Jock Taxes Generate Dollars, but make no “Cents”

“Greed, for lack of a better word, is good” - at least according to a number of Gordon Gekkos in government (Stone, 1987, 1:18:02). Because of this greed, professional athletes - highly paid individuals who earn income in accordance with public schedules - have been unfairly targeted and subjected to intentional and discriminatory tax schemes, colloquially referred to as “jock taxes” for the past three decades. These taxes lack a substantial nexus to the income they are applied to, are not fairly apportioned, and they discriminate against interstate commerce. Consequently, if challenged, these jock taxes would be rendered unconstitutional, as they likely violate both the Equal Protection and Commerce Clauses of the United States Constitution, and should be repealed in favour of an alternative taxation scheme.    

Nothing is Certain Except Death and Taxes

To many, taxes are a necessary evil. Governments provide social services that benefit society, as a whole, and, in return, individuals are expected to share the burden of subsidizing the resultant bill. Taxes are the mechanism by which different levels of government recoup these costs, and they can be implemented in a variety of different ways. Most commonly, taxes are applied on income, property, and sales from within the jurisdiction, but the rate to which tax is imposed, if at all, is at the discretion of elected officials.

During the 1990s, however, state and local governments were forced to get creative. The status quo wasn’t sufficient to fund their social programs. At this time, governments were struggling to lead their constituents out of a recession, grappling with significant cuts in federal funding, and facing mounting budgetary deficits (DiMascio, 2007). In search of a new, lucrative revenue stream, governments came upon a convenient solution – queue the sports industry.  

Michael Jordan’s Revenge and the Birth of the Jock Tax

In 1991, Michael Jordan won his first ever NBA championship, against the LA Lakers (Fontein, 2018). Undeterred, California adhered to the old adage, “if you can’t beat ‘em, tax ‘em” and became the first government to impose their state tax on non-resident players of visiting teams (Fontein, 2018). This initiated a chain reaction, as Illinois responded in kind by enacting legislation colloquially termed “Michael Jordan’s Revenge”, which was a reciprocal tax applicable only to non-resident athletes from jurisdictions, like California, that applied a jock tax (Fontein, 2018, p.330). Other states followed suit and, currently, only five states with professional sports teams do not apply a tax on non-resident athletes, and that is because they do not impose a state tax at all (Fontein, 2018).

On its face, the allure of the jock tax was understandable. Originally, athletes did not make substantial incomes, but this all changed during the 1980s. During this period, the wages of professional athletes escalated dramatically (DiMascio, 2007). Accordingly, these individuals became easy targets – athletes were celebrities who earned significant salaries, adhered to public schedules, and, as a bonus, were non-residents, so they were unable to voice their displeasure at the voting booth (DiMascio, 2007). Since California’s fateful decision in 1991, the sports industry, on the back of revenues generated by media broadcast deals, sports gambling, daily fantasy sports, and merchandise sales, has developed into a lucrative business enterprise. As of 2022, PricewaterhouseCoopers valued the North American sports market at $83.1 billion (Holden & Kisska-Schulze, 2022). As player salaries increased, so too did the coinciding tax bill. Enthralled with the prospect of bolstering their budgets, governments got creative with the implementation of jock taxes.  

Jock Taxes Come in Many Shapes and Sizes  

There are numerous Machiavellian ways in which governments have masterminded to pry money out of the hands of non-resident athletes over the years. The most effective way to differentiate these schemes is to analyze each on two factors: (1) its jurisdiction and (2) the method used to apportion income for taxation.

When considering jurisdiction, it is important to consider at what level of government the taxation is occurring. An athlete may be taxed by the state, the municipality, or both when playing an “away” game (Fontein, 2018).

Additionally, these governments may use different approaches to determine how much of the athlete’s income was earned, and therefore subject to taxation, within their jurisdiction. The two most prominent methods used are referred to as the “duty days” and “games-played” method (Overbay, 2016).

Using the games-played method, the percentage of the player’s income earned within the jurisdiction is calculated by taking the number of games played by the individual in the jurisdiction and dividing it by the total number of games played by that person that season, including exhibition games (DiMascio, 2007). Conversely, the duty days method requires an individual to take the number of days in which a player provided services within that jurisdiction and dividing it by the total number of days in which they provided services, from pre-season to the end of the regular season (DiMascio, 2007). Lastly, instead of imposing a tax in the form of a percentage of an athlete’s earned income, some jurisdictions simply impose a flat fee (Pogroszewski & Smoker, 2013).

