Constitutionality of facility tax imposed on nonresidents under the Uniformity Clause of the Pennsylvania Constitution
National Hockey League Players Ass’n v. City of Pittsburgh, 308 A.3d 318 (Pa. Cmwlth. 2024), allocatur granted July 22, 2024, appeal docket 20 WAP 2024
In this case, the Pennsylvania Supreme Court will address the constitutionality of the City of Pittsburgh’s Facility Usage Fee (Facility Tax), a tax imposed by the City exclusively on nonresident athletes and entertainers.
The City enacted the Facility Tax under Section 304 of The Local Tax Enabling Act (Tax Act), which allowed second-class cities with publicly funded sports facilities to levy a tax on nonresident individuals who use these facilities for compensated events. The City imposed a 3% tax on income earned by nonresident athletes and entertainers at event venues such as PNC Park and Heinz Field. Resident performers were subject to a 1% Earned Income Tax (EIT) payable to the City and an additional 2% school district tax. Nonresidents performing in the City but not at these facilities paid a 1% EIT and were exempt from the school tax.
The National Hockey League Players Association, Major League Baseball Players Association, National Football League Players Association, and individual nonresident athletes (Appellees) filed a complaint asserting that the Facility Tax violated the Uniformity Clause of the Pennsylvania Constitution, which mandates that “all taxes shall be uniform, upon the same class of subjects, within the territorial limits of the authority levying the tax,” by taxing nonresidents at a higher rate than residents for similar activities. The City responded that the combined tax burden was equal for both groups: residents paid a total of 3% (1% EIT to the City and 2% to the school district), while nonresidents paid a 3% Facility Tax to the City. The trial court declared the Facility Tax unconstitutional and enjoined the City from further assessing, imposing, or collecting the Facility Tax, concluding, as summarized by Commonwealth Court:
The trial court noted that, while the Uniformity Clause does not require perfect uniformity or exact equality, the Uniformity Clause is violated where the method used to compute the tax produces arbitrary, unjust, or discriminatory results. The trial court held that the Facility Tax makes a facial distinction between residents and nonresidents, as nonresidents who earned income from one of the Facilities were subject to the Facility Tax, while residents, who also earned income from one of the Facilities, were not. Thus, nonresident athletes paid a 3% tax while resident athletes paid a 1% EIT. The trial court considered the resident/nonresident distinction unreasonable and violative of the Uniformity Clause. The trial court rejected the City’s argument that residents and nonresidents bore an equivalent tax burden of 3%, because the 2% school tax paid by residents was levied by the District, not the City. The trial court declined to find uniformity in a tax levied by a separate entity for a separate purpose.
Slip op. at 4-5. The City appealed to Commonwealth Court, which summarized the City’s arguments as follows:
The City argues that the tax burden on both residents and nonresidents is 3%, as residents pay a 1% earned income tax and a 2% school tax, while nonresidents pay the 3% Facility Tax. Because the overall tax burden is the same, the City contends that the Facility Tax does not violate the Uniformity Clause. The City relies on Minich v. City of Sharon, 366 Pa. 267, 77 A.2d 347 (1951), in which our 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 where residents of the City of Sharon only paid a 5 mills tax on income, because residents also paid a 5 mills tax to the school district. The City notes that, prior to enactment of the Facility Tax, residents and nonresidents paid a 1% EIT. Residents paid an additional 2% school tax. The City argues that enactment of the Facility Tax rectifies this imbalance. The City also argues that the Facility Tax serves the legitimate state purpose of financing the Facilities in which professional sports events are held, “from which nonresident athletes and entertainers benefit immensely.” City’s Br. at 6.
In Minich, the City of Sharon enacted an ordinance that assessed a tax of 10 mills per dollar earned on residents of the City of Sharon and nonresidents who worked for the City of Sharon, effective January 1, 1950. On June 27, 1949, the City of Sharon School District (SSD) adopted a resolution imposing a tax of 5 mills per dollar earned on residents of SSD, for the period of January 1, 1950 to July 2, 1950. In light of the 5 mills tax imposed by SSD, the City of Sharon only collected a 5 mills tax from its residents. Nonresidents who worked in the City of Sharon filed an action arguing that they should not be required to pay a 10 mills tax where residents only paid a 5 mills tax.
