United States: Illinois Trial Court Holds Cook County Use Tax On Non-Titled Tangible Personal Property Is Unconstitutional

On October 11, 2013, Cook County Circuit Judge Robert Lopez Cepero held that the Cook County, Illinois use tax on non-titled tangible personal property cannot be imposed because it violates the Illinois Counties Code, the Illinois Constitution and the Commerce Clause of the U.S. Constitution.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, but the rate was subsequently reduced on June 19, 2013 to 0.75 percent.2

Original Ordinance

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. Under 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."3 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.4 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.5 The purchaser or user of the property is liable for remittance of the tax.6 Sellers are not required to collect and remit the tax on a purchaser or user's behalf.7

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.8 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.9 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.10

Initial Complaint and Amended Ordinance

In May 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.11 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.

On June 19, 2013, Cook County amended the ordinance12 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.13 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.14 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.

Preliminary Injunctions

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.15 Cook County was directed to give notice of these orders by reference on the Cook County Department of Revenue Web site16 and to not cash any checks received for payment of the tax for any return date following the July 20, 2013 return date.17 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."18

On October 4, 2013, the Illinois Appellate Court granted the Cook County Department of Revenue's motion to stay one of the preliminary injunctions blocking imposition and enforcement of the Cook County use tax.19 This order stayed the preliminary injunction pending the outcome of the circuit court's proceedings on the claims and request for permanent injunction.20

Circuit Court's Decision Invalidating Tax

The circuit court granted the law firms' motions for summary judgment and held that the Cook County use tax on non-titled tangible personal property violates the Illinois Counties Code, the Illinois Constitution and the Commerce Clause of the U.S. Constitution.

Improper Tax Base Violates Counties Code

The circuit court held that the Cook County use tax on the value of non-titled tangible personal property violates the Counties Code because it is impermissibly based on the "selling or purchase price" of the property. Unless an exception applies, the Counties Code provides that "no home rule county has the authority to impose, pursuant to its home rule authority, a use tax, sales tax or other tax, on the use, sale or purchase of tangible personal property based on the gross receipts from such sales or the selling price or purchase price of said tangible personal property."21 The Illinois Supreme Court has explained that "gross receipts" means "total selling price or the amount of such sales," which in turn means "the consideration for a sale valued in money whether received in money or otherwise."22 Because the statute does not provide a definition of "selling or purchase price," the circuit court considered the definition used for purposes of the use tax. Similar to the Illinois Supreme Court's definition, "selling price" is defined by a use tax statute as "the consideration for a sale valued in money whether received in money or otherwise."23 This is the same language that the Illinois Supreme Court interpreted as meaning the "value placed upon the property by the seller and accepted by the buyer."24 According to the circuit court, the fact that the ordinance attempts to qualify the "value" by when the property is "first subject to use in the County" was of "no meaningful consequence." There is no time-lag for depreciation or another factor to change the "value" from the "selling price" on the invoice. Because the tax is imposed by a home rule county on the value of the property, the circuit court concluded the tax violated the Counties Code.

Imposition of Tax on Personal Property Violates Illinois Constitution

The circuit court held that the tax is prohibited by the Illinois Constitution as an "ad valorem" (value-based) tax on personal property. The Illinois Constitution abolished ad valorem personal property taxes as of January 1, 1979.25 The county admitted in its briefing that "the Use Tax is an ad valorem tax because the tax is, plain and simple, a use tax based on value at the time of the first use in the County." However, the county argued that the tax was not a personal property tax because it is imposed on the privilege of using the property within the county. In rejecting a similar argument, the Illinois Supreme Court explained that labeling a tax as a "privilege tax" does not insulate the tax from constitutional challenges if the tax is based on the value of the personal property.26 The circuit court concluded that the Cook County ordinance violates the Illinois Constitution because it "plainly and clearly applies the tax rates to the value of the personal property."