Each of these factors can fundamentally alter a player’s resultant tax bill.

Academic Arguments against Jock Taxes

Fortunately, for many states, jock taxes have yet to be scrutinized under the bright lights of the highest courts (Fontein, 2018). One has to believe, however, that it’s only a matter of time before a version of the jock tax finds itself on the docket. Critics have focused on two main challenges, under the Equal Protection and Commerce Clauses of the Constitution of the United States, which they maintain render jock taxes unconstitutional (Fontein, 2018).

The Equal Protection Clause

The Fourteenth Amendment of the U.S. Constitution introduces the Equal Protection Clause, and it reads, “No State shall… deny to any person within its jurisdiction the equal protection of the laws” (U.S. Const. amend. XIV). Put into context, this amendment requires a tax to be applied to all visitors of the state in question, regardless of their profession (Fontein, 2018). Traditionally, however, the jock tax scheme has only been imposed on professional athletes and entertainers, and this selective targeting runs afoul of America’s tax jurisprudence (Fontein, 2018). To determine if a jock tax is a violation of the Equal Protection Clause, a court must apply the rational basis test, which requires the court to determine whether discrimination is related to a legitimate state interest. (Fontein, 2018).

The Rational Basis Test

Fortunately, the Supreme Court has weighed in on the application of the rational basis test and provided some guidance. In Allegheny Pittsburgh Coal Company v. County Commission of Webster County, West Virginia (1989), the nation’s highest court considered a tax assessment scheme related to the purchase of property and found that it was not rationally related to its purpose. The facts of the case demonstrate that a coal company, upon purchasing property, was subjected to a tax approximately 8 to 35 times greater than that applied to neighbouring properties (Allegheny Pittsburgh Coal Company, 1989).  The bench concluded that this constituted “intentional and systematic discrimination” and ruled the scheme to be unconstitutional (Allegheny Pittsburgh Coal Company, 1989, p.698).

Similarly, in Hooper v. Bernalillo County Assessor (1985), the Supreme Court considered a state property tax policy from New Mexico that exempted Vietnam veterans who settled into the jurisdiction prior to 1976, but not those who arrived after. The state of New Mexico asserted two legitimate interests in respect of the policy: (1) to convince Vietnam veterans to settle in the state; and (2) to honor their service (Hooper, 1985). Despite these interests, the Court rendered the policy unconstitutional because it concluded that the policy’s effect dichotomized a class of similarly situated citizens and that this was not rationally related to New Mexico’s stated interests (Hooper, 1985).

Application of the Rational Basis Test to the Jock Tax

It is not difficult to draw parallels between the aforementioned coal company, Vietnam veterans, and our present-day professional athletes. Like these predecessors, athletes have been isolated by a policy that disproportionately impacts them in a negative way. Professional athletes are not unicorns – many other members of highly-paid professions earn income in multiple jurisdictions, yet only “jocks” (and some entertainers) are subject to these unique tax policies. Although states may argue that they have a legitimate state interest in generating revenue through the application of these policies, it is at the expense of intentional and systemic discrimination which adversely affects athletes in comparison to other professionals within a similar class.

Such a challenge was posed in National Hockey League Players’ Association et al. v. City of Pittsburgh (2022), wherein players’ associations from three of the major league sports organizations filed a complaint against the City of Pittsburgh for the implementation of its “Non-resident Sports Facility Usage Fee” (NHLPA, 2022). For non-resident athletes, this “fee” amounted to a tax equal to 3% of income earned within the city, while the fee was significantly less, only 1%, for resident athletes (NHLPA, 2022). The Allegheny County Common Pleas Court determined that residency cannot be a factor used to discriminate when applied to taxation policies regarding individuals of the same occupation (NHLPA, 2022). As a result, it determined that the fee was unconstitutional under Pennsylvania’s Uniformity Provisions, the state equivalent of the Equal Protections Clause.