The Supreme Court held that the tax scheme was not discriminatory, as the City of Sharon and SSD imposed their taxes pursuant to the Act of June 25, 1947, P.L. 1145 (1947 Act), and Section 5 of the 1947 Act explicitly provided that the payment of any tax on wages to a political subdivision acted as a credit towards any other tax on wages imposed by another political subdivision. Because residents were entitled to a credit for the 5 mills tax paid to SSD, the 10 mills tax, if imposed in full, would have been reduced to 5 mills regardless.
Slip op. at 7-8. As to Appellees’ counter-arguments, Commonwealth Court summarized:
Appellees argue that the City has failed to demonstrate any justification for classifying the individuals liable for the Facility Tax based on their status as nonresidents. Appellees note that the 2% school tax paid by residents to the District cannot by law be imposed on nonresidents and they suggest that a tax on nonresidents cannot be rendered uniform on the basis of a different tax paid by residents to a separate taxing authority for services enjoyed solely by residents. Furthermore, Appellees point out that the Facility Tax cannot be used as a credit towards any EIT paid by nonresidents to the political subdivision in which they live, nor are nonresidents permitted to reduce the amount of the Facility Tax owed by any EIT paid to the municipality in which they reside. Appellees cite Danyluk v. Bethlehem Steel Co., 406 Pa. 427, 178 A.2d 609 (1962), as dispositive of this matter, as the Supreme Court in Danyluk invalidated a tax imposed on individuals solely based on their status as nonresidents. In addition, Appellees contend that the Facility Tax arbitrarily distinguishes between taxpayers based on their occupations, as nonresident doctors or lawyers, for example, are not required to pay the Facility Tax.
Finally, Appellees challenge the method of calculating the amount of the Facility Tax owed by a particular athlete because the Facility Tax paid by NFL players is based on “duty days” held in the City, while the Facility Tax for NHL and MLB players is based solely on the number of games played. Appellees suggest that excluding NHL and MLB practices held outside the City from the calculation artificially inflates the percentage of work they perform in the City.
In Danyluk, the City of Johnstown (Johnstown) enacted an ordinance imposing a $10 occupational tax on nonresidents who engage in any occupation within Johnstown’s corporate limits. The stated purpose of the tax was to provide revenue for capital improvements in Johnstown. Nonresidents employed in Johnstown filed an action alleging the occupational tax was unconstitutional, as it only applied to nonresidents. Johnstown argued that the tax was uniform because a $10 per capita tax was imposed upon residents. The Supreme Court rejected Johnstown’s argument, as the tax was not an occupational tax, which would be based on the assessed value of an occupation. The occupational tax Johnstown imposed on nonresidents made no distinction as to the occupation of the person taxed, or the amount of income earned by the nonresident – rather, it taxed nonresidents a flat $10. Furthermore, the purpose of the tax was to generate revenue for services benefiting residents of Johnstown. The Supreme Court held that the occupational tax was, in reality, a “direct levy upon persons[,]” which constituted a capitation tax that could only be imposed on residents of Johnstown. Id. at 610. Accordingly, the Supreme Court rejected the tax as unconstitutional, noting that a taxpayer’s residence could not be used as the basis for “discrimination in taxation of persons engaged in the same occupation or profession.” Id.
Slip op. at 8-10.
