Multistate Tax Update - April 30, 2015


City of Cleveland Strikes Out on Jock Tax

The Supreme Court of Ohio (the Court) today handed down its ruling in Hunter T. Hillenmeyer v. City of Cleveland Board of Review and declared the City of Cleveland’s method of taxing nonresident professional athletes to be unconstitutional. As we previously reported, the City of Cleveland imposed a so-called “jock tax” on professional athletes based upon the number of games the visiting team plays in the city divided by the total number of games in a season. In a unanimous decision, the Court held that the use of the games-played method violates due process and, therefore, is unconstitutional. The decision of the Board of Tax Appeals was reversed and the matter was remanded with instruction that tax refunds be awarded to Hillenmeyer.

The Court reasoned, “[d]ue process requires an allocation that reasonably associates the amount of compensation taxed with work the taxpayer performed within the city. The games-played method results in Cleveland allocating approximately five percent of Hillenmeyer’s income to itself on the basis of two days spent in Cleveland. By using the duty-days method, however, Cleveland is allocated approximately 1.25 percent based on the same two days. By using the games-played method, Cleveland has reached extraterritorially, beyond its power to tax. Cleveland’s power to tax reaches only that portion of a nonresident’s compensation that was earned by work performed in Cleveland. The games-played method reaches income for work that was performed outside of Cleveland, and thus Cleveland’s income tax violates due process as applied to NFL players such as Hillenmeyer.”

Instead of employing a games-played method for calculating the amount of taxes owed to the city, the Court ordered that the tax be recomputed using the duty-days method. Of the eight cities in the United States that impose this form of tax, all the cities, except for Cleveland, utilize the duty-days methodology. Under the duty-days formula, the tax is imposed based on the number of days the team spends in the city divided by the number of days which the athletes perform services for their team during the year.

Mr. Hillenmeyer is owed a refund from the City of Cleveland plus interest for the additional amount of tax collected under the games-played method as compared to the amount which would be owed under the duty-days method. While the Court declared the games-played method unconstitutional, they stopped short of invalidating the imposition of the tax altogether. During oral arguments, Hillenmeyer’s attorney argued that imposing the tax in the first instance violated the equal protection clause because other nonresidents who work 12 days or less in a city are not taxed by the municipality. However, the Court found that exclusion of professional athletes from the occasional-entrant rule does not violate equal protection.

Thus, Mr. Hillenmeyer is entitled to collect his refund for the excess taxes the City of Cleveland collected from him, and the City of Cleveland will conform its method of taxing professional athletes to the same method employed by seven other similarly situated municipalities. The City of Cleveland estimates that the ruling will cost the city approximately $1 million per year in lost tax revenue.

Survey reveals that states’ tax policies on certain technologies are inconsistent

On April 25, 2015, Bloomberg BNA released its 14th annual Survey of State Departments (Survey), aimed at “clarifying each state’s position on the gray areas of corporate income tax and sales and use tax administration, with an emphasis on nexus policies.” For state tax purposes, the concept of nexus concerns the minimum threshold of contact between a taxpayer and a state before the state has jurisdiction to tax the taxpayer.

The Survey notes that “[s]tate tax policies continue to lag behind new business models such as cloud computing, as well as a change that began long ago: [T]he nation’s shift toward a service-based economy.”

A given state’s nexus policy can be based on either a physical or economic presence. If the policy is based on a physical presence, nexus often results from the physical presence of employees or property, including inventory, within a state’s borders. If the policy is based on an economic presence, “nexus can be triggered merely by making sales into the state; owning property or maintaining a payroll is not required.”

The concept of nexus is becoming increasingly significant to taxpayers as the Internet renders geographical boundaries irrelevant. The Survey observes that nexus policies are inconsistent and unpredictable among states, which increases uncertainty. The Survey notes, “[t]he lack of uniform tax policies among states means that some transactions may be taxed by more than one jurisdiction, while other transactions may entirely escape state taxation.”

The Survey also focused on clarifying each state’s position on whether nexus is created under various scenarios. Here are some examples:

  1. An out-of-state corporation that repairs tangible personal property located outside its borders and then delivers it by common carrier to an in-state customer: Most states agree that this would not establish a nexus.
  2. An out-of-state corporation that charges fees to in-state customers for the right to access non-downloadable prewritten software that is hosted on a server in another state: All but three states said there would not be a sales tax nexus under this circumstance.
  3. Multistate sales of services or intangibles in the jurisdiction in which the greatest proportion of the income-producing activity occurred: A growing minority of states now look to where the benefit is received to determine if it is a taxable transaction.

