The City of Chicago imposes a personal property lease transaction tax on the lease of personal property within Chicago and on the use of property in the city that is rented or leased outside Chicago. In 2011, a Chicago Department of Finance ruling (Ruling 11) stated that the tax applies to rentals made by car rental companies inside Chicago and within three miles of Chicago’s border. The ruling also stated that the tax was to be imposed on a lessee who is a Chicago resident as shown by the renter’s driver’s license who leases personal property in Chicago or primarily uses leased property for more than 50% of the time in Chicago.
Following this ruling, rental car companies, Hertz and Enterprise, separately filed suit against the City of Chicago and the City comptroller. The companies sought a declaration that the tax violates the Illinois and United States Constitutions and requested an injunction to prevent the City from enforcing the ordinance on them. The plaintiffs then consolidated their actions.
The circuit court granted summary judgement to plaintiffs, declaring that Ruling 11 was facially unconstitutional and permanently enjoining the City from enforcing the ordinance against plaintiffs with respect to short-term vehicle rental transactions occurring outside the City’s borders.
The appellate court reversed the decision of the Trial Court, finding that taxing non-Chicago rental transactions did not exceed Chicago’s home-rule authority since the connection between the rental company, the use of the car, and the city of Chicago is reasonable and clear. The appellate court discussed the nature of the tax as being more of a use tax than a transaction tax and therefore the City has the right to require a retailer who has nexus with the City to collect the tax on transactions that occur outside its jurisdiction.
The case then made its way to the Illinois Supreme Court. The Illinois Supreme Court reversed the decision of the appellate court and held that Ruling 11 violates the home rule article of the Illinois constitution because it has an extraterritorial (the legal ability of a government to exercise authority beyond its normal boundaries) effect and is therefore an improper exercise of the City’s home rule powers.
The Supreme Court stated that the City’s use tax is imposed not on actual use within the City’s borders but on the lessee’s stated intent to use the property in Chicago. Without a statement of intent from the lessee, the tax is presumed and based upon the lessee’s residence address in Chicago. The “conclusive presumption of taxability based on residency has nothing to do with use of the rental vehicles, as there is no evidence of where the vehicle was in fact driven.
The Supreme Court warned that imposing the tax based on the lessee’s stated intention or a presumption of use in the City based on residency would allow other home rule units in the Chicago area to enact their own use taxes for vehicle leasing. Such a precedent would place a burden on the vehicle lessee to estimate the percentage of use they intend to make in each taxing jurisdiction and on motor vehicle rental companies to collect and remit taxes to multiple jurisdictions. (Hertz Corp. v. City of Chicago, 2017 IL 119945)