotional activities. As such, Ohio’s “occasional entrants” statute violates both the Ohio Constitution and the Equal Protection Clause of the Fourteenth Amendment to the United States Constitution, to which the Ohio Supreme Court agreed.

Rather than accepting the normal games played methodology, Hillenmeyer thought total days that derive income was a more appropriate calculation. During a typical season, a player will travel to a game the day before and return home with the team the day of the game. This means that they spent two days in a city. The Ohio Supreme Court then looked to the proper allocation of the two days in comparison to total number of work days, which ranged from 157 to 168 days each year for three years. Therefore, the proper allocation should have been 2 days in Cleveland divided by 157 duty days which is approximately 1.27%, not the simple 1 game out of 20 or 5%. Ultimately, the Ohio Supreme Court ruled that the games-played method reached beyond its power to tax.

Both cases highlight the every evolving area of state and local tax. Even though, the Cleveland taxing scheme was always done that way, the tandem cases show that there is always a ripe opportunity to challenge seemingly settled rules. With multi-million dollar salaries, shaving a few percent off of a state income tax can result in big savings for high earners, like athletes. Aside from highlighting that Cleveland has lost more than just football games this year, these cases highlight a savings opportunity for athletes that perform in high municipal or state income tax arenas. Perhaps, more athletes will come up with creative income tax savings opportunities in 2016.

About the Author: Mr. Donnini is a Florida Attorney and a partner in the law firm of Moffa, Sutton & Donnini, P.A., in Fort Lauderdale, Florida. Mr. Donnini’s primary practice is Florida tax controversy with a heavy emphasis on the convenience store and petroleum industry. Mr. Donnini also does extensive work in the area of Florida wholesaler beverage and tobacco tax. Mr. Donnini is a co-author for CCH’s Expert Treatise Library: State Sales and Us Tax and writes extensively on multi-state tax issues for SalesTaxSupport.com. Mr. Donnini earned his LL.M. in Taxation at New York University.

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