Appellate panel: Chicago's three-mile radius car rental tax OK as tax on 'use' not 'transaction'

By Scott Holland | Sep 29, 2015

The city of Chicago can pull its controversial three-mile-radius car rental tax from the curb, after a state appellate panel determined the tax is a “use tax” assessed only on city residents using their rented vehicles in the city, and not an attempt to slap a transaction tax on vehicle rentals outside of city limits, which otherwise would have been an illegal extension of the city’s authority.

Since 1990, the city has collected use tax on all rentals in the city. In more recent years, the city moved to extend the collection of the tax on rented vehicles to car rental businesses within three miles of city limits. In 2011, the Chicago Revenue Department issued a ruling clarifying the collection would apply to city residents who the city believes would use the rented vehicles primarily within the city. Car rental companies Enterprise and Hertz responded by filing separate complaints in Cook County Circuit Court, naming the city and the comptroller as defendants. Hertz filed in 2010. Enterprise followed in 2011.

Cook County Associate Judge Daniel T. Gillepsie eventually found the revenue department’s ruling to be unconstitutional.

On Sept. 22, a three-justice panel of the Illinois First District Appellate Court reversed the circuit court decision. Justice Daniel J. Pierce wrote the majority opinion; justices P. Scott Neville and Sheldon A. Harris concurred.

The revenue department’s ruling applies only to rental car companies that have locations in the city as well as the three-mile limit. It grants exemptions for cars used outside the city for more than half the rental period. During audits, the city is allowed to assume any Chicago resident renting a car used it in the city unless the rental firm has written proof to the contrary.

The rental companies and the city disputed whether the company’s lease language was sufficient for determining if a particular renter should be assessed the tax or allowed an exemption, giving rise to the initial complaint. The rental companies argued the revenue department ruling amounted to “an extraterritorial exercise of Chicago’s home rule authority” and further that it violated the scope of the ordinance and the Constitution’s due process and commerce clauses.

The rental car companies have painted the tax as a transaction tax, while the city has maintained it is a use tax. The appeals court sided with the city, finding the tax is only applicable if the vehicles are used primarily inside the city. That stance — that the tax is on the use of the vehicle inside the city and not the actual rental — led the appeals court to disagree with the rental companies’ argument the city overstepped its home rule authority.

“A use tax is warranted by the taxpayer’s receipt of concomitant benefits such as ‘public roads, police protection, a judicial system and all the other usually forgotten advantages conferred by the (city’s) maintenance of a civilized society,’” Pierce wrote. “The use tax operates as a tariff protecting city revenue by taking from city residents the advantage of resorting to a nearby suburban location of a national rental agency to lease a vehicle in order to avoid a use tax otherwise imposed were the vehicle leased within the city itself.”

Further, the appeals court rejected the rental companies’ argument they were unduly burdened by being made to collect the tax and keep transaction records for audits. Since these companies already maintain rental records, and since the city allows a driver to simply check a box indicating where they intend to use the vehicle.

The commerce clause claim is irrelevant, the appellate justices said, because even though portions of Indiana are within three miles of Chicago, the plaintiffs do not have any outlets in that zone, making the argument speculative. And the due process claim failed because the tax is effective only for cars used in the city, justices said. Since the city intends this to be a tax only on Chicago residents using rental cars in the city, it remains constitutionally compliant.

Enterprise was represented in the action by attorneys with the firm of Duane Morris LLP, of Chicago.

Hertz was represented by the firm of Jenner & Block, of Chicago.

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Organizations in this Story

City of Chicago Duane Morris LLP Enterprise Holdings Inc. Hertz Corporation Illinois First District Appellate Court

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