Dec 3rd 2013
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By Teresa Ambord, Correspondent
As professional athletes' salaries continue to escalate, several revenue-strapped states seem to be looking to the athletes for a solution. Tax authorities are tightening enforcement of their existing personal income tax laws, and that has left some pro athletes feeling like they're in the crosshairs of overzealous auditors. That's why two NFL players are crying foul . . . and taking one major city to court.
Here's what happened
Former Indianapolis Colts center Jeff Saturday and former Chicago Bears linebacker Hunter Hillenmeyer have each filed a separate lawsuit against the city of Cleveland, Ohio, accusing tax authorities of applying an unfair method of taxation to their incomes.
This method, they say, results in tax liabilities that are considerably higher than the more common method of calculating what is known as the "jock tax." In response, Cleveland representatives say the method the city uses is "certainly reasonable." Changing to the more standard method would cost the city about $1 million per year in tax revenue.
Method of allocation
Most tax jurisdictions, whether state or city, tax visiting athletes who earn income within their borders based on a system known as "duty days." A duty day is any team workday and includes playing, practicing, attending team meetings, training, etc.
The duty day method allocates income by applying a ratio, the numerator of which is the number of duty days the athlete is present in the state and the denominator is the total number of duty days in the year. So if a player spends two days in a given state, and there are 200 duty days in a year, 2/200 of his income is taxed by that jurisdiction.
"These rules apply to any employee of the team who travels with the team and performs services on a regular basis. This includes coaches, trainers, doctors, team executives, and others," said CPA Robert A. Raiola, who heads the Sports & Entertainment Group for the New Jersey–based accounting firm of Fazio, Mannuzza, Roche, Tankel, LaPilusa, LLC.
The duty days method works well. Cleveland, however, uses the "games-played method." If an athlete is on the roster, Cleveland applies a 2 percent tax rate to the number of games played in Cleveland – preseason, regular season, and playoff – compared to the number of games played by the team during the year. For example, if twenty games are played in a year and one is played in Cleveland, 1/20 of the player's income is subject to Cleveland tax. Using this method, the tax is much higher.
Hillenmeyer and Saturday both point out in their lawsuits that by using the games-played method of taxation, Cleveland wrongly assumes the players only worked on game days, resulting in a much higher percentage of income that can be taxed by the city (see chart).
Hillenmeyer agreed to talk to AccountingWEB by granting an interview through our collaborator, Raiola.
In the interview, Hillenmeyer said although he only performed services in Cleveland for two days in 2004 and 2006, the city applied the games-played formula. That resulted in 5 percent of his income from the Bears being allocated, therefore taxed, by Cleveland. The Bears were then required to withhold tax based on that formula. Hillenmeyer applied for a refund but was denied.
Saturday's case is similar, but with an added twist. His lawsuit points out that Cleveland taxed him for one game when he wasn't even in the city.
According to the court briefs, in 2008 the Colts were in Cleveland for a regular season game. Saturday did not travel with the team because he was injured: "Despite the fact that he did not travel to Cleveland in 2008, the city of Cleveland required the Colts to withhold Cleveland income taxes from Saturday based on a formula that allocated 4.5 percent of total income paid by the Colts." Like Hillenmeyer, he applied for a refund and was denied.
The Ohio Board of Tax Appeals stated that Saturday had taken a "sick day," and according to the board, it's standard and accepted practice to tax the employee where he or she would have worked, if the employee had not been sick or injured.
How much are the lawsuits asking for? The amounts are modest compared to the players' salaries. Hillenmeyer's refund would be $5,062 and Saturday's would be $3,294. But it's not about the money, said Stephen Kidder, the NFL Players' Association's tax counsel who represents both players.
"It's an attempt to right a wrong, frankly," said Kidder. "Their method of taxation pulls into Cleveland income that is not earned in Cleveland. And that's what no jurisdiction should be able to do."
Cleveland city attorneys filed a brief with the Ohio Board of Tax Appeals stating, "The 'games-played' method is certainly reasonable... since players are paid to do one thing - play in games." They do acknowledge that other cities have switched from the games-played method to the duty days method.
The city attorneys added, "That shift, however, appears to have been largely orchestrated by the [NFL] Players Association who have threatened and strong-armed taxing jurisdictions to discard the games-played method."
The Ohio General Assembly considered an income tax reform bill which would make the switch from the games-played method to the duty days method. However, that bill was tabled for now, as the assembly waits to see the outcome of the players' lawsuits.
"In these days of continuously escalating salaries for profession athletes, several states and cities, which have been experiencing severe revenue shortfalls, have been attempting to strictly enforce their personal income tax apportionment laws," said Raiola. "These jurisdictions have been vigorously enforcing existing laws based on the portion of an athlete's income generated by days worked in a state. The duty days method is a better indication of the number of days that an athlete is required to work. It is a basic premise of income taxation that a nonresident wage earner should only be taxed in a particular city if that athlete performs services in that city."
Right now, the two lawsuits are with the state appeals board. If the board rules against Hillenmeyer and Saturday, the players may look to the Ohio Supreme Court for help. AccountingWEB will be watching for the decision of the Ohio Board of Tax Appeals, due December 6, and we'll keep you informed.
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