On January 20, 2017, the Illinois Supreme Court issued a taxpayer-friendly opinion in The Hertz Corporation, et al v. The City of Chicago, 2017 IL 119945. At issue was whether the City of Chicago (the “City”) could mandate collection of its Personal Property Lease Transaction Tax (the “Transaction Tax”) from certain car rental agencies located outside its borders based on presumptive, but not actual, use of property within the City. Hertz Corporation and Enterprise Leasing, Inc. challenged the City’s extraterritorial tax scheme as a violation of both the Illinois Constitution and the U.S. Constitution. The Illinois Supreme Court struck down the tax, holding that it violated the Illinois Constitution.
The City imposes Transaction Tax on (1) leases entered into within the City and (2) leases entered into outside the City to the extent the leased property is used within the City. The City’s ability to impose the Transaction Tax emanates from the Illinois Constitution’s home rule taxing authority granted to Illinois counties and municipalities. By the Illinois Secretary of State’s most recent count, there are approximately 205 home rule jurisdictions in Illinois, each with its own separate power to impose transaction taxes.
In May 2011, the City promulgated Personal Property Lease Transaction Tax Second Amended Ruling 11 (“Ruling 11”), which required suburban car rental agencies, defined as those car rental agencies located within three miles of the City limits that also had locations within the City, to collect the Transaction Tax from any customer presenting a driver’s license with a City address, unless that customer provided written proof of its intended use outside the City. Ruling 11 also included a “safe harbor” such that, in lieu of keeping records of their customer’s intended use, a suburban car rental agency could assume that 25% of its rentals to Chicago customers were for use in the City and pay tax on that amount.
The Illinois Supreme Court properly noted that Ruling 11 purported to impose tax on stated intent or presumptive use, neither of which represented actual use in the City. Without an actual connection to the City, the Court determined that Ruling 11 amounted to a tax on activity conducted entirely outside the City’s borders. The Court noted that it had previously warned in Commercial National Bank of Chicago v. City of Chicago, 89 Ill. 2d 45, 79 (1982) that the “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.” These concerns prompted the Illinois Supreme Court to hold in Commercial National Bank that the expansion of home rule powers outside municipal limits can only be granted by the Illinois legislature. In the instant case, the concerns in Commercial National Bank were made manifest. If the Court sanctioned the City’s ability to impose the Transaction Tax extraterritorially, other home rule jurisdictions could similarly expand their taxing powers. The result would significantly burden lessees and lessors alike. The Court ultimately held that because the Illinois legislature had not expressly expanded the City’s taxing authority to permit an extraterritorial tax, Ruling 11 violated the Illinois Constitution.
This case illustrates the lengths taxing authorities are willing to go in an effort to extend their taxing jurisdiction. Thankfully, the Illinois Supreme Court properly denied Chicago’s attempt to exert its jurisdiction outside its borders.