Violation of the Equal Protection Clause

Governments would certainly attempt to assert revenue generation as a legitimate state interest. These grounds alone, however, are unlikely to survive scrutiny under the rational basis test. It is clear that professional athletes are being targeted by the implementation of jock taxes, while other highly paid professionals, who belong to a similar class and earn income in multiple jurisdictions, are not. The aforementioned precedents in caselaw demonstrate that tax policies based on intentional and systemic discrimination will constitute a violation of the Equal Protections Clause. Accordingly, a jock tax would likely be rendered unconstitutional, if challenged on these grounds.    

The Commerce Clause

Article 1, Section 8, Clause 3 of the U.S. Constitution gives Congress the power “to regulate commerce with foreign nations, and among several states…” (U.S. Const. art. I, § 8, cl. 3). In order to satisfy the Commerce Clause, a state tax must “(1) [be] applied to an activity with a substantial nexus with the taxing state, (2) [be] fairly apportioned, (3) not discriminate against interstate commerce, and (4) [be] fairly related to the services provided by the State” (Complete Auto Transit, 1977, p.279).  

Taxes Must have a Substantial Nexus

The first prong, requiring a “substantial nexus”, usually refers to either a (1) nexus to the taxpayer or (2) a nexus with the taxed income (Pogroszewski & Smoker, 2013). Normally, this type of relationship would necessitate a taxpayer’s physical presence in the jurisdiction, but some cases have suggested that a taxpayer’s economic presence may be sufficient to meet this threshold (Pogroszewski & Smoker, 2013). In Saturday v. Cleveland Board of Review (2015), a former NFL player was forced to pay a Cleveland municipal income tax when his Indianapolis Colts travelled to the city in order to play the Browns (Saturday, 2015). The catch, however, is that Saturday never played in the game, nor did he even travel to Cleveland – he remained in Indianapolis to rehabilitate an injury (Saturday, 2015). The Ohio Supreme Court recognized that players are not paid simply to play games, but rather to provide a number of services which also include attending meetings, practices, and medical appointments as part of their responsibilities to their teams throughout the season (Saturday, 2015). Due to the fact that Saturday was performing services for the Colts by participating in a rehabilitation program in Indianapolis, the Court concluded that Saturday performed no work in Cleveland and, therefore, there was no nexus between Saturday and the taxing government (Saturday, 2015). As a result, the Court ordered the municipality to surrender a full refund of any taxes paid by Saturday.   

Taxes must be Fairly Apportioned and not Discriminate Against Interstate Commerce

The fair apportionment requirement is designed to ensure that a state does not tax beyond its “fair share” of interstate activity (Pogroszewski & Smoker, 2013). If a tax is not fairly apportioned, and the state has taxed activities over which the state has no jurisdiction, then the tax would be considered extraterritorial. If this were to occur, the tax regulation would automatically discriminate against interstate commerce. Consequently, for the purposes of this analysis, these two factors will be combined.

In Hillenmeyer v. Cleveland Board of Review (2015), another former NFL player challenged the same Cleveland municipal income tax that Saturday had, alleging that the tax, which was calculated on a “games-played” methodology, constituted a due process violation (Hillenmeyer, 2015). As in Saturday, the Ohio Supreme Court once again recognized the fact that Hillenmeyer did not just provide services during games – instead, it found that he provided services from the beginning of the pre-season until the end of the regular season (Hillenmeyer, 2015). On average, it was determined that Hillenmeyer worked approximately 160 days per season. Using the games-played method, 5% (1 game in Cleveland/20 games total) of his salary would have been earned in Cleveland. This is in stark contrast to the 1.25% (2 days in Cleveland/160 days total) of his salary that would have been earned in the city, as determined by the duty days method. Accordingly, the Court held that the use of the games-played method disproportionately apportioned income to the city and resulted in Hillenmeyer being taxed on income he had not earned within its jurisdiction (Hillenmeyer, 2015). Consequently, the Court held that the games-played method of apportioning income rendered the tax scheme extraterritorial and, therefore, unconstitutional.  