Discrimination in Favor of Local Firms Violates Commerce Clause

The circuit court held that the tax violated the Commerce Clause of the U.S. Constitution by discriminating in favor of local firms. As discussed above, the Cook County sales tax is imposed at a rate of 0.75 percent and the use tax on non-titled tangible personal property purchased outside Cook County was originally imposed at a rate of 1.25 percent. On June 19, 2013, the ordinance was amended to equalize the rates.27 The circuit court held that the use tax clearly violated the Commerce Clause for the period prior to the amendment of the ordinance. The ordinance discriminated in favor of local firms by taxing out-of-state purchases at a higher rate. Also, the court held that the ordinance similarly discriminates in favor of local firms after the amendment. For example, purchases from a private seller in Cook County would result in no tax, but purchases from a private seller outside Illinois would be subject to the use tax upon the property's first use in Cook County. The circuit court concluded that the amendment to the ordinance did not prevent it from violating the Commerce Clause.

Commentary

As a result of the circuit court's decision that the Cook County use tax on non-titled tangible personal property violates the Counties Code as well as the Illinois and U.S. Constitutions, taxpayers currently do not have to file returns or remit payment of the tax. However, Cook County is expected to appeal the decision.28 The Illinois Appellate Court could possibly stay the circuit court's decision and may eventually reverse the decision on appeal. Therefore, the validity of the tax remains uncertain at this point. Note that the circuit court did not address the topic of taxpayer refunds. Many tax professionals believe that the county may have a difficult time in sustaining this tax, but the litigation is still in its early stages. Because the Illinois Appellate Court has not yet ruled on the ultimate merits of the tax, taxpayers should continue to monitor developments. As shown by the history of the litigation challenging this tax, the duty to comply with this ordinance can quickly change.

Footnotes

1 Reed Smith LLP v. Ali, Cook County Circuit Court, Nos. 13 L 050454, 13 L 050470, order granting plaintiffs' motions for summary judgment, Oct. 11, 2013.

2 Cook County Ordinance 12-O-63, enacted Nov. 9, 2012 and amended by Cook County Ordinance 13-O-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 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.

4 "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.

5 Cook County Code § 74-652(c).

6 Cook County Code § 74-652(b).

7 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.

8 Cook County Code § 74-653.

9 Cook County Code § 74-657.

10 Cook County Code § 74-654.

11 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."

12 Cook County Ordinance 13-O-30, enacted on June 19, 2013.

13 Cook County Code § 74-652(a).

14 Cook County Code § 74-652(d).

15 Preliminary Injunction Orders No. 13 L 050454 and No. 13 L 050470, Circuit Court of Cook County, Aug. 1, 2013, Sections A and B.

16 Id., Section A.

17 Id., Section C.

18 Id., Section C.

19Horwood, Marcus & Berk, Chtd. v. Cook County Department of Revenue, Illinois Appellate Court, 1st Dist., No. 1-13-2654, order staying preliminary injunction, Oct. 4, 2013.

20 Because the circuit court has issued a final decision, this Appellate Court order is no longer in effect.

21 55 ILL. COMP. STAT. 5/5-1009. Note that Cook County is a home rule county. Also, note that an exception allows home rule counties to impose use tax on titled tangible personal property. 55 ILL. COMP. STAT. 5/5-1008.

22 Hornoff v. Kroger Co., 219 N.E.2d 512 (Ill. 1966).

23 35 ILL. COMP. STAT. 105/2.

24 Hornoff, 219 N.E.2d 512.

25 IL CONST. art IX, § 5.

26 Berry v. Costello, 341 N.E.2d 709 (Ill. 1976).

27 As originally enacted, the use tax rate was 1.25 percent of the value of non-titled tangible personal property purchased outside Cook County and the corresponding county sales tax rate was 0.75 percent. On June 19, 2013, the ordinance was amended to reduce the rate imposed on personal property purchased outside Cook County to 0.75 percent. Thus, the amendment equalized the rates to 0.75 percent. However, the circuit court indicates the amendment equalized the rates to 1.25 percent. The overall analysis remains the same because the tax rates were equalized, but there appears to be a discrepancy in the rates discussed in the opinion.

28 For further discussion of the Cook County use tax on non-titled personal property and the litigation concerning the tax, see GT SALT Alert: Court Blocks Illinois' Cook County Use Tax onNon-Titled Tangible Personal Property.

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