The Survey also reveals that even if a state has laws on the books, it is difficult to ascertain how and to what extent a state interprets and enforces its laws. In addition, the jurisprudence on nexus standards, both at the federal and state levels, often do not provide definitive guidance on which standards apply. As a result, there is increasing pressure on the federal government to establish uniformity.

The Marketplace Fairness Act of 2015 is one piece of pending legislation that could clarify taxation rules for certain online sales activity. According to, the legislation “grants states the authority to compel online and catalog retailers (remote sellers), no matter where they are located, to collect sales tax at the time of a transaction—exactly like local retailers are already required to do. However, there is a caveat: States are only granted this authority after they have simplified their sales tax laws.”

In addition, 24 states have voluntarily simplified their state tax laws in accordance with the Streamlined Sales and Use Tax Agreement (SSUTA). notes that any state that is in compliance with the SSUTA, and has achieved full member status as a SSUTA implementing state will have collection authority on the first day of the calendar quarter that is at least 180 days following enactment of the legislation.

Besides these federal efforts, 15 states have signed on to some or all of the provisions of the Multistate Tax Compact:

  • Alabama
  • Alaska
  • Arkansas
  • Colorado
  • Washington, D.C.
  • Hawaii
  • Idaho
  • Kansas
  • Michigan
  • Missouri
  • New Mexico
  • North Dakota
  • Oregon
  • Texas
  • Utah

Montana and Washington are also parties to the Multistate Tax Compact, but Montana did not respond to this portion of the Survey and Washington does not impose a corporate income tax.

The Multistate Tax Compact has four purposes:

  • Facilitate proper determination of state and local tax liability of multistate taxpayers, including the equitable apportionment of tax bases and settlement of apportionment disputes;
  • Promote uniformity or compatibility in significant components of tax systems;
  • Facilitate taxpayer convenience and compliance in the filing of tax returns and in other phases of tax administration; and
  • Avoid duplicative taxation.

For now, Bloomberg BNA laments the fact that “[d]espite the shift towards a service-based economy decades ago, states are still unable to reach a consensus on sourcing rules aimed at determining how they will apply their income tax to transactions involving services or intangibles that take place in more than one jurisdiction.” Bloomberg BNA is offering a webinar on May 1 to further explain the results of its survey.

Ohio: Governor’s efforts to eliminate income tax are not going well

Different versions of the budget

In several recent Plain Dealer articles, the paper has reported that many Ohio lawmakers are opposed to Gov. Kasich’s endeavor to eliminate personal income tax while offsetting the revenue loss by increasing other taxes.

One article explained that there are now three different budget plans: Gov. Kasich’s, the House’s, and the Senate’s. The governor’s original $138.7 billion budget sought a 23 percent income tax cut, which would be partially offset by increasing sales tax and commercial activity, tobacco, and fracking taxes, among other things.

HB 64, the 3,215-page bill passed by the Ohio House last week, offered its own $131.6 billion budget. It “gutted” much of Gov. Kasich’s proposal and drastically increased spending on other initiatives, like education. Though it now proceeds to the Senate, lawmakers there insist on starting from scratch. Sen. Scott Oelslager remarked, “Perhaps some of the House proposal, as well as the governor's proposal, will end up in our budget.”

The day after HB 64 was released, The Plain Dealer reported that Gov. Kasich was not very happy; his administration characterized the bill as a “missed opportunity” for tax reform, and a threat to Ohio’s economic recovery. It only reduces income tax by 6.3 percent (compared to 23 percent in the governor’s budget). “That would reduce Ohio's income tax rate from 5.33 percent to 4.99 percent on residents making more than $200,000 per year…” according to the paper.

In addition, it proposes spending $280 million more than Gov. Kasich did for primary and secondary education, and does not seek to raise sales taxes or commercial activity, tobacco, or fracking taxes to offset other decreases, as proposed in the governor’s plan.

Besides education spending, the other big “chunk” in HB 64 is Medicaid spending. The bill raises Ohio’s hospital franchise fee, resulting in more Medicaid matching funds from the federal government. Also, it continues the acceptance of federal funding for Medicaid expansion for another two years, after which the federal support will begin to wane.

Some say the House budget is “good news”

On the other hand, in a recent Tax Foundation essay, economist Scott Drenkard opines that HB 64 was a marked improvement on Gov. Kasich’s budget plan because the governor’s plan was “deeply in conflict with itself.”

