The Hertz Corporation v. City of Chicago
41 N.E.3d 574
Ill. App. Ct.2015Background
- Chicago's Municipal Code § 3-32-030(A) imposes an 8% tax on (1) rentals occurring inside the City and (2) the use in the City of leased personal property even if the lease occurred outside the City. The ordinance authorizes the Department (Comptroller) to issue interpretive rulings.
- In 2011 the Department issued Personal Property Lease Transaction Tax Second Amended Ruling No. 11 (Ruling 11) applying the City use tax to short-term car rentals by Chicago residents from suburban rental locations within 3 miles of the City border when the vehicle is used primarily (>50%) in Chicago; it included recordkeeping guidance, a safe-harbor (25% default remittance), and an audit-time presumption based on the lessee’s driver’s-license address unless rebutted by written proof of intended use.
- Plaintiffs Enterprise and Hertz operate rental locations inside Chicago and in the suburban 3-mile zone; they challenged Ruling 11 seeking declaratory and injunctive relief, arguing it amounts to impermissible extraterritorial taxation, exceeds the ordinance, and violates due process and the Commerce Clause.
- The circuit court granted summary judgment for Enterprise, declared Ruling 11 facially unconstitutional, and enjoined enforcement as to short-term rentals occurring outside Chicago. The City appealed.
- The appellate court reviewed de novo, concluded the ordinance imposes a use tax (not a transaction tax), upheld Ruling 11 as a permissible interpretation and enforcement tool, reversed the circuit court, vacated the injunction, and entered summary judgment for the City.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Ruling 11 improperly exercises extraterritorial/home-rule power by taxing out-of-city lease transactions | Ruling 11 expands the ordinance to tax lease transactions that occur outside Chicago (extraterritorial) | The ordinance taxes use in the City, not the location of the lease; City may tax use by residents inside its borders and require entities that do business in City to collect | Held for City: ordinance is a use tax; Ruling 11 targets in-City use by Chicago residents and is not extraterritorial |
| Whether Ruling 11 exceeds the ordinance's scope by imposing recordkeeping, presumptions, and contractual changes on plaintiffs | Ruling 11 adds burdens (required records, administrative presumption, forced lease-language changes) beyond the ordinance | Ruling 11 is an interpretive enforcement rule within the ordinance's grant of authority; recordkeeping and safe-harbor are reasonable and largely mirror ordinance requirements | Held for City: Ruling 11 falls within scope; obligations are reasonable and rebuttable; safe-harbor and records are permissible |
| Commerce Clause challenge (risk of taxing interstate/suburban activity) | Ruling 11 could be applied to out-of-state locations (e.g., Indiana) and thus burden interstate commerce | Ruling 11 as applied relates to in-City use by Chicago residents; speculative expansion to out-of-state sites is not ripe | Held for City: Commerce Clause challenge dismissed as speculative and not shown on the record |
| Due Process / minimum contacts (can City tax out-of-city rentals when use in City is uncertain) | City lacks minimum contacts with out-of-city transactions where actual in-City use is not certain | Taxable event is use in the City; Ruling 11 links tax to in-City use by residents and provides rebuttable presumptions and audit procedures | Held for City: Due-process link exists because the taxable event is use in Chicago; plaintiffs lack standing to attack facially as a transaction tax |
Key Cases Cited
- Brown's Furniture, Inc. v. Wagner, 171 Ill. 2d 410 (1996) (upholding use tax rationale based on receipt of municipal benefits and preventing revenue escape)
- Miller Brothers Co. v. State of Maryland, 347 U.S. 340 (1954) (use tax operates to prevent residents from avoiding tax by out-of-state purchases)
- Mulligan v. Dunne, 61 Ill. 2d 544 (1975) (home-rule power is broad but may not be exercised extraterritorially)
- O'Connor v. A&P Enterprises, 81 Ill. 2d 260 (1980) (administrative agencies may adopt interpretive rules to guide enforcement)
- Commercial Nat'l Bank of Chicago v. City of Chicago, 89 Ill. 2d 45 (1982) (entities doing business with residents may be required to collect local taxes tied to in-jurisdiction activity)
- Irwin Indus. Tool Co. v. Department of Revenue, 238 Ill. 2d 332 (2010) (due-process taxing link requires a definite connection to the taxed activity)
- Allied-Signal, Inc. v. Director, Div. of Taxation, 504 U.S. 768 (1992) (the constitutional link must be to the activity taxed, not merely to the actor)