The city of Chicago cannot require car rental businesses
located outside city limits to collect city taxes on rental cars leased by
Chicago city residents, the Illinois Supreme Court has ruled, striking down as
unconstitutional a city ordinance seeking to slap a tax on cars rented within
three miles of Chicago city limits.
On Jan. 20, the state Supreme Court overturned the decision
of a state appeals court, which had declared the city had the power under the
Illinois state constitution to demand the tax, even though the rental transactions
took place entirely outside of Chicago city limits.
The Supreme Court justices, however, said the tax represents
an attempt to improperly stretch the city’s “extraterritorial” taxing power
beyond the limits allowed under the state constitution’s language governing
home rule cities.
“… 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 state Supreme Court
justices wrote. “Absent an actual connection to Chicago, the City’s tax …
amounts to a tax on transactions that take place wholly outside Chicago’s
Justice Rita B. Garman authored the unanimous opinion.
The high court agreed a year ago to take up the case, after
the Illinois First District Appellate Court in 2015 had upheld the city’s
rights to require car rental companies to collect the tax. The appellate court
had overturned the decision of Cook County Associate Judge Daniel T. Gillepsie,
who had sided with auto rental companies Hertz and Enterprise, after the
businesses had challenged the tax as an illegal extension of the city’s power.
City Hall has collected the so-called use tax on all car
rentals in the city since 1990. However, the city in more recent years had
moved to also require the tax on all vehicle rentals at outlets within a
three-mile radius of the city. In 2011, the Chicago Revenue Department issued a
ruling clarifying the tax extension would apply to city residents who the city
believes would use the rented vehicles primarily within Chicago city limits.
The ruling applied to companies which operated rental locations within the
city, as well as within the three-mile radius.
The ruling had exempted customers using the rental cars outside
the city for more than half of the rental period. However, the ruling allowed
city auditors to presume the car was used primarily within city limits, unless
car rental companies can provide written proof to the contrary.
Hertz challenged the tax in 2010, and Enterprise in 2011.
In court, the city argued the tax should be upheld because
it is a use tax, assessed on people for the “privilege of using” the cars in
Chicago, and not a tax strictly on the transaction itself. City lawyers said
this should distinguish the car rental tax from other attempts, also ruled unconstitutional,
to extend other city taxes to transactions conducted outside the city.
But the Supreme Court justices put the brakes on the city’s
reasoning, saying case law cited by the city doesn’t apply to the use tax.
“The question here is whether the City has improperly
extended its home rule power to tax beyond its borders by requiring plaintiffs
to collect the subject tax from vehicle lessees who state their intention to
use the vehicle at least 50 percent of the time in Chicago,” the court said. “It
does not matter whether the taxed commodity is services or use of personal
Further, while the city said the tax should stand because it
was assessed on Chicago city residents, justices said the city could not point
to “authority for the proposition that mere residence in a taxing jurisdiction
gives that jurisdiction the ability to impose taxes on the resident regardless
of whether the taxed property or activity is connected to the taxing entity.”
And justices pulled to the curb the city’s contentions it
should have the right to tax these car rentals because the car rental companies
“are ‘doing business’ in Chicago because, by ‘setting up shop so close to
Chicago,’ they are leasing vehicles to customers who will drive them on a
short-term basis in Chicago,” and place a demand on city services, “such as
police and fire protection, as well as maintenance of Chicago’s streets.”
Justices said the tax is essentially based on nothing more
than a “lessee’s stated intent to use the property in Chicago or, failing any
statement of intent, on presumed use based upon the lessee’s residence address.”
Allowing this tax to stand could open the door to many other
home rule communities in Illinois to similarly attempt to tax businesses
located outside their borders, something generally not permitted by the home
rule provisions of the state constitution.
“Sanctioning the tax here based on nothing more than a
lessee’s stated intention or a conclusive presumption of use in Chicago based
solely on residency would allow other home rule units in the Chicago area to
enact their own use taxes in similar circumstances,” justices wrote.
According to court records, Enterprise had been represented
in the matter by the firm of Duane Morris LLP, of Chicago. Hertz had been
represented by the firm of Jenner & Block, of Chicago.