United States: Illinois Appellate Court Upholds Chicago Revenue Ruling On Taxation Of Transactions Outside City Limits

On September 22, 2015, the Illinois Court of Appeals issued a decision that may affect home rule municipalities' authority to tax entities located outside of that municipality. In the combined cases Hertz Corporation v. City of Chicago (No. 10 CH 51118) and Enterprise Leasing Company of Chicago LLC v. City of Chicago (No. 11 L 50840), the appellate court held that the City of Chicago is authorized to tax rental car companies on vehicle rental transactions that occur at rental locations outside the Chicago city limits.

The rental car agencies filed lawsuits seeking declaratory and injunctive relief against a 2011 Chicago Department of Revenue Ruling (Ruling 11) that authorized the enforcement of an 8 percent tax on vehicle rentals by Chicago residents from "motor vehicle rental companies doing business in the City" or that "regularly rent vehicles that are used in the City" at a suburban office within three miles of the city limits. Although Chicago has imposed a use tax on all leased personal property since 1990 pursuant to an ordinance, Ruling 11 instructed car rental agencies that do business in the City and also have an agency "within 3 miles of Chicago's borders" how to impose the tax on vehicles used within the City. The Ruling explained that if a renter had a Chicago address on his or her driver's license, it was incumbent upon the rental agency to maintain records to rebut the presumption that the renter would use the rental car primarily in the City. An indication on the lease from the renter that the car would be used more than 50 percent of the time outside the City was sufficient to rebut the presumption that the transaction was subject to the tax.

The plaintiff rental car companies argued that Ruling 11 was an improper exercise of Chicago's home rule authority, that the Ruling violates the scope of the ordinance, and that the Ruling violates the Due Process and Commerce Clauses of the U.S. Constitution. In September 2012, the Cook County Circuit Court granted Enterprise's motion for summary judgment, enjoining enforcement of the ordinance against the company, and likewise enjoined enforcement against Hertz, which had filed a similar lawsuit.

The appellate court reversed, however, and granted summary judgment to the City. The court reasoned that the taxable event at issue was not "non-Chicago" car rental transactions but instead the "use" of the rental car in Chicago. First, the court stated that the "use tax" was justified by "the taxpayer's receipt of concomitant benefits such as 'public roads, police protection, a judicial system and all the other ... usually forgotten advantages conferred by the [City's] maintenance of a civilized society.'" (Op. ¶ 23.) Second, the use tax operates "as a tariff protecting city revenue by taking from city residents the advantage of resorting to a nearby suburban location of a national rental agency to lease a vehicle in order to avoid a use tax otherwise imposed were the vehicle leased within the city itself." (Id.) The court explained:

Chicago residents using plaintiffs' vehicles use city streets and receive city services and without imposition of this use tax they would not contribute to defraying a part of the associated costs of road maintenance and public safety. The lease of a vehicle in Chicago triggers an 8% tax under the ordinance for the same reason that the use of the leased commodity, the car, will be used in the city and benefit from city services. It is plaintiffs' personalty that is used primarily in the city that benefits from the city's transportation system, roadway services, police and fire protection services in the event of an accident or theft of plaintiffs' vehicle. Therefore, the City has an interest in capturing revenue that would otherwise escape the city if residents could go to nearby suburban locations to avoid the 8% use tax while using the rental car primarily in Chicago.

(Op. ¶ 25.) Citing the Illinois Supreme Court case Brown's Furniture, Inc. v. Wagner, 171 Ill. 2d 410 (1996), the court dispatched with plaintiffs' argument that the City did not have jurisdiction to require the suburban locations to collect the tax: "This position is contrary to established case law to the effect that entities that transact business outside the taxing jurisdiction, with residents of the taxing jurisdiction, can be required to collect and remit the taxing jurisdiction's use tax when the item will be used within the taxing jurisdiction." (Op. ¶ 26.)

The court also rejected the rental agencies' constitutional arguments. First, it held that because the ordinance did not involve "interstate" commerce, the Commerce Clause was not violated. (Op. ¶ 47.) In addition, the court held that plaintiffs lacked standing to bring their due process claim because "the City is not imposing a tax on extraterritorial transactions because the taxable event, i.e., the use, occurs within the city's borders." (Op. ¶ 50.)

This decision may affect how Illinois home rule municipalities frame taxes imposed on entities outside of the taxing jurisdiction. Rather than imposing taxes on specific "transactions," home rule municipalities may be more likely to impose "use" taxes on items that may be used within the city limits.

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