The Hertz Corporation v. The City of Chicago
2017 IL 119945, 77 N.E.3d 606, 413 Ill. Dec. 1 (2017)
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Rule of Law:
A home rule unit's administrative ruling that imposes a use tax collection duty on businesses for transactions occurring entirely outside its borders, based on a customer's stated intent to use the property within the unit or a presumption of use based on residency, is an unconstitutional extraterritorial exercise of its taxing power.
Facts:
- The City of Chicago imposes a tax on the privilege of using leased personal property within the city, even if the property is rented outside the city.
- The City's Department of Revenue issued 'Ruling 11' to guide suburban vehicle rental agencies located within three miles of Chicago's borders on collecting this tax.
- Ruling 11 holds these agencies responsible for collecting the tax unless they obtain written proof that the lessee will use the vehicle primarily (more than 50%) outside the City.
- Absent such proof, Ruling 11 establishes a presumption that a customer with a Chicago residential address will use the vehicle primarily in the City and is therefore subject to the tax.
- Conversely, a non-Chicago resident is presumed to use the vehicle primarily outside the City and is exempt, unless they state an intent to use it in Chicago.
- The Hertz Corporation and Enterprise Leasing Company of Chicago operate rental locations in the suburbs subject to Ruling 11.
- All aspects of the rental transactions at issue, including contract negotiation, signing, and vehicle delivery, occur entirely outside Chicago's city limits.
Procedural Posture:
- The Hertz Corporation and Enterprise Leasing Company of Chicago filed separate suits against the City of Chicago in the circuit court, which were later consolidated.
- Plaintiffs sought a declaratory judgment that Ruling 11 was unconstitutional and an injunction to prevent its enforcement.
- The circuit court (trial court) granted summary judgment in favor of the plaintiffs, finding Ruling 11 to be an unconstitutional extraterritorial exercise of taxing authority.
- The City of Chicago appealed the circuit court's decision to the Illinois Appellate Court.
- The appellate court reversed the trial court's judgment, upholding Ruling 11.
- The plaintiffs, Hertz and Enterprise, were granted leave to appeal to the Supreme Court of Illinois.
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Issue:
Does a city's administrative ruling, which requires vehicle rental agencies located outside the city to collect a city use tax based on a customer's Chicago residency or their stated intent to use the vehicle primarily in the city, constitute an unconstitutional extraterritorial exercise of the city's home rule taxing power under the Illinois Constitution?
Opinions:
Majority - Justice Garman
Yes. The ruling is an unconstitutional extraterritorial exercise of the City's home rule power. Home rule units are prohibited from extending their taxing power beyond their borders unless expressly authorized by the legislature. Unlike prior cases where a tax was upheld, the taxable event here has no tangible connection to the City at the time of the transaction. The tax is imposed not on the actual use of the vehicle in Chicago, but on the lessee's stated intent about future use or on a conclusive presumption of use based solely on the lessee's residency. A statement of intent is not equivalent to actual use, which may never occur, and a residency address is not evidence of where a vehicle will be driven. Because the transactions take place wholly outside Chicago and the tax is triggered by an intent or presumption rather than a concrete connection, Ruling 11 amounts to an impermissible tax on extraterritorial transactions, in violation of the principles set forth in Commercial National Bank of Chicago v. City of Chicago.
Analysis:
This decision reaffirms the strict territorial limitations on a home rule unit's taxing authority under the Illinois Constitution. It clarifies that a tax nexus cannot be established based merely on a customer's stated intent or a legal presumption tied to residency for transactions that occur entirely outside the taxing jurisdiction. The ruling prevents a potential cascade of similar ordinances from various home rule units, which would create significant and complex compliance burdens for businesses operating near multiple jurisdictions. By demanding a more tangible connection between the taxed activity and the taxing body, the court protects businesses from overreach and maintains clear jurisdictional lines for taxation.
