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Extraterritoriality and Cleveland's tax on NFL players

In January, we noted that some former NFL players had sued Cleveland regarding the tax rate applied to their playing in the city when they were active with the NFL. Cleveland used a unique method of calculating the income tax owed, based on the number of days they play in Cleveland, which the players objected as a violation of their Constitutional due process rights.

The Ohio Supreme Court agreed with them in a recent ruling. Cleveland taxed the athletes on a games-played basis. This method used the total number of days they played NFL games and divided that by the number of time they played in Cleveland. This allowed a 5 percent tax rate.

In other cities, the players are taxed on a duty-days basis, which looks at the total number of days a player reports for duty with his team, including practices and other work they do in order to prepare for playing all games. This produces a tax rate of 1.25 percent.

According to the Ohio Supreme Court, Cleveland is only able to tax the "portion of a nonresident’s compensation that was earned by work performed in Cleveland." Taxing authorities are typically limited by the concept of "extraterritoriality."

Constitutional due process only permits taxation when an individual has "significant contacts" with a jurisdiction and Ohio ordinarily cannot tax those who are extraterritorial, or outside Ohio. Ohio can only tax Ohio residents, because they live in Ohio.

Technically, all workers could be taxed by Ohio, if they earn income in the state, but administratively it would be too expensive to tax one or two days pay, however, professional athletes, because of their extreme incomes are the exception.

However, if you work temporarily in Ohio for a couple of months, you could be obligated to pay Ohio tax. As with any tax concerns, you should always speak with a tax attorney if you any questions.

Wsj.com, "Ohio High Court Strikes Down Cleveland’s 'Jock Tax'," Jacob Gershman, April 20, 2015

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