No Taxation Without Representation: NFL, MLB, and NHL Players Sue to Enjoin Pittsburgh’s Facility “Fee”

No Taxation Without Representation: NFL, MLB, and NHL Players Sue to Enjoin Pittsburgh’s Facility “Fee”

Should the government be able to tax those who are denied representation?  Anyone with a rudimentary understanding of American history should be familiar with the slogan, “no taxation without representation.”^[1] So how does a slogan that has been heralded since the British Parliament began taxing American colonists back in the 1760s relate in any way, shape, or form to two professional hockey players and a former baseball player?^[2]

The former professional athletes, alongside the players’ associations of the National Hockey League (“NHL”), National Football League (“NFL”) and Major League Baseball (“MLB”), empowered by this basic idea that lies at the heart of democracy, have sued Pittsburgh over a tax levied on them based on their status as nonresident professional athletes.^[3] The plaintiffs filed a 525-page lawsuit on November 5, 2019 in the Allegheny County Court of Common Pleas.^[4]

Among the players suing are former Pittsburgh Penguin Scott Wilson, now in the Buffalo Sabres’ minor league system; Kyle Palmieri of the New Jersey Devils; and lead plaintiff former baseball player Jeff “Frenchy” Francoeur.^[5] So can the slogan, “no taxation without representation,” in fact empower the Plaintiffs to enjoin Pittsburgh’s tax on nonresident professional athletes?^[6] Quite possibly.

Pittsburgh’s “jock tax” is levied on professional athletes who work for short periods of time in the city.^[7] The plaintiffs’ primary contention is that the city of Pittsburgh unfairly levies a three percent earned income tax on visiting professional athletes while taxing all other nonresident earned income at one percent.^[8] According to Stephen W. Kidder––the attorney who represents the plaintiffs in this matter––the city is unfairly singling out professional athletes to the extent that it is unconstitutional under both the Pennsylvania Constitution and the United States Constitution.^[9]

To understand the plaintiffs’ argument, a brief detour explaining the origins of Pittsburgh’s “jock tax” is warranted.^[10] In 2004, the Pennsylvania legislature adopted a statute known as the “nonresident sports facility usage fee.”^[11] The statute authorizes Pennsylvania cities in which a sports stadium––that has received public funds in connection with its construction––is located “[to] enact a publicly funded facility usage fee upon those nonresident individuals who use such facility to engage in an athletic event or otherwise render a performance for which they receive remuneration.”^[12] Pls.’ Mem. Supp. Summ. J. at 5­–6 (quoting 53 Pa. Cons. Stat. § 6924.304).[/mfn]  The statute essentially empowers Pittsburgh and other Pennsylvania cities to enact a usage fee on nonresident professional athletes who perform at publicly funded venues––including PNC Park, Heinz Field and PPG Paints Arena.^[13]

Indeed, since 2005, Pittsburgh has charged nonresident professional athletes who play at these select venues a fee on salaries they earn in the city.^[14] The statute explicitly provides that the fee can be a flat dollar amount of a “percentage of the individual’s income attributable to such individual’s usage of the facility… not to exceed three percent.”^[15]  As such, the city effectively adopted a fee equal to three percent of taxable earned income allocable to the days worked in a sports arena or stadium.^[16] Strikingly, although these arenas were built, in part, with public funds, none of those funds were provided by the city.^[17]

The Pennsylvania Legislature also enacted another statute in 2004 that provides Pittsburgh “shall use two[-]thirds” of the [nonresident sports facility usage fee]…to ‘reduce the amount of tax on admissions to places of amusement that are involved with performing arts for which the net proceeds therefrom inure to the benefit of an institution of purely public charity.’”^[18] Thus, the city could enact the fee on visiting professional athletes while forgoing revenue generated by a previous amusement tax on events held in Pittsburgh by nonprofit performing arts organizations.^[19]