Commonwealth Court held that the Facility Tax violates the Uniformity Clause and affirmed the trial court’s injunction prohibiting the City from imposing and collecting the Facility Tax. The court concluded that:
The City overstates the relevance of Minich, which concerned a different tax enactment that explicitly provided resident taxpayers a credit for other taxes paid to another political subdivision. Although the parties agree that the Facility Tax is a tax, there is no evidence to suggest that nonresidents can offset the amount of the Facility Tax by the amount of EIT paid to another taxing authority. Even if this Court were to assume that 1% of the Facility Tax represents the 1% EIT imposed on nonresidents prior to the enactment of Section 271.03(a) of the Ordinance, the Facility Tax otherwise burdens nonresidents with an additional 2% tax on earned income that is not assessed on residents. The 2% school tax paid by residents is not relevant to our analysis, as the District is prohibited from imposing school taxes on nonresidents, per Section 652.1(a)(4) of the School Code. The City has not suggested that the school taxes paid by residents offset the cost of maintaining the Facilities, the use of which clearly benefits residents who earn income in those Facilities. If we exclude the 2% school tax from our analysis, it is clear that the City has effectively imposed a 3% EIT on nonresidents who derive income from the City’s Facilities, while imposing a 1% EIT on residents who similarly derive income from the Facilities. [fn 12]
[fn 12] The dissent distinguishes Danyluk from the instant appeal on the basis that the tax in Danyluk was “essentially a capitation tax which could never be charged to nonresidents.” Nat’l Hockey League Players Ass’n v. City of Pittsburgh, 308 A.3d 318, 327, 2024 WL 104310 (Pa. Cmwlth., No. 1150 C.D. 2022, filed January 10, 2024). This does not undermine our reliance on Danyluk. While residents and nonresidents alike pay a 3% tax based on their earned income, 2% of the tax assessed on residents represents school taxes, which may not be imposed on nonresidents. Nonresidents, on the contrary, pay a 3% EIT to the City based on their use of Facilities. Therefore, although both residents and nonresidents derive income from their use of the Facilities, only nonresidents bear the tax burden associated with that use.
The City has failed to provide the requisite concrete justification for treating residents and nonresidents as distinguishable classes that may be subjected to different tax burdens. Rough uniformity is not achieved where only one class of taxpayers – nonresidents – is assessed a 2% tax on income derived from its use of the Facilities.
Slip op. at 10-11.
Dissenting, President Judge Renée Cohn Jubelirer opined that the tax burdens on residents and nonresidents were substantively equal, as both residents and nonresidents ultimately paid a total of 3% in local taxes on income earned at City facilities, therefore the Facility Clause did not violate the Uniformity Clause. The dissent reasoned:
The Uniformity Clause, in my view, is primarily concerned about equality of tax burden among members of a class. See Fox’s Appeal, 112 Pa. 337, 4 A. 149, 153 (1886) (Uniformity Clause “was intended to and does sweep away forever the power of the legislature to impose unequal burdens upon the people under the form of taxation.”). Moreover, the first step in the analysis is to determine whether “the enactment results in some form of classification” in the first instance. Wilson Partners, 737 A.2d at 1220. Accordingly, I agree with the City that here, because the purpose of the tax is to equalize tax treatment between classes, no impermissible classification results. (City’s Brief (Br.) at 14.) Resident and nonresident athletes and entertainers both ultimately pay a 3% total local tax on income attributable to their work in Pittsburgh, though all 3% of nonresidents’ share goes to the general fund, while 1% of residents’ share goes to the general fund, and 2% to the local school district. (Common Pleas Opinion at 7.) I do not believe that the ultimate destination of the tax revenue to either the City’s general fund or to its schools changes that result. Rather, what matters is the overall burden experienced by the taxpayers. [fn 3]
[fn 3] I would also submit that any reliance on the part of Appellees or common pleas on Danyluk v. Bethlehem Steel Company, 406 Pa. 427, 178 A.2d 609 (1962), is misplaced. The Danyluk Court reasoned that the tax in question there was essentially a capitation tax which could never be charged to nonresidents. Id. at 610. And to the extent Danyluk could be read as a per se bar on residency classifications, I would point to Leonard v. Thornburg, where the Supreme Court explained that Danyluk stands for the proposition that residency alone is not enough to sustain a classification. 507 Pa. 317, 489 A.2d 1349, 1352 (1985).
Slip op. at RCJ-3 (emphasis in original).
The Pennsylvania Supreme Court granted allocatur limited to the following issue:
Whether the Commonwealth Court’s majority opinion departed from this Court’s precedent in Minich v. Sharon, 366 Pa. 267, 77 A.2d 347 (1951), and incorrectly interpreted the Pennsylvania Uniformity Clause to require exact uniformity in the ultimate destination of the tax revenue among residents and nonresidents, rather than “rough equality” in the overall tax burden.