Pro Athletes! What You Need to Know About Pittsburgh's 3% Fee & How To Get Your Money Back
The City of Pittsburgh has been withholding 3% of athletes' income when playing in Pittsburgh. This has been ruled unconstitutional, which is a great win for athletes. However, the ruling does not guarantee you will be paid back the money that was taken from you.
You are required to file a tax refund, and the deadline is approaching.
Article Summary:
Background: This article talks about a court case involving pro athletes and Pittsburgh's 3% Facility Use Fee for using the City's sports venues.
Plaintiffs' Argument: Athletes said the fee was like an income tax and unfair under Pennsylvania's rules.
Court Rulings:
The local Court agreed with athletes and stopped the City from collecting the fee.
The higher Court also agreed with the first decision.
Key Findings:
The fee only applies to athletes who are not residents of Pittsburgh.
Athletes argued the fee was unfair and more like a tax than a regular fee.
Courts said the fee was indeed a tax and broke state rules.
Action Items for Professional Athletes:
Athletes should know about this case and what it means for them.
Athletes who are not residents of Pittsburgh and played games during the 2021, 2022, and 2023 seasons must apply for a refund by April 30, 2024.
What's At Stake?
For example, an MLB player earning $1m who played six games in Pittsburgh.
Step 1: Calculate Wages allocated to PA
Salary multiplied by games played in PA/total games (duty days)
$1,000,000 x 6/187 = $32,085.56 taxable wages
Step 2: Multiple Wages allocated by 3% Fee
$32,085.56 x 3% = $962.57 tax withheld
Do NOT assume your CPA has filed for your Refund.
It is reported that only 600 and 700 athletes have filed claims to receive refunds from Pittsburgh.
Athletes who are nonresidents of Pittsburgh and played games during the 2021, 2022, and/or 2023 seasons must apply for a refund by April, 30th 2024.
For assistance with gathering the requirements and filing the refund protection claim, or if you have any additional questions, don't hesitate to get in touch with our team HERE.
Overview of Pittsburgh Jock Tax:
The Pennsylvania Legislature adopted a statute in 2004 known as the “nonresident sports facility usage fee.” It authorizes Pennsylvania cities with publicly funded sports facilities to enact a usage fee on nonresident athletes. A fundamental justification for the fee is to protect the financial interests of a city’s taxpayers. If those taxpayers foot part of the bill for constructing a sports facility that out-of-town athletes later use, those athletes ought to chip in.
Pittsburgh promptly took advantage of this law by adopting a design for nonresident athletes to pay up. Per city ordinance, athletes pay a fee equal to 3% of their taxable “earned income” allocable to the days in which they play games in PPG Paints Arena, Heinz Field, or PNC Park. Also, earned income includes any salaries, wages, and bonuses.
Background on Lawsuit:
On November 5, 2019, former Pittsburgh Penguin Scott Wilson, New Jersey Devil Kyle Palmieri, and former MLB right fielder Jeff Francoeur teamed up with the players' associations of Major League Baseball, the National Hockey League, and the National Football League and filed a complaint in an Allegheny County (PA) Court, against the City of Pittsburgh, claiming the City has adopted a tax scheme that unlawfully disfavors professional athletes who don’t reside in the city limits.
The plaintiffs above argue that this provision violates the U.S. and state constitutions because the state constitution claims, “all taxes shall be uniform,” which prohibits the City from taxing nonresidents at a higher rate than residents. The 3% tax is three times higher than the tax the City imposes on all other types of nonresidents, be they out-of-town businesspersons, physicians, or visiting professors, who earn income in the City.
A single group of individuals (i.e., professional athletes) can also not be singled out for higher taxes. The U.S. Constitution does not allow preferential tax treatment, nor does it allow a city to establish conditions on work that are more burdensome for nonresidents.
COURT CASES
The player's unions have won at both the trial and appeals court levels, declaring that the tax is not constitutional. We expect the City of Pittsburgh to appeal the decision to the PA Supreme Court. It is still being determined if the Supreme Court will agree to hear the case, but we expect refund claims to be processed when the appeal is done or denied (or if the players' unions lose at the Supreme Court). If the City does not appeal, we expect movement on the refund claims in the near term, and we will keep you updated on the next steps if that is the case. A refund will likely only be issued to anyone who has filed a refund claim.
DETAIL FACTS
In Leimberg Income Tax Planning Newsletters #229 and #239 Jim Weller provides members with commentary that examines the appeal of National Hockey League Players Association, Major League Baseball Players Association, National Football League Players Association, Jeffery B. Francoeur, Kyle C. Palmieri, and Scott Wilson v. City of Pittsburgh.
Court of Common Plea of Alleghany County, Pennsylvania[i]
The City of Pittsburgh instituted a Nonresident Sports Facility Use Fee ("Facility Fee"). The Facility Fee applies to professional athletes who are not residents of Pittsburgh who use the City's sports venues: the Pittsburgh Steelers Heinz Field (renamed Acrisure Stadium), the Pittsburgh Penguins PPG Paints Arena, and the Pittsburgh Pirates PNC Park. The Facility Fee is assessed at 3% on personal income earned while in Pittsburgh. Professional athletes who reside in Pittsburgh are not subject to the Facility Fee, however they are subject to a 1% tax on income.
