Illinois Appellate Court Upholds Chicago Revenue Ruling On Taxation Of Transactions Outside City Limits

On September 22, 2015, the Illinois Court of Appeals issued a decision that may affect home rule municipalities' authority to tax entities located outside of that municipality. In the combined cases Hertz Corporation v. City of Chicago (No. 10 CH 51118) and Enterprise Leasing Company of Chicago LLC v. City of Chicago (No. 11 L 50840), the appellate court held that the City of Chicago is authorized to tax rental car companies on vehicle rental transactions that occur at rental locations outside the Chicago city limits.

The rental car agencies filed lawsuits seeking declaratory and injunctive relief against a 2011 Chicago Department of Revenue Ruling (Ruling 11) that authorized the enforcement of an 8 percent tax on vehicle rentals by Chicago residents from "motor vehicle rental companies doing business in the City" or that "regularly rent vehicles that are used in the City" at a suburban office within three miles of the city limits. Although Chicago has imposed a use tax on all leased personal property since 1990 pursuant to an ordinance, Ruling 11 instructed car rental agencies that do business in the City and also have an agency "within 3 miles of Chicago's borders" how to impose the tax on vehicles used within the City. The Ruling explained that if a renter had a Chicago address on his or her driver's license, it was incumbent upon the rental agency to maintain records to rebut the presumption that the renter would use the rental car primarily in the City. An indication on the lease from the renter that the car would be used more than 50 percent of the time outside the City was sufficient to rebut the presumption that the transaction was subject to the tax.

The plaintiff rental car companies argued that Ruling 11 was an improper exercise of Chicago's home rule authority, that the Ruling violates the scope of the ordinance, and that the Ruling violates the Due Process and Commerce Clauses of the U.S. Constitution. In September 2012, the Cook County Circuit Court granted Enterprise's motion for summary judgment, enjoining enforcement of the ordinance against the company, and likewise enjoined enforcement against Hertz, which had filed a similar lawsuit.

The appellate court reversed, however, and granted summary judgment to the City. The court reasoned that the taxable event at issue was not "non-Chicago" car rental transactions but instead the "use" of the rental car in Chicago. First, the court stated that the "use tax" was justified by...