The Supreme Court, in Comptroller of the Treasury of Maryland v. Wynne (2015), provided a test to guide analysis of the third factor, related to interstate commerce (Comptroller of the Treasury, 2015). As part of the “internal consistency test”, one must apply the state tax regulation from the jurisdiction in question to all other states in order to determine if it would disadvantage interstate commerce in relation to intrastate commerce. In this case, the Court found that a Maryland income tax regulation failed the internal consistency test, and was therefore unconstitutional, because it resulted in the double taxation of its residents and Maryland did not provide a subsequent credit to individuals for taxes paid to these other states (Comptroller of the Treasury, 2015).

The Tennessee Professional Privilege Tax (TPPT) was a flat $2,500 fee per game, up to an annual max of $7,500, imposed on NHL and NBA players for the privilege of playing in Tennessee (Pogroszewski & Smoker, 2013). This fee was imposed on top of federal and state taxation. An unintended result of this policy was that some lower-paid players, such as fringe NHLer Jon DiSalvatore, actually owed more money in tax than he earned after playing a game in Tennessee during the 2011-2012 season, resulting in a $156.21 loss (Pogroszewski & Smoker, 2013). If this TPPT scheme was applied to all other states, it would result in heavier taxation on interstate commerce than if the commerce was purely intrastate, and Jon DiSalvatore, among many other professional athletes, would not have earned a positive net income. Clearly, this would be an example of a tax regulation that failed the internal consistency test and would therefore violate the Commerce Clause. Understandably, with the looming threat of challenges from multiple league unions, the TPPT was repealed in 2014 and the Tennessee state government ended up refunding more than $8 million of the $18 million it had originally generated (Holden & Kisska-Schulze, 2022).

Taxes Must be Fairly Related to the Services Provided by the State

Lastly, many academics posit that jock taxes are not actually enforced to recover expenses related to the services or benefits provided to non-resident athletes. Instead, they argue that they are a veil under which governments continue to target tax revenue from “low hanging fruit” – i.e., high-salaried figures who have publicized schedules (Fontein, 2018). Many of these schemes ignore the fact that a visit from a popular sports team can actually create an enormous amount of revenue for the state, whether it be for restaurants, hotels, bars, retail providers, or other local businesses (Fontein, 2018). In the event that the state does provide some services for professional sporting events – i.e., in the form of police support to ensure public safety or crowd control - these services aren’t directly linked to the athletes themselves. These services would be provided by the state for any large event, regardless of whether a sport was played or not, and they’re provided for the benefit of society, as a whole (Fontein, 2018). Non-resident athletes, by their very definition, do not reside in the taxing jurisdiction, therefore they have little control over how tax revenues will be used, and any benefit they do receive from the state is likely to be minimal, relative to the amount of taxes they pay (Fontein, 2018).

Violation of the Commerce Clause

In order for a state tax to satisfy the Commerce Clause, it is required to meet all four prongs of the Complete Auto Transit test (Complete Auto Transit, 1977). As evidenced above, there are significant concerns regarding at least three of the four prongs.

Consequently, it is highly likely that a jock tax scheme challenged under the Commerce Clause would be rendered unconstitutional.

The Unexpected Consequences of Jock Taxes

Impact on Government

Governments will point to their balance sheets to justify the existence of jock taxes, but in all reality, it’s entirely plausible that the ink is actually red, relative to alternatives. Considerable resources are invested in tracking athlete salaries, their schedules, and in counteracting tax evasion by non-resident athletes (Fontein, 2018). In addition to these onerous tasks, governments must also ensure that appropriate tax credits are applied to their own resident athletes who have, themselves, been subjected to jock taxes.

What are tax credits? Good question.

Consider an athlete that lives in New Jersey, plays for a New York professional sports team, and participates in games in multiple states that impose a jock tax (DiMascio, 2007). This individual’s entire salary would be subject to taxation by New Jersey, due to the athlete’s residency, and portions of the same income would be subject to subsequent taxation by New York and any other jurisdiction that he plays in (DiMascio, 2007). In order to avoid double-taxation, the taxation of the same source of income multiple times, states, that impose an income tax, will grant their resident athletes a tax credit to reimburse them for taxes paid to another jurisdiction (DiMascio, 2007).

Generally, the funds paid out as tax credits to resident athletes offset the revenue gained by taxing other non-resident athletes (DiMascio, 2007). As a consequence, taxing an athlete’s entire income based exclusively on residency may produce the same revenue as a jock tax scheme, with the important caveat that this alternative would not require the state to incur all the associated administrative costs (DiMascio, 2007).