And as required by the Legislature, the city reduced its amusement tax on nonprofit performing arts organizations over a series of years, to zero.^[20] Pursuant to these statutes, nonresidents who earn income in Pittsburgh––but do not work in a sports facility––are subject only to a separate one percent earned income tax.^[21] What’s more, nonresidents who work in the city––but reside elsewhere in Pennsylvania and are not athletes––do not pay any earned income tax to the City.^[22] State law explicitly affords said nonresidents a tax credit for the amount they pay to their local municipalities (at least one percent) against the amount they would owe the City under its one percent earned income tax rate.^[23] Hence, the city rate of earned income is effectively zero.^[24] While nonresidents who are not professional athletes are immune from this “jock tax,” visiting professional athletes who live in Pennsylvania are stuck paying a one percent earned income tax to their local municipalities on top of the three percent they must also pay to Pittsburgh.^[25]

Shockingly, although Pittsburgh eschews the word “tax” in describing what Pennsylvania state law labels a “fee,” the city’s definition of “earned income” is nearly identical to Pennsylvania’s definition of taxable income.^[26] Specifically, the city defines “earned income” as “[s]alaries, wages, commissions, bonuses, incentive payments, fees, tips and all other forms of compensation, whether based on profits or otherwise, earned by a person or a personal representative for services rendered, whether directly or through an agent, and whether in cash or in property.”^[27]

To add insult to injury, the definition is similar to Pittsburgh’s own definition of earned income, applicable to others who earn income in Pittsburgh.^[28] Indeed, according to the plaintiffs, whether the nonresident facility usage “fee” is called a fee or a tax is “immaterial.”^[29] The substance of the tax determines its nature.^[30]

Because the “fee” functions as a revenue-generating tax––one the city adopted to replace revenue lost when it phased out the amusement tax––it “bears no characteristics of a ‘fee,’” according to the plaintiffs.^[31] Certainly, the “fee” is based on income, and like a tax, is calculated as a percentage of income and is withheld by the athlete’s employers and subsequently remitted to Pittsburgh in quarterly returns.^[32]

Perplexingly, Pittsburgh has admitted that revenue collected as a result of the fee is “general revenue included in the City’s General Fund.”^[33] Undeniably, according to Pittsburgh’s proposed operating budget for 2019, the city expects to generate $5.5 million in “jock tax” revenue.^[34]

Pittsburgh justifies the “fee” under the guise of the protection of the financial interests of the city’s taxpayers.^[35] The rationale––or arguably lack thereof––is that if the taxpayers foot part of the bill for the construction of a sports facility that nonresident athletes later use, said athletes “ought to chip in.”^[36] This justification found no basis in reality, according to the plaintiffs.^[37]

To the contrary, the plaintiffs contended that “[p]rofessional athletes are but one of innumerable classes of wage earners whose income is derived, in part, from spending on public works.” ^[38] Wittingly, they noted that Pittsburgh does not charge transportation workers a higher rate of income tax simply because their income is earned on roads built with public dollars.^[39]

Before diving into the plaintiffs’ argument, the methods for calculating the facility fee also warrant reflection. Calculating the fee for athletes varies by sport.^[40]  For NHL and MLB players, the “games played” method is utilized.^[41]. Income allocation is calculated as a fraction comprised of total games played within the city of Pittsburgh versus total games played––including exhibition, preseason, regular season and post-season games.^[42] The fraction is then multiplied against the player’s total compensation and that dollar amount is then taxed at three-percent.^[43]

The plaintiffs assert that the denominator is artificially low because it does not include work days spent by NHL and MLB players practicing and preparing for games.^[44] As such, the allocation of income to Pittsburgh is substantially higher than the income the players actually earn there.^[45]

For NFL players, however, the “duty days” method is utilized.^[46] Income allocation is calculated as a fraction comprised of total duty days within the city of Pittsburgh verses total duty days.^[47] Duty days include: preseason and regular season practice sessions; pre-season and regular season games; and post-season games and practice sessions that are officially sanctioned by the team’s league.^[48] The duty days fraction is then multiplied against the player’s total compensation.^[49].

