United States: Illinois Supreme Court Strikes Down Chicago Tax As Applied To Out-Of-City Car Rentals

Last Updated: February 23 2017
Article by Kirk Jenkins

The City of Chicago levies a tax on the lease or rental of personal property within the City or the privilege of using personal property leased elsewhere in the City. In 2011, the City's director of the department of revenue issued Ruling 11, which provided that the City Department of Revenue would hold suburban car rental agencies within three miles of the city limits responsible for paying the tax with respect to many of their customers. On January 20, the Supreme Court unanimously held in Hertz Corporation v. City of Chicago that Ruling 11 was unconstitutional under the home rule provision of the Illinois Constitution.

Chicago's personal property lease transaction tax ordinance provides that the lease or rental of the property is deemed to take place at the location where the lessee takes possession of the property. Property rented outside of the City is exempt from the tax if it is primarily used – more than 50% – outside the City. Ruling 11 provides that absent written proof to the contrary, the Department would assume that any Chicago resident (as proven by their driver's license) renting a vehicle at a suburban location would be using the vehicle 50% or more inside the City. As for non-Chicago residents, Ruling 11 suggested the inclusion of a check-box on the rental form by which the renter would disclose whether or not he or she planned to use the vehicle more than 50% inside the City. If the box was checked "yes," the tax would apply.

The plaintiffs filed separate suits against the City challenging Rule 11 on various federal and state constitutional grounds. The Circuit Court granted the plaintiffs' motion for summary judgment, holding that Ruling 11 was an improper attempt to project the taxing power of the City extraterritorially. The Appellate Court reversed, holding that Ruling 11 was taxing use inside the City, not rentals outside the City, and therefore wasn't being applied extraterritorially even with respect to rentals occurring in the suburban locations.

In an opinion by Justice Garman, the Supreme Court unanimously reversed the Appellate Court. The Court began with the home rule provision of the Illinois Constitution, Article VII, Section 6(a). The Court has previously held under Section 6(a) that home rule units may not extend their home rule powers beyond their geographic borders unless specifically authorized to do so by the General Assembly. The plaintiffs argued that Ruling 11 operated extraterritorially in two ways: (1) it taxed rental transactions occurring beyond City borders; and (2) it taxed the entire value of the rental based on a trigger of only 50% use inside the City.

The Court pointed out that the City was relying on a number of due process cases to defend the tax ordinance, but cited no authority equating due process with the city's home rule authority. The question in Hertz was not whether the customers' due process rights had been violated; it was whether the City had exceeded its home rule authority by requiring the plaintiffs to collect the tax from certain of its customers. The City relied on cases where the tax was levied on sales of tangible personal property within the boundaries of the taxing jurisdiction. According to the Court, the City was trying to expand these cases, arguing that the City could reach conclusions outside of the City simply because the plaintiffs were doing business inside the City.

The lessee's statement that he or she planned to use the vehicle inside Chicago wasn't enough, the Court found. "A statement of one's intent is evidence only of present intent, not of actual use." At the time of the transaction, "the use of the leased vehicle has not taken place and may never take place within Chicago's borders." The City was trying to tax the use of rental vehicles in Chicago, but was in fact taxing the stated intent to use the vehicles inside the City at some future time. "Absent an actual connection to Chicago, the City's tax under Ruling 11 amounts to a tax on transactions that take place wholly outside Chicago's borders," according to the Court, and the tax therefore violated the home rule article of the constitution.

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