On August 1, 2013, Cook County Circuit Court Judge Robert Lopez Cepero entered two preliminary injunctions blocking imposition and enforcement of the Cook County, Illinois use tax on non-titled tangible personal property due to a violation of the Counties Code, the Illinois Constitution, and the U.S. Commerce Clause.1 This use tax is imposed on any individual or company based on the value of non-titled tangible personal property acquired from sellers located outside Cook County, when the property is first subject to use in the county. The use tax originally was imposed starting on April 1, 2013 at a rate of 1.25 percent, which rate was subsequently reduced on June 19, 2013 to 0.75 percent.2
On November 9, 2012, the Cook County Board of Commissioners passed the use tax ordinance as a component of its budget for fiscal year 2013. In passing the ordinance, the Board justified the ordinance as a means to close purported "tax loopholes" and to provide an incentive to purchase non-titled property within the county.3
Pursuant to the ordinance, effective April 1, 2013, the use tax is imposed "upon the privilege of using in the county non-titled personal property which is purchased outside of the county."4 When the ordinance became effective, this tax was originally applied at a rate of 1.25 percent of the non-titled property's value on the date of first use of the property within the county.5 The ordinance states that non-titled property purchased outside the county, and delivered to a location within the county, is presumed to be first used in the county on the date of delivery.6 The purchaser or user of the property is liable for remittance of the tax.7 Sellers are not required to collect and remit the tax on a purchaser or user's behalf.8
Every person in Cook County who, in the course of business, acquired non-titled property from outside the county is required to register with Cook County's Department of Revenue to remit the tax.9 Returns are to be filed on or before the 20th day of each month, remitting tax due on any transaction that occurred in the immediately preceding month.10 A credit is available for the first non-titled property valued at $3,500 at the time of first use within the county, which is applied against the taxpayer's aggregate county use tax liability for the taxable year.11
On May 7, 2013 (after the use tax was in effect, but prior to the initial deadline for filing tax returns and making payments by May 20, 2013), two law firms filed complaints in the Cook County Circuit Court against the county to enjoin it from enforcing its newly enacted use tax.12 The complaints asked the Court to declare that the tax violates the Illinois Counties Code, the Illinois Constitution, and the Commerce Clause of the U.S. Constitution.
Specifically, the complaints asserted that the Section 5-1009 of the Counties Code prohibits home rule units such as Cook County from imposing use taxes on the selling price of tangible personal property. Although the county purports to impose the tax on the "value" of the tangible personal property purchased, this "value" is the functional equivalent of "selling price," violating the Illinois Counties Code. In addition, the complaints noted that the county is prohibited from imposing any tax on value as Article IX, Section 5 of the state's constitution abolished "ad valorem" (value-based) personal property taxes as of January 1, 1979. In the event the use tax is not based upon the "selling price," then it must be based upon "value" and hence a personal property tax, which is impermissible under the Illinois Constitution. Finally, the complaints emphasized that the use tax is a per se violation of the Dormant Commerce Clause as found in Article 1 Section 8 of the U.S. Constitution because by its own commentary, Cook County designed and imposed the tax in order to increase purchases from within the county, discriminating against purchases made from locations outside the county by the imposition of a higher use tax rate than the Cook County sales tax rate.
On June 19, 2103, Cook County amended the ordinance13 in order to make two changes. First, the use tax rate was changed to 0.75 percent, decreasing the use tax rate to equal the corresponding county sales tax rate.14 Second, a credit equal to the amount of county sales or county retailers' occupation tax actually paid in another county was instituted for taxpayers who paid such taxes in another county.15 Both of these changes were effective "upon passage" and were apparently designed to address the discrimination argument under the U.S. Constitution's Commerce Clause. In fact, following the amendments, court filings were amended to eliminate the Commerce Clause violation argument for periods following June 19, 2013.