Therefore, a simpler, residence-based tax scheme may actually generate more net revenue than its jock tax counterpart.

The Impact on Subjects

Further complicating factors are the literal, and figurative, costs of compliance. Non-resident athletes are required to file separate tax returns in each jurisdiction they play in that imposes a jock tax (DiMascio, 2007). Filing these tax returns is often a complex and tedious task that requires the individual to hire a professional to perform, thereby incurring additional expenses (DiMascio, 2007). Although there may be little sympathy within society for athletes who get paid ridiculous sums of money to play a game, the impact is not limited to these privileged players. (DiMascio, 2007) Jock taxes apply to team affiliates that travel with the team, affecting many lower-paid individuals, such as coaches, scouts, trainers, and equipment personnel (DiMascio, 2007). Compliance with jock tax schemes imposes a disproportionately heavier burden on these, decidedly less privileged, individuals (DiMascio, 2007).  

The Path to Rendering Jock Taxes Unconstitutional

A jock tax has never been challenged in front of the Supreme Court (Fontein, 2018). The Ohio Supreme Court had an opportunity to consider the constitutionality of a jock tax in Saturday and Hillenmeyer, but shied away from answering that question in favor of focusing on smaller aspects of the tax’s application (Fontein, 2018). Due to the wide application of these schemes, and the fact that thousands of individuals have historically been affected by jock taxes, there is the potential for affected parties to band together to form a class-action suit (Fontein, 2018). It is important, however, that any such challenge originate within a state that imposes a standard and traditional form of jock tax, unlike the TPPT, so that any decision would have a wide ranged impact (Fontein, 2018). Unfortunately, attaching their name to such a cause of action would likely tarnish the reputation of any athlete within the eyes of the public, so it remains to be seen whether there is an appetite to take such a risk (Fontein, 2018).

Only time will tell.

Conclusion

Even Gordon Gekko said, “you either do it right, or you get eliminated” (Stone, 1987, 1:17:33). It seems, in this circumstance, governments have got it wrong. Jock taxes arbitrarily target professional athletes and are often implemented without a substantial nexus to either the taxpayer or their respective income. These schemes are often unfairly apportioned and result in double-taxation, discriminating against interstate commerce. Due to all of these factors, jock taxes likely violate both the Equal Protection and Commerce Clauses. If challenged, they would be rendered unconstitutional and should, therefore, be eliminated in favour of simple, residency-based taxation schemes.    

References

Allegheny Pittsburgh Coal Company v. County Commission of Webster County, 488 U.S. 336 (1989).

Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977).

Comptroller of the Treasury of Maryland v. Wynne, 575 U.S. 542 (2015).

DiMascio, J. (2007). The “Jock Tax”: Fair Play or Unsportsmanlike Conduct. University of Pittsburgh Law Review, 68, 953-973.

Fontein, A. (2018). The Home Team Advantage: Why Lawmakers and the Judiciary Should Bench the Jock Tax. Arizona State Sports and Entertainment Law Journal, 7, 327-355.

Hillenmeyer v. Cleveland Board of Review, 144 Ohio St. 3d 165 (2015). 

Holden, J.T. & Kisska-Schulze, K. (2022). Taxing Sports. American University Law Review, 71, 845-910.

Hooper v. Bernalillo County Assessor, 472 U.S. 612 (1985).

National Hockey League Players’ Association v. City of Pittsburgh, No.:GD-19-015542 (Pa. Ct. Com. Pl., 2022).

Overbay, N. (2016). A Uniform Application of the Jock Tax: The Need for Congressional Action. Marquette Sports Law Review, 27, 217-238.

Pogroszewski, A. & Smoker, K.A. (2013). Is Tennessee’s Version of the “Jock Tax” Unconstitutional? Marquette Sports Law Review, 23, 415-433.

Saturday v. Cleveland Board of Review, 142 Ohio St. 3d 528 (2015).

Stone, O. (Director). (1987). Wall Street [Film]. American Entertainment Partners; Amercent Films.

U.S. Const. amend. XIV.

U.S. Const. art. I, § 8, cl. 3.