Illinois Supreme Court Holds City of Chicago Went Too Far in Taxing Cars Rented Outside Its Borders
The Illinois Supreme Court, in Hertz Corp v. City of Chicago, 2017 IL 119945 (Jan. 20, 2017), held that the City of Chicago’s ruling requiring rental car companies located within three miles of the City to collect tax on vehicle rentals is unconstitutional under the home rule article of the Illinois Constitution. Hopefully, the court’s ruling will stymie the City’s expansive interpretation of its taxing powers.
The tax at issue is the City’s Personal Property Lease Transaction Tax (Lease Tax), which is imposed upon “(1) the lease or rental in the city of personal property or (2) the privilege of using in the city personal property that is leased or rented outside of the city.” Mun. Code of Chi. § 3-32-030(A). While the Lease Tax is imposed upon and must be paid by the lessee, the lessor is obligated to collect it at the time the lessee makes a lease payment and remit it to the City. Mun. Code of Chi. §§ 3-32-030(A), 3-32-070(A).
The subject of this litigation is the City’s application of the Tax in its Personal Property Lease Transaction Tax Second Amended Ruling No. 11 (eff. May 1, 2011) (Ruling 11). The plaintiffs argued that Ruling 11 extends the reach of the tax ordinance beyond Chicago’s borders in violation of the home rule provision of the Illinois Constitution and violates the federal due process and commerce clauses. The Ruling “concerns [short-term] vehicle rentals to Chicago residents, on or after July 1, 2011, from suburban locations within 3 miles of Chicago’s border … [excluding locations within O’Hare International Airport] by motor vehicle rental companies doing business in the City.” Ruling 11 § 1. The Ruling explains that “‘doing business’ in the City includes, for example, having a location in the City or regularly renting vehicles that are used in the City, such that the company is subject to audit by the [City of Chicago Department of Finance] under state and federal law.” Ruling 11 § 3. As for taxability of leased property, the Ruling cites the primary use exemption, exempting from Tax “[t]he use in the city of personal property leased or rented outside the city if the property is primarily used (more than 50 percent) outside the city” and stating the taxpayer or tax collector has the burden of proving where the use occurs. Ruling 11 § 2(c) (quoting Mun. Code of Chi. § 3-32-050(A)(1)).
Ruling 11 contains a rebuttable presumption that motor vehicles rented to customers who are Chicago residents from the suburban locations of rental companies that are otherwise doing business in Chicago are subject to the Lease Tax. The Ruling applies to companies with suburban addresses located within three miles of the City. The presumption may be rebutted by any writing disputing the conclusion that the vehicle is used more than 50 percent of the time in the City. The opposite is assumed for non-Chicago residents. Ruling 11 § 3. The Ruling provides that such a writing can be as simple as a customer’s initialing a statement that the vehicle will be used more than 50 percent outside the City (Ruling 11 § 3), but it must be part of the lease agreement or otherwise kept in the company’s business records. Companies that do not wish to comply with the record keeping requirements may opt to pay tax on 25 percent of its rental charges from Chicago customers.
Plaintiffs Hertz Corporation and Enterprise Leasing Company of Chicago LLC, filed separate actions against the City seeking declaratory and injunctive relief from the application of Ruling 11. The cases proceeded in tandem in circuit court and the court granted summary judgment to the companies. The circuit court declared Ruling 11 facially unconstitutional and permanently enjoined the City from enforcing the ordinance with respect to vehicle rental transactions occurring outside the City. The appellate court reversed and held that there is a sufficient nexus between the plaintiffs and the taxable activity (the use of the cars in the City) to permit the tax to be imposed and collection duties placed on plaintiffs. The Supreme Court granted leave to appeal and allowed the Illinois Chamber of Commerce and the Taxpayers’ Federation of Illinois to file amicus briefs on behalf of the car rental companies.
The Supreme Court held that the imposition of the Lease Tax on rentals of cars taking place outside the City limits has an extraterritorial effect and is therefore an improper exercise of the City’s home rule powers. The court was seemingly troubled by the fact that the Lease Tax is imposed not on the actual use within the City’s borders but on the lessee’s stated intent to use the property in Chicago or, failing any statement of intent, on presumed used based on the lessee’s home address. The court noted that at the time of the lease transactions, the use of the vehicle has not yet taken place and may, in fact, never take place within Chicago’s borders. The court said that “unrestrained extraterritorial exercise of home rule powers in zoning, taxation, and other areas could create serious problems, given the number of home rule units in Illinois, particularly in the Chicago area.” 2017 IL 119945 at ¶ 30. Thus, the court held that Ruling 11 exceeds the scope of the City’s home rule authority. In light of its holding that the ruling violates the Illinois Constitution, the court did not address the plaintiffs’ arguments that it also violates the federal due process and commerce clauses.
Hopefully, the court’s ruling will invite further challenges to the City’s expansive imposition of the Lease Tax. The City’s recent extension of the Lease Tax to cloud computing in Lease Tax Ruling #12 is now particularly susceptible to challenge given that the providers of those services are often located outside Chicago’s borders.