Remarkably, Pittsburgh adopted the “duty days” basis for all professional athletes when it first adopted the facility fee ordinance in 2005, according to the plaintiffs.^[50] However, in 2016, the city changed course, adopting the “games played” method for MLB and NHL players.^[51] This remained unaffected despite Pennsylvania clarifying its Tax Guide by requiring apportionment of income using the “duty days” method for all professional athletes.^[52]

With all of this in mind, the plaintiffs contend that Pittsburgh has no constitutionally permissible basis––whether federal or state––to maintain the nonresident facility usage fee.^[53] As such, they are asking the Allegheny County Court of Common Pleas to find Pittsburgh’s ordinance unconstitutional.^[54] In addition, they are seeking an injunction barring its enforcement against Francoeur, Palmieri and Wilson, all of whom have pending individual tax cases against the city.^[55] Further, they are requesting injunctions for all nonresident professional athletes.^[56]

The key legal issue advanced in the lawsuit is whether Pittsburgh’s “disuniform” arrangement is illegal under both state and federal law.^[57]  Specifically, the plaintiffs allege that the facility fee is violative of the Uniformity Clause of the Pennsylvania Constitution, as well as the Privileges and Immunities, Due Process, and Dormant Commerce Clauses of the United States Constitution.^[58]

The Uniformity Clause Argument

The plaintiffs argue that by imposing the fee, Pittsburgh treats athletes differently from other Pittsburgh workers as well as Pittsburgh residents differently from nonresidents.^[59] Specifically, they contend that the city treats employment wage income differently, depending on the employee’s profession.^[60] This, Pittsburgh simply cannot do, according to the plaintiffs.^[61]

The Uniformity Clause of Pennsylvania’s Constitution provides that “[a]ll taxes shall be uniform, upon the same class of subjects.”^[62] Indeed, the Uniformity Clause is interpreted broadly and is construed to include all kinds of taxes. mfn]Id. at 17 (quoting Amidon v. Kane, 279 A.2d 53, 58 (Pa. 1971))[/mfn] Where a tax classification, method or formula “’in its operation or effect produce[s] arbitrary, unjust, or unreasonably discriminatory results, the uniformity requirement is violated.’”^[63]

In citing to relevant precedent in Pennsylvania, they explained that “’[r]esidence cannot be made the basis of discrimination in taxation of persons engaged in the same occupation or profession.’”^[64] They likened the facility fee to a “variable-rate” tax on income, which according precedent, does not comport with the Uniformity Clause.^[65] Indeed, a higher individual income tax imposed exclusively on people engaged in a chosen profession “is simply not permitted,” according to the Plaintiffs.^[66]

The Privilege and Immunities Clause Argument

The Privilege and Immunities clause provides “’Citizens of each State shall be entitled to all the Privileges and Immunities of Citizens in the several States.’”^[67] The Clause, according to the Plaintiffs, was intended to “’insure to a citizen of State A who ventures into State B, the same privileges which the citizens of State B enjoy.’”^[68]

The pursuit of common calling is one of the most fundamental privileges protected by the Clause, according to the plaintiffs.^[69] Thus, the plaintiffs argued that access to Pittsburgh’s stadiums and arenas, which are central to the profession of professional athletics, cannot be conditioned on a fee that is imposed exclusively on nonresident athletes–who reside overwhelmingly out-of-state–while exempting Pittsburgh’s residents.^[70]

For pursuing their common calling, Wilson, Palmieri, Francoeur, and similarly suited professional athletes were charged a three percent facility fee.^[71] Indeed, this was so while their colleagues who lived in Pittsburgh and were engaged in the same occupation, were charged nothing other than the City’s general income tax.^[72] Especially when one considers that “the continued viability of the city’s own sports franchise depends on games against those nonresident athletes,” the plaintiffs argued that the Privileges and Immunities Clause was violated.^[73]