Depending on the sports league of the athlete, the portion of personal earned income is assessed differently. For instance, the income of an NFL player is calculated by dividing duty-days in Pittsburgh by duty-days for the year. The ratio is then multiplied by the total earned income to determine the amount of income subject to the Facility Fee. For players in the NHL and MLB, the income is calculated by dividing the number of games played in Pittsburgh by the total games played, including preseason and postseason games. The ratio is then multiplied by the total income earned.
The Players Associations' main argument was that the Facility Fee was in substance a tax. As such, the discrepancy between the 3% rate charged to nonresidents and the 0% rate charged to residents was discriminatory, and it violated the Uniformity Clause of the Pennsylvania Constitution along with the Privileges and Immunities and Dormant Commerce Clauses of the U.S. Constitution.
The Court of Common Pleas (the "Court') saw no need to address both alleged violations and focused on the Uniformity Clause of the Pennsylvania Constitution. In order for the Facility Fee to be struck down as a violation of the Uniformity Clause of the Pennsylvania Constitution, the Facility Fee would first have to be shown to be a tax in substance and not uniformly applied.
In determining whether the Facility Fee was a tax, the Court noted that it was the function of a tax measure not its name that constitutes its identity. The Court looked to National Biscuit Co. v. City of Philadelphia, 98 A.2d 182 (1953) in which the Pennsylvania Supreme Court differentiated fees from taxes. The Supreme Court stated that the distinguishing features of a license fee are: (1) that it is applicable only to a type of business or occupation which is subject to supervision and regulation by the licensing authority under its police power; (2) that such supervision and regulation are in fact conducted by the licensing authority; (3) that the payment of the fee is a condition upon which the licensee is permitted to transact his business or pursue his occupation; and (4) that the legislative purpose in exacting the charge is to reimburse the licensing authority for the expense of the supervision and regulation conducted by it.
The Court applied these features against the Facility Fee. Based on this analysis, the Court came to the conclusion that the Facility Fee did not meet any of these features. First, the Facility Fee was not subject to any supervision or regulation. Second, there was no licensing authority existing to collect the fee and regulate the use of sports venues. Third, the use of the sports venues was not conditioned on payment of the Facility Fee. Rather, the Facility Fee was based on the amount of time an athlete uses the sports venue, and payment was made after the use. Finally, the funds collected for the Facility Fee went to the City of Pittsburgh general fund, and there was no regulatory body that existed to reimburse for the cost of the supervision.
Based on the failure to meet the distinguishing features of a fee, the Court concluded that the Facility Fee could not be considered a true licensing fee. Instead, the Facility Fee fit the description of a tax. It was a measure specifically enacted to raise revenue for general public purposes. The revenue generated was paid directly into the City's general fund, and as recently as 2021, it was included in the City's budget under "sources of revenue."
In addition, the Court stated that the Facility Fee seemed to fall more appropriately under both the City and State of Pennsylvania's definition of an income tax assessed against salaries and wages. In other words, both definitions encompassed salaries based on services rendered, including athletic performances. Coupled with the failure to meet the features of a fee as noted above, the Court held that the Facility Fee was a tax in function, and it should be recognized as such.
Next, the Court examined the Uniformity Clause in the Pennsylvania Constitution. Under Article VIII, §1, all taxes shall be uniform, upon the same class of subjects, within the territorial limits of the authority levying the tax, and shall be levied and collected under the general laws. However, the Court added that the Uniformity Clause did not require absolute equality. Instead, what was required was substantial uniformity.
Substantial uniformity must be supported by a non-arbitrary, reasonable and just basis for the disparate treatment. The burden falls on the taxpayer to prove that there was not substantial uniformity in the application of the tax, and that there was no rational basis for the exception.
The Court pointed out that Pennsylvania Courts have consistently held that residence cannot be made the basis for discrimination when taxing persons engaged in the same profession. For example, in Danyluk v. Johnstown, 178 A.2d 609 (1962), the Court held that a tax levied on nonresidents of Johnstown was unconstitutional because it violated the Uniformity Clause. Furthermore, the Court stated that even if the tax was administered as an excise tax for the privilege of doing business in the City it would still violate the Uniformity Clause as a discriminatory tax practice across the same occupation.
The Court concluded that the Facility Fee was facially discriminatory because it levied a 3% income tax on nonresidents while only a 1% income tax was being levied on residents of Pittsburgh. This constituted discriminatory tax rates across the same occupation.
The City of Pittsburgh countered by asserting that even if the fee were a tax it would be permissible as both residents and nonresidents pay the same effective tax rates. Pittsburgh residents pay a 2% income tax toward the school districts and a 1% tax on income to the City.
The Court found error in the City's assertion because the 2% school tax was levied by the school board not the City of Pittsburgh. Also, the tax directly funded the schools whereas the Facility Fee was paid into the general fund. Similarly, because Pittsburgh resident athletes pay a 1% tax on their income to the City and nonresident athletes pay 3% tax on their income, there could be no permissible or rational basis for such an unequal application of tax rates across residents and nonresidents in the same profession. As a result, the Court held that the Facility Fee was a clear violation of the Uniformity Clause of the Pennsylvania Constitution, and it granted the Player Associations' motion for summary judgment.