Drenkard asserts that the internal conflict stems from the offsets the governor chose to utilize to balance the income tax reduction. Acknowledging that when done correctly, such “tax swaps…can reduce highly harmful taxes while offsetting revenue losses by leaning on less distortive taxes,” Gov. Kasich’s proposal “lean[s] on economically distortive, nontransparent taxes to make the ledger balance,” like the commercial activity tax (CAT). Drenkard has characterized a CAT as the most economically damaging and non-transparent offset. This is so, in part, because it has a pyramiding effect that ratchets up the final cost of goods for the consumer by taxing every step a product takes before reaching the end user.

HB 64 fixes this by keeping the CAT at its current rate. Other problems HB 64 avoids are “prohibition style levels” of cigarette taxes and the proposed 100 percent exemption of all pass-through business income. Drenkard warns that this would simply facilitate “opportunities for tax avoidance, as wage earners could reclassify themselves as small businesses to get big tax savings.”

The budget deadline approaches

Lawmakers have until June 30, 2015, to pass a unified budget, which Gov. Kasich can veto in whole or part. Despite the tight deadline, Senate GOP spokesman John Fortney does not think there will be a “massive fight.”

Maine governor asks lawmakers a billion dollar question

A semantically bold press release posted by the Office of Gov. LePage asks “The Billion Dollar Question: Will You Support Eliminating the State Income Tax?" The press release refers to a letter the governor recently sent to state lawmakers proposing a constitutional amendment to eliminate the income tax. He asserted that the “path to prosperity for Maine is a future with no state income tax,” which he gleaned from his conversations with constituents in town hall meetings over the last few months.

In January, the governor released his $6.5 billion fiscal year 2016-17 budget proposal, which seeks to gradually reduce the income tax burden by 2019 despite the budget’s inclusion of a recommendation by the Revenue Forecasting Committee to increase income tax revenue through 2017. In fiscal years 2016 and 2017, the budget calls for a reduction of income tax revenue by $176 billion and $546 billion respectively.

At the time of the budget’s release, the Bangor Daily News summarized additional key components, like reduced corporate income tax rates, a broader, higher sales tax, and elimination of the home mortgage deduction, among other things.

Gov. LePage also wants to accomplish the following through the budget proposal:

  • Eliminate certain state jobs, most of which are currently vacant, which would increase the attrition rate from 0.6 percent to three percent in the next two years, and save approximately $10.8 million;
  • Help school districts consolidate their administrations by providing $5 million statewide in both fiscal year 2016 and 2017;
  • Reduce state funding for teacher retirement costs by about $35 million in fiscal year 2016 and $31 million in fiscal year 2017;
  • Spend about $1.1 million to create a new system to collect liquor excise taxes; and
  • Help people suffering from mental illness with $13 million in new money for the Bridging Rental Assistance Program, $11.6 million for funding programs required by the state’s mental health consent decree, and more than $30 million over the biennium to eliminate waitlists for Section 21 Tier II and III home- and community-based services, plus additional new funding to reduce service waitlists for adults with autism and brain injuries.

Reuters reported Gov. LePage’s idea to amend the Constitution would require authorization by two-thirds of the legislature, and if approved, would make Maine the 10th state to partly, or entirely, eliminate income tax. Most democratic lawmakers oppose complete elimination of the income tax, though they do support lower income and property taxes. House Speaker Mark Eves declared that "Maine's economy is at a crossroads. Our tax system is broken. It's rigged for those at the very top. The governor's proposal will make it worse."

For additional information regarding these subjects, or any other multistate tax issues, please contact:

David M. Kall

David H. Godenswager, II

Susan Millradt McGlone

Multistate Tax Services

Businesses must be vigilant and careful in managing their state and local tax liabilities and exposures. We understand this can be a daunting task. McDonald Hopkins Multistate Tax Services provides a broad range of state and local tax services including tax controversy, tax evaluation, tax planning, and tax policy. With professionals who have worked both inside and outside government agencies, our multistate tax team leverages its knowledge and experience to help clients control their complex multistate taxes.

Jump to Page

McDonald Hopkins uses cookies on our website to enhance user experience and analyze website traffic. Third parties may also use cookies in connection with our website for social media, advertising and analytics and other purposes. By continuing to browse our website, you agree to our use of cookies as detailed in our updated Privacy Policy and our Terms of Use.