On August 1, 2013, Cook County Circuit Court Judge Robert Lopez Cepero entered two preliminary injunctions blocking imposition and enforcement of the Cook County, Illinois use tax as originally enacted and as amended.16 Cook County was directed to give notice of these orders by reference on the Cook County Department of Revenue Web site17 and to not cash any checks received for payment of the tax for any return date following the July 20, 2013 return date.18 In addition, the county was directed to deliver to the Court, in chambers, "...a confidential document setting forth a listing of the total County Nontitled Personal Property Use collections through July 30, 2013."19
As a result of the preliminary injunctions, taxpayers do not have to currently file returns or remit payment for the Cook County Non-Titled Personal Property Use Tax during the pendency of the injunctions. Although many tax professionals believe that the county may have a difficult time in sustaining this tax, the litigation is still in its early stages. As a result, the status of any previous payments made by taxpayers and the actions needed to secure refunds for any previously paid tax to the county have not yet been addressed by the Court.
Interestingly, Circuit Court Judge Cepero has ordered a confidential listing of the total Cook County Non-Titled Personal Property Use Tax collections through July 30, 2013. This listing should help the Court understand the impact of this tax on taxpayers and consider the mechanics of refunding funds collected in the event the tax is eventually struck down. If the tax is ultimately declared unconstitutional, the county should readily have the information needed to refund monies to taxpayers. It remains to be seen whether taxpayers would need to file refund claims with the Cook County Department of Revenue in order to receive the tax that has been previously paid and any applicable interest.
It is extremely important to keep in mind that the Illinois courts have not yet ruled on the ultimate merits of the tax and after additional proceedings could hold the tax to be valid. Therefore, taxpayers should continue to monitor developments and be prepared to quickly file returns in the event the injunction is lifted or a court requires taxpayers to begin filing returns with the payments being escrowed. In addition, the Illinois legislature could make changes to the Counties Code. All of these scenarios require taxpayers to continue to track the potential Cook County use tax on non-titled personal property.
1 Preliminary Injunction Orders No. 13 L 050454 and No. 13 L 050470, Circuit Court of Cook County, Aug. 1, 2013.
2 Cook County Ordinance 12-O-63, enacted Nov. 9, 2012 and amended by Cook County Ordinance 13-0-30, enacted on June 19, 2013. The full name of the ordinance is the "Cook County Use of Non-Titled Personal Property Tax Ordinance" and was enacted as Cook County Code §§ 74-650–74-662.
3 Cook County Ordinance 12-O-63 provides "there has appeared a widening tax loophole through which persons in Cook County are in a position to purposely avoid the sales tax associated with the acquisition of non-titled personal property for use within Cook County . . .."
4 Cook County Code § 74-652. "Non-titled personal property" means "tangible personal property, as set forth in the Illinois Use Tax Act, other than tangible personal property that is registered or titled with an agency of the State." Cook County Code § 74-651.
5 "Value" is defined as "an accurate assessment or evaluation of a non-titled personal property's worth when first subject to use in the county." Cook County Code § 74-651.
6 Cook County Code § 74-652(c).
7 Cook County Code § 74-652(b).
8 Because the tax is on purchases from retailers located outside the county, the county would have no authority to attempt to mandate collection from any sellers.
9 Cook County Code § 74-653.
10 Cook County Code § 74-657.
11 Cook County Code § 74-654.
12 The two law firms that initiated litigation on these matters were Reed Smith LLP and Horwood Marcus & Berk Chtd. These firms sued both the Cook County Department of Revenue and the Department's Director, in her capacity as Director. The Chicagoland Chamber of Commerce also joined the Reed Smith LLP litigation as a "plaintiff-in-intervention."
13 Cook County Ordinance 13-0-30, enacted on June 19, 2013.
14 Cook County Code § 74-652(a).
15 Cook County Code § 74-652(d).
16 Preliminary Injunction Orders No. 13 L 050454 and No. 13 L 050470, Circuit Court of Cook County, Aug. 1, 2013, Sections A and B.
17 Id., Section A.
18 Id., Section C.
19 Id., Section C.
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