Commonwealth Court of Pennsylvania[ii]
The Court began by addressing the Uniformity Clause. The Court pointed out that the Uniformity Clause does not require absolute equality and perfect uniformity. In fact, so-called rough uniformity with a limited amount of variation is permitted.
According to the Court, a taxpayer who challenges the constitutionality of taxation under the Uniformity Clause must demonstrate that enactment of the tax results in some form of classification that is unreasonable and not rationally related to a legitimate state purpose. Judicial review of alleged unconstitutionality focuses on whether there is some concrete justification for treating the relevant group of taxpayers as members of distinguishable classes subject to different burdens. A violation of the Uniformity Clause occurs when the method or formula for computing the tax produces arbitrary, unjust, or unreasonably discriminatory results.
The City of Pittsburgh once again argued that the tax burden on residents and nonresidents is the same at 3% because residents pay a 1% earned income tax and a 2% school tax while nonresidents pay the 3% Facility Fee. To support its position, the City relied on Minich v. City of Sharon, 366 Pa. 267, 77 A.2d 347, 42 Mun. L Rep. 186 (Pa. 1951). In Minich, the Pennsylvania Supreme Court held that a 10 mills tax imposed on nonresidents who earned income working in the City of Sharon did not violate the Uniformity Clause because although residents of the City of Sharon only paid 5 mills tax on income, they also paid 5 mills to the school district.
The Court found that the City of Pittsburgh overstates the relevance of Minich to the 3% Facility Fee. In particular, the enactment of the tax in Minich was different because it provided resident taxpayers a credit for other taxes paid to another political subdivision. On the other hand, there was no evidence that nonresidents could offset the amount of the Facility Fee by the amount of earned income tax paid to another taxing authority.
The Court also found that the 2% School Tax paid by residents was not relevant to the matter at hand because the District was prohibited from imposing school taxes on nonresidents. In eliminating the 2% School Tax from its analysis, the Court concluded that the City of Pittsburgh effectively imposed a 3% earned income tax on nonresidents who derived income from the City's Facilities while in turn only imposing a 1% earned income tax on residents who similarly derived income from the use of the facilities. Based on the above analysis, the Court concluded that the Facility Fee violated the Uniformity Clause.
The Court next addressed the City's argument that the trial court should have severed the language in the ordinance that was deemed invalid. In other words, the City suggested that the unconstitutionality of the Facility Fee could be prevented if the word "nonresident" was replaced with the word "individual." The end result would be that severability would cause the 3% Facility Fee to apply to both residents and nonresidents.
Section 1925 of the Pennsylvania Statutory Construction Act of 1972 states that "the provisions of every statute shall be severable. If any provision of any statute or the application thereof to any person or circumstance is held invalid, the remainder of the statute, and the application of such provision to other persons or circumstances, shall not be affected thereby, unless the Court finds that the valid provisions of the statute are so essentially and inseparably connected with, and so depend upon, the void provision or application, that it cannot be presumed the General Assembly would have enacted the remaining valid provisions without the void one; or unless the Court finds that the remaining valid provisions, standing alone, are incomplete and are incapable of being executed in accordance with legislative intent."
The Court disagreed with the City's severability argument and stated that the Facility Fee cannot be salvaged by removing the word "nonresident" from the ordinance. The section of the Tax Act authorizing the Facility Fee only provides for the assessment on nonresidents. It does not permit the imposition of the Facility Fee on residents. Furthermore, the section of the Tax Act authorizing the Facility Fee provided that nonresidents who pay the Facility Fee are exempt from paying any earned income tax that the City might otherwise impose. If that section of the Tax Act was held to be invalid this exemption from earned income tax would no longer apply. The Court concluded that the General Assembly preferred that the ordinance be stricken entirely if held to be unconstitutional rather than expanding the Facility Fee to residents. In addition, the Court refused to supply omissions in a statute when it appeared that the matter was intentionally omitted.
CITE AS:
LISI Income Tax Planning Newsletter #253 (February 20, 2024) at http://www.leimbergservices.com. Copyright 2024 Leimberg Information Services, Inc. (LISI). Reproduction in Any Form or Forwarding to Any Person Prohibited - Without Express Permission. Our agreement with you does not allow you to use or upload content from LISI into any hardware, software, bot, or external application, including any use(s) for artificial intelligence technologies such as large language models, generative AI, machine learning or AI system. This newsletter is designed to provide accurate and authoritative information regarding the subject matter covered. It is provided with the understanding that LISI is not engaged in rendering legal, accounting, or other professional advice or services. If such advice is required, the services of a competent professional should be sought. Statements of fact or opinion are the responsibility of the authors and do not represent an opinion on the part of the officers or staff of LISI.
CITATIONS:
[i] Court of Common Pleas of Allegheny County, Pennsylvania, No., GD-19-015542 (9/21/2022).
[ii] Commonwealth Court, No. 1150 CD 2022 (1/10/2024).