Jock Tax’ a Mistake by the Lake

CHICAGOLAWBULLETIN.COM TUESDAY, MAY 26, 2015

Volume 161, No. 102 Cleveland’s ‘jock tax’ a mistake by the lake

n April 30, the Ohio sending tax bills to California games-played method in one Supreme Court held athletes who played in Illinois. TIME-OUT jurisdiction and taxed under the that Cleveland’s This jock tax was coined duty-days method in his home specific method of “Michael Jordan’s Revenge.” state, he may ultimately pay imposing a “jock To date, 22 of the 26 states income tax twice on a portion of Otax” violated due process. It also that are home to professional his income. held that there was no violation sports teams have some type of AMY N. Worth noting is the U.S. of the U.S. Constitution’s equal jock tax. Eight cities have their SCHILLER Supreme Court ruling from May protection clause in taxing own jock taxes, including 18 that rejected Maryland’s visiting professional athletes but Cleveland. income-tax system that allowed not taxing other visiting profes - To calculate a jock tax on Amy N. Schiller is an attorney at double taxation of some sionals. visiting professional athletes, a Schiller, DuCanto & Fleck LLP where residents in certain circum - The ruling was a result of majority of jurisdictions use the she practices family law with a strong stances who received out-of-state former NFL offensive lineman “duty-days” method. Under this focus on property issues and the income. The justices held uncon - Jeff Saturday and ex-Bears line - method, a tax is imposed on the complex financial and custody matters stitutional Maryland’s refusal to backer Hunter Hillenmeyer chal - number of days an athlete facing professional athletes and give its residents full credits lenging Cleveland’s jock tax in spends in a city performing entertainers. She can be reached at against income taxes paid to court. various duties such as practicing, [email protected]. other states. In the majority Hillenmeyer, a nonresident, playing, training and promoting. opinion, Justice Samuel A. Alito sued Cleveland arguing that the Then, the athlete’s total income was taxed by the city of Jr. emphasized the unconstitu - city used an unlawful method in income is divided by the total Cleveland. This resulted in tionality of tax schemes that computing the amount of his number of days which he Cleveland capturing a larger result in people being taxed compensation subject to a city performs these services for his portion of Hillenmeyer’s income twice on the same income. municipal tax obligation, or a team during the year. Each juris - because there are far fewer In the Ohio Supreme Court “jock tax.” diction that uses the duty-days actual game days than duty days. case, Hillenmeyer sought a Jock taxes are income taxes method then taxes the athlete The Ohio Supreme Court refund of approximately $6,000, levied against nonresident only on those duty days spent in found that Cleveland’s games- which represented the difference athletes to states or cities where their respective jurisdiction. played method imposed an extra - between the games-played the athletes perform. Since However, Cleveland has been territorial tax in violation of the method computation and the states cannot realistically track historically practicing the due process clause of the duty-days method computation. the countless nonresidents doing “games-played” method of Constitution. It was found that The court ordered that business within their borders, taxing professional athletes. Cleveland’s power to tax should Cleveland recalculate more wealthy, high-profile Cleveland imposes a 2 percent only reach that portion of a Hillenmeyer’s jock tax using the people, such as professional tax on the income Cleveland nonresident’s compensation duty-days method, under which athletes, are often targeted. finds allocable under the games- earned for work performed Cleveland should have only taxed Jock taxes came into play back played method. This process inside of Cleveland. The games- 1.25 percent of his income. in 1991 when the Chicago Bulls determines apportionment of played method extended to Professional athletes who beat the Los Angeles Lakers for income based upon game days income earned outside of were overtaxed in Cleveland may the NBA championship (you can alone. Only the number of games Cleveland, thus violating due also be able to recoup some now take a second to reminisce an athlete’s team played in a process as applied to NFL money previously paid to the about the Bulls dynasty of the season is considered instead of players such as Hillenmeyer. city. 1990s). the total number of days actually In many scenarios, if an Cleveland will now likely join To nobody’s surprise, even worked. athlete pays income tax for work the other seven cities that from winning the 1991 title alone, In 2004, 2005 and 2006, performed in another jurisdic - impose a jock tax using the duty- Michael Jordan was to receive a Hillenmeyer spent two days per tion outside of his home jurisdic - days method if it wants to keep significant amount of income. In year playing football games in tion, he will be afforded a full tax the jock tax around at all. The a clever move, California decided Cleveland. He played 20 games credit in his home jurisdiction, city stands to lose significant to tax Jordan’s earnings that per season including preseason but only up to the amount his revenue — an estimated $1 were actually earned while games. Hillenmeyer was “on home state would have collected. million — in the future under the playing in California for the title. duty” for 160 days total, taking But tax rates vary among juris - duty-days method. As illustrated When Jordan received his tax into consideration the days dictions. If the out-of-state tax is by Hillenmeyer’s case, each bill from California for a portion including his practice, training, higher, the player will not receive athlete will save a few thousand of his income, Illinois wasn’t too strategy sessions, promotional a credit for the incremental out- bucks. pleased as Illinois believed it activities and other job-related of-state taxes paid. If the out-of- It can be assumed that this deserved all of the taxable services he engaged in outside of state tax is lower, then the home lawsuit was based more on revenue from Jordan’s income. Cleveland. state will likely levy a tax for the principle than money, but it is a To retaliate, the Illinois Under Cleveland’s method - difference. small victory for traveling Department of Revenue began ology, 5 percent of Hillenmeyer’s If an athlete is taxed under the professional athletes.