On September 29, 2010, the U.S. Court of Appeals for the Seventh Circuit certified a state law question to the Illinois Supreme Court for review in a case that the taxpayer had originally removed to federal court. City of Chicago v. Stub- Hub!, Inc., No. 09-3432 (7th Cir. 2010). In StubHub!, the City of Chicago filed suit in Cook County Circuit Court for a declaratory judgment that StubHub! was required to collect an amusement tax, and StubHub! successfully removed the action to federal court, invoking federal court jurisdiction on diversity grounds. The ability of a company to challenge a state/city tax in federal court is often preempted by the Tax Injunction Act (TIA). So, why was StubHub! not precluded by the TIA from removing the case to federal court?
Passed by Congress in 1937, the TIA prohibits federal court jurisdiction over suits to “restrain the assessment, levy or collection” of a state tax, provided that a plain, speedy and efficient remedy is available in state court. Underlying the TIA are principles of federalism and comity, and a recognition of the needs of states to manage their own fiscal affairs. The TIA has been interpreted broadly such that it is difficult for taxpayers challenging a state tax to be heard in federal court. The TIA does not, however, bar federal court jurisdiction in cases where taxing authorities are seeking a declaratory judgment against taxpayers to begin enforcing the collection of a tax. Since the City of Chicago brought the action for declaratory judgment to compel the collection of the amusement tax, the TIA did not apply.
Although StubHub! was permitted to remove the declaratory judgment action to federal court because of the unusual origination of the case, its procedural victory was short-lived as the federal court sent the case back to state court to decide the substantive tax issues at the heart of the litigation. According to Rule 20 of the Illinois Supreme Court Rules, the Seventh Circuit can certify questions of state law to the Illinois Supreme Court, where such questions are dispositive and there are no controlling precedents in the Illinois Supreme Court. In deciding to certify the issue of whether municipalities can require electronic intermediaries to collect and remit amusement taxes on resold tickets, the Seventh Circuit noted the abundance of web-auction sites, that the resolution of the tax issue is important for municipalities in Illinois, and that certification was the only way to ensure that a state court would have an opportunity to resolve the issue.