During his NBA playing career, former Philadelphia 76ers point guard Allen Iverson was known as The Answer. He famously minimized the importance of practice compared to official games, making it clear that he was compensated for playing in games, not for practicing. For income tax purposes, the City of Cleveland agrees with Mr. Iverson, taxing nonresident professional athletes based on the ratio of game days spent in Cleveland to all game days. Hunter Hillenmeyer, a retired linebacker who played for the Chicago Bears, successfully questioned The Answer. On April 30, 2015, the Ohio Supreme Court granted Mr. Hillenmeyer’s claim for a Cleveland income tax refund, holding that the games-played method used by the City to allocate a nonresident professional athlete’s compensation to Cleveland violates the Due Process Clause of the United States Constitution. On July 8, the Court rejected Cleveland’s motion for reconsideration, ending the matter unless the City files a petition for certiorari that is accepted by the United States Supreme Court. According to what the City characterized as a conservative estimate, the Court’s decision will cost Cleveland at least $1,000,000 annually (see page 10 of the linked .pdf), and it potentially exposes the City to millions of dollars in refund claims.

State and local income taxation of nonresident professional athletes is hardly uncommon, so what was the source of contention here? Cleveland stands apart from the states and cities that tax the compensation of nonresident professional athletes. To their detriment, these states and other cities divide a nonresident player’s compensation by the total number of “duty days” the player has during the year – games, practices, and other obligations – to determine the portion of the player’s compensation that is attributable to the game (or games) played in the taxing jurisdiction. By contrast, Cleveland has used the Allen Iverson approach – it divides each nonresident player’s compensation solely by the total number of games the player’s team has in the season to determine the portion of each player’s compensation that is attributable to the game (or games) played in Cleveland. The smaller denominator used by Cleveland leads to a significantly larger income tax base compared to those of the jurisdictions that tax the compensation of nonresident professional athletes based on the larger “duty days” denominator. Given, however, that Mr. Hillenmeyer’s Cleveland income tax refund claim was supported by the National Football League Players Association and was sustained by the Ohio Supreme Court, and that the National Hockey League Players Association recently reached a $3,320,000 settlement with Tennessee regarding Tennessee’s unique taxation of nonresident professional hockey players, states and other cities that tax nonresident athletes will likely be reluctant to consider any deviation from the duty-days method of allocation.

The Ohio Supreme Court dealt with two of the three constitutional arguments raised by Mr. Hillenmeyer in his refund claim. The first was the contention that the Ohio municipal income taxation of professional athletes and entertainers violates the Equal Protection Clauses of both the United State Constitution and the Ohio Constitution. With certain exceptions, Ohio law provides that an Ohio municipal corporation may not tax the compensation paid to a nonresident individual for personal services performed in the municipal corporation on 12 or fewer days during the calendar year (this threshold increases to 20 days for years beginning on or after January 1, 2016). One exception to the prohibition against the municipal income taxation of “occasional entrants” is for occasional entrants who are professional athletes or professional entertainers. Mr. Hillenmeyer asserted that professional athletes and professional entertainers are similarly situated to other occasional entrants and that the failure to extend the prohibition against Ohio municipal income taxation to professional athletes and entertainers therefore runs afoul of Equal Protection.

Mr. Hillenmeyer’s Equal Protection argument was not merely an attack against Cleveland’s use of the games-played method to allocate a nonresident professional athlete’s compensation to the City. A successful Equal Protection argument by Mr. Hillenmeyer would have prevented not only Cleveland from taxing any compensation paid to nonresident professional athletes who would be protected by the occasional entrant rule (which would be virtually all nonresident athletes), it would have prevented such taxation by Cincinnati (home of Major League Baseball’s Reds and the National Football League’s Bengals) and Columbus (home of Major League Soccer’s Crew and the National Hockey League’s Blue Jackets).

Not surprisingly, the Court rejected Mr. Hillenmeyer’s Equal Protection claim. The Court noted that the distinction between professional athletes and entertainers and other occasional entrants violates Equal Protection only if there is no rational relationship between the disparate treatment and some legitimate government purpose. The Court further noted that because taxation is a fundamentally legislative responsibility, courts are especially deferential to the classifications and distinctions that arise in the tax law. Applying this especially deferential standard of review, the Court held that a rational basis exists for the distinction between the municipal income tax treatment of nonresident professional athletes and entertainers and other occasional entrants. The Court found that this difference in treatment could be supported by the fact that, compared to other occasional entrants, professional athletes and entertainers are usually highly compensated and easy to find, which allows cities to obtain significant tax revenue with relative ease. The Court also found that this difference in treatment could be supported by the additional fact that, compared to other occasional entrants, professional athletes and entertainers and their events more heavily burden a city’s resources in terms of police protection, traffic control, and crowd control (among other public services), which justifies the taxation of those responsible for the incidence of these increased public burdens.

Although the Court did not deliver a knockout blow to the Ohio municipal income taxation of nonresident professional athletes, it was not nearly as accommodating in its constitutional assessment of Cleveland’s use of the games-played method to allocate the compensation of nonresident professional athletes. The Court held that the games-played method of allocation did not comport with the Due Process Clause, because, unlike the duty-days method, the games-played method does not reasonably associate the amount of compensation taxed by Cleveland with the work performed by the taxpayer in Cleveland. Because the Court held that the games-played method failed to comply with the Due Process Clause, it did not reach Mr. Hillenmeyer’s additional contention that the games-played method violates the Commerce Clause of the United States Constitution.

The Court articulated the correct standard regarding whether a method of allocation of compensation satisfies the Due Process Clause, but its holding in this case rests on the fanciful notion that a professional athlete is compensated equally for each duty day that he or she provides services to his or her employer. There can be no doubt that if an athlete has continuing subpar game performance (remember, golf is the only sport in which subpar is good), the athlete’s employer will release him or her from all contractual obligations and cease the payment of compensation (regardless of how exceptionally the athlete might have performed on duty days that didn’t also happen to be game days). Further, as Mr. Iverson can attest, an athlete who excels on game days but has an unexcused absence from a non-game duty day, or who otherwise doesn’t perform with full vigor on non-game duty days, is very unlikely to be docked the equally weighted portion of his salary that would be allocable to such duty days under the duty-days method of allocation.

If the games-played method of allocation goes too far by allocating no portion of an athlete’s compensation to non-game days, the duty-days method of allocation goes equally far in the other direction by failing to recognize the disproportionate effect game performance has on the athlete’s compensation compared to the athlete’s performance on other duty days. Perhaps Cleveland could adopt a duty-days method of allocation that complies with constitutional constraints in more heavily weighting game days, the true source of any athlete’s compensation, than non-game days in the allocation process. This would help preserve some portion of the income tax revenue that the City will otherwise lose under the Court’s decision and that it needs to service its debt and provide vital services to residents and nonresidents alike.