The Dormant Commerce and Due Process Clause Arguments

The Dormant Commerce Clause is derived from Congress’ power to regulate interstate commerce.^[74] The plaintiffs contended that the clause was violated by Pittsburgh’s “games played” income allocation method for NHL and MLB players.^[75]  Indeed, the United States Supreme Court has struck down tax schemes distinguishing between residents and nonresidents as burdening interstate commerce.^[76]  According to the Plaintiffs, a “critical element of fair apportionment is whether the tax is ‘external consistent.’”^[77]

In citing to U.S. Supreme Court precedent, they asserted that a tax is not externally consistent if it “’reaches beyond that portion of value that is fairly attributable to economic activity within the taxing [jurisdiction].’”^[78] Hence, the plaintiffs argued that the “games played” method of allocating income to MLB  and NHL players does in fact reach beyond the City’s own borders to impose a tax on work performed elsewhere, thus is unconstitutional.^[79]

Further, Pennsylvania requires the city to apportion income attributable to the taxpayers usage in accordance with the guidance provided by the State’s Department of Revenue.^[80] The failure to comply with state law, asserted the Plaintiffs, gives rise to a constitutional violation under the Due Process Clause of the Fourteenth Amendment.^[81] Thus, they argued that Pittsburgh’s power to tax reaches only that portion of income that was earned by performing work in Pittsburgh––not work performed beyond its borders.^[82]

Although it unclear whether the court will side with the Plaintiffs, their argument is extremely compelling.  Indeed, this is not the first “jock taxes” case to surface in recent years.^[83]; see Hillenmeyer, 41 N.E.3d at 1164; Saturday v. Cleveland Bd. of Rev., 33 N.E.3d 46 (2015).[/mfn] In 2015, two retired NFL players, Hunter Hillenmeyer and Jeff Saturday, successfully challenged Cleveland’s jock tax scheme.^[84]

In the case of Hillenmeyer, for example, the court reasoned that “the city’s application of its games-played method of allocating income violates the due-process rights of NFL players.”^[85]  Specifically, the Hillenmeyer court explained that in guarding against extraterritorial taxation, “’[t]he Due Process Clause places two restrictions on a State’s power to tax income generated by the activities of an interstate business.’”^[86]

The first, the Hillenmeyer court explained, is to require “’some definite link, some minimum connection, between a state and the person, property or transaction it seeks to tax.’”^[87] The second restriction is that “’the income attributed to the State for tax purposes must be rationally related to ‘values connected with the taxing State.’’”^[88]

In reasoning that the income of a nonresident lies within the taxing jurisdiction by virtue of the activity being performed within that jurisdiction, the Hillenmeyer court explained that “local taxation of a nonresident’s compensation for services must be based on the location of the taxpayer when the services were performed.”^[89] Thus, according to the Hillenmeyer court, “due process requires an allocation that reasonably associates the amount of compensation taxed with work the taxpayer performed within the city.”^[90] As Cleveland’s games-played method “foreseeably imposes Cleveland income tax on compensation earned while Hillenmeyer was working outside Cleveland,” the Hillenmeyer court concluded that Cleveland’s income tax violates due process as applied to NFL players such as Hillenmeyer.^[91]

The Hillenmeyer court, however, held that the duty days method comports with due process.^[92] Indeed, for the Hillenmeyer court, the duty days method ensures that the tax collected is “not disproportionate to the income received for work in Cleveland” because it includes as taxable income only that compensation earned in the city by accounting for all the work for which an NFL player is paid, rather than merely the football games played each year.^[93]

Although Hillenmeyer was litigated through Ohio’s court system and thus, is not binding precedent on the Pittsburgh litigation, the court’s reasoning is nevertheless compelling and may very well persuade the Allegheny County Court of Common Pleas to side with the plaintiffs in this case.^[94]

For now, while it is uncertain whether a court will side with the plaintiffs on finding Pittsburgh’s facility “fee” unconstitutional, one thing remains clear.  There is “no taxation without representation.”^[95]