By Joseph M. Hanna, of Goldberg Segalla
Professional athletes in two states are fighting “jock taxes.” Arguing that the taxes are “unfair and unconstitutional,” players are telling Tennessee and Ohio they want their money back.
A “jock tax” raises state or city tax revenues by taxing athletes who play in those locations. These taxes are imposed on professional athletes in a number of places such as the state of Tennessee and the cities of Cleveland, Cincinnati, Detroit, and Philadelphia. The general idea is that athletes are charged a certain amount to play in the city or state because the money was earned there. The amount depends on which method of calculation is used by the location.
The attacks on “jock tax” laws are targeting different points of the laws in an attempt to force reimbursement. In Cleveland, two former NFL players are disputing the constitutionality of the city’s “games played” calculation method. If successful, the city would be forced to switch methods and reimburse part of the amounts paid. However, the National Hockey League Players’ Association (NHLPA) seeks permission to sue the state of Tennessee and argues the whole law is unconstitutional. If the NHLPA is successful, all the money paid by players since the law took effect in 2010 could be reimbursed.
Various Calculation Methods
Cleveland uses the “games played” method to determine how much a visiting athlete will pay to the city. Using this approach, the city’s tax authority divides the number of games an athlete’s team played in Cleveland that season by the total number of games the athlete was available to play (including preseason and playoffs). That ratio is then multiplied by the athlete’s taxable income for the year.
A more common method that is used by other cities is the “duty days” method. This approach results in a lower “tax rate” because the number days worked in a location during the year is divided by the total number of days worked in any location. Work or “duty” days include practices, team meetings, and training camps.
A third method is used in Tennessee. There, NHL and NBA players are charged a flat fee per game played in the state. An athlete pays $2,500 per game for up to three games. The Tennessee method has two interesting twists. First, unlike other methods, the tax is applicable to both visiting and home players. Second, the law specifically excludes taxing NFL players.
Former NFL Players’ Cleveland Cases
Former Indianapolis Colt, Jeff Saturday, and former Chicago Bear, Hunter Hillenmeyer, have separate cases pending against Cleveland. Both players say the current method wrongly assumes they only work on game days, yet during the years in question, the players worked a minimum of 150 days. The attorney representing both players said the cases are “an attempt to right a wrong.” “Their method of taxation pulls into Cleveland income that is not earned in Cleveland.”
Under Cleveland’s “games played” method, Hillenmeyer’s tax rate for 2004 and 2006 was 1/20. He played one game in Cleveland each of those years and was eligible to play for 20. In 2005, he was eligible for an additional game, lowering his tax rate to 1/21.
Saturday has and additional issue with the calculation. He was taxed for a game his team played in Cleveland on November 30, 2008, even though he wasn’t in Cleveland. He stayed in Indiana to undergo rehabilitation for an injury. His attorney called the tax “absolutely extraordinary.”
A lot is at stake for Cleveland. According to a “conservative estimate” by the city’s tax office, the city will lose $1 million per year if it switches to the “duty days” method. The city says other locations have shifted away from the “games played” method solely because of threats and strong-arm tactics by the NFL Players’ Association.
The city also responded to Saturday’s complaint about being taxed when he wasn’t in the city. It said, “When an employee takes a sick day, it would be an administrative burden to the taxing authority to determine where an employee is sick or injured. It is, therefore, standard accepted practice to tax the employee where he or she would have worked if he were not sick or injured.”
NHLPA’s Tennessee Dispute
In Tennessee, the NHLPA is attempting to fight the law and reimburse players for taxes paid prior to the new collective bargaining agreement (CBA). The NHLPA hopes to get players’ money back for payments during the ’09-’10 through the ’11-’12 seasons.
Starting with the ’12-’13 season players no longer have to bear the burden of the tax: now team owners do. Under the terms of the current CBA, the owners reimburse the players for the tax.
However, the NHLPA wants Tennessee to pay back those taxes paid until that agreement. The association hopes to attack the tax in two forums: the Tennessee General Assembly and court. If the challenges are successful, the state may have to refund about $3.5 – $4.5 million per year to players.
At the General Assembly level, the NHLPA and is lobbying against the tax bill. It hopes get the act fully repealed. During this year’s Assembly, a bill to repeal the tax fell short. If it is repealed at some point, players are able to file refund requests for payments made within three years of the repeal. That means the deadline for payments during the 2009-2010 season would be December 31, 2013.
Since it is unlikely that the law will be repealed before the Dec. 31 deadline, the NHLPA wants to go to court. However, before the NHLPA can bring the lawsuit, it must get the approval of the member-players to sue on their behalf.
With disputes pending in two states, it’s only a matter of time before we see just how far these taxes can go.
