Hertz Corp. v. City of Chi.

• Decision Date: 20 January 2017
• Docket Number: Docket Nos. 119945,119960 cons.
• Citation: 77 N.E.3d 606,2017 IL 119945
• Parties: The HERTZ CORPORATION et al., Appellants, v. The CITY OF CHICAGO et al., Appellees.
• Court: Illinois Supreme Court

2017 IL 119945

77 N.E.3d 606

The HERTZ CORPORATION et al., Appellants,

v.The CITY OF CHICAGO et al., Appellees.

Docket Nos. 119945

119960 cons.

Supreme Court of Illinois.

Opinion filed January 20, 2017.

Michael A. Scodro, Ross B. Bricker, John F. Ward, Jr., Barry Levenstam, and Clifford W. Berlow, of Jenner & Block LLP, of Chicago, for appellantHertz Corporation.

Kevin M. Forde and Joanne R. Driscoll, of Forde Law Offices LLP, and Stanley R. Kaminski, Amy E. McCracken, and Elinor H. Murárová, of Duane Morris LLP, both of Chicago, for appellantEnterprise Leasing Company of Chicago, LLC.

Stephen R. Patton, CorporationCounsel, of Chicago (Benna Ruth Solomon, Myriam Zreczny Kasper, and Suzanne M. Loose, Assistant CorporationCounsel, of counsel), for appellees.

Michael J. Wynne, Adam P. Beckerink, Jennifer C. Waryjas, and Douglas A. Wick, of Reed Smith LLP, of Chicago, for amicus curiae Taxpayers' Federation of Illinois.

Theodore R. Bots and Julie S. Townsley, of Baker & McKenzie LLP, of Chicago, for amicus curiae Illinois Chamber of Commerce.

OPINION

JUSTICE GARMANdelivered the judgment of the court, with opinion.

¶ 1Defendant, the city of Chicago(City), imposes a tax on the use of personal property within its borders.The tax applies to the lease of personal property within the City and to the use of property in the City that is rented or leased outside the City.In 2011, the City's director of the department of revenue (now the City comptroller) issued Ruling 11, which provided guidance to suburban vehicle rental agencies located within three miles of Chicago's borders, including plaintiffs, as to the collection of the tax.Personal Property Lease Transaction Tax Second Amended Ruling 11 (eff.May 1, 2011)(Ruling 11).Ruling 11 stated that beginning July 1, 2011, in the event of an audit, the City department of revenue (Department) would hold the suburban rental agencies responsible for paying the tax unless there was written proof that the lessee was exempt from paying the tax based upon the use of the leased vehicle outside the City.In the absence of such proof, Ruling 11 provided, the Department would assume that a customer who is a Chicago resident would use the leased vehicle primarily in the City and that a customer who is not a Chicago resident would use the vehicle primarily outside the City.

¶ 2Plaintiffs, the Hertz Corporation(Hertz) and Enterprise Leasing Company of Chicago (Enterprise), separately filed suit against the City and the City comptroller, seeking a declaration that the tax violates the Illinois and United States Constitutions and requesting an injunction to prevent the City from enforcing the ordinance as to them.The circuit court granted summary judgment to plaintiffs, declaring that Ruling 11 was facially unconstitutional and permanently enjoining the City from enforcing the ordinance against plaintiffs with respect to short-term vehicle rental transactions occurring outside the City's borders.The appellate court reversed.

¶ 3 BACKGROUND

¶ 4 The Chicago personal property lease transaction tax ordinance (Chicago Municipal Code§ 3-32-030(A)(added Dec. 15, 1992)) levies a tax on the lease or rental in the City of personal property or the privilege of using in the City personal property that is leased or rented outside the City.The obligation to pay the tax is upon the lessee of the personal property.The lease or rental of the property is deemed to take place at the location where the lessee takes possession or delivery of the personal property.Chicago Municipal Code§ 3-32-030(C)(added Dec. 15, 1992).The use in the City of personal property leased or rented outside the City is exempt from the tax if it is primarily used (more than 50%) outside the City.Chicago Municipal Code§ 3-32-050(A)(1)(added Dec. 15, 1992).

¶ 5 In May 2011, the then-director of the City's department of revenue promulgated a second amended ruling, Ruling 11, to explain the administration and enforcement of the ordinance as applied to suburban short-term vehicle rental locations within three miles of the City's borders.The ruling applies to vehicle rental companies that are doing business in the City, defined as having a rental location in the City or regularly renting vehicles that are used in the City, such that the company is subject to audit by the Department.Id.§ 3.Ruling 11 advises vehicle rental companies doing business in the City, when renting from a suburban location within three miles of the City's borders to a customer who will use the vehicle in the City, to maintain written records that support any claim of exemption from the tax, for the company's use in the event of an audit.In such an event, the ruling states, absent written proof to the contrary, the Department will assume that a customer who is a Chicago resident, based upon the customer's driver's license, will use the vehicle in the City and is thus subject to the tax.Conversely, the ruling further states that the Department will assume that a customer who is not a Chicago resident will use the vehicle primarily outside the City and thus be exempt from the tax.Ruling 11 suggested the following provisions for inclusion in rental agreements, which, when selected by the customer, would be deemed by the Department to be acceptable evidence of taxable and exempt transactions:

"___ By initialing this space you are notifying us that you plan to use this vehicle 50% or more of the time (including garaging) in the City of Chicago.

___ By initialing this space you are notifying us that you plan to use this vehicle more than 50% of the time (including garaging) outside the City of Chicago."Id.

¶ 6Section 4 of Ruling 11 states that, as a policy matter, the Department has decided that it will not audit or assess any motor vehicle rental companies for rentals from locations more than three miles outside the City's border.Ruling 11 further states that in the event of a change in policy, the Department will provide at least 120 days' notice of the change, which would be prospective only.Id.§ 4.Ruling 11 contains a "safe harbor" provision, which states that in lieu of maintaining written records, a suburban motor vehicle rental company subject to the ruling may assume that 25% of its rental charges to customers who are Chicago residents are for vehicles that will be used primarily in Chicago and the company may then pay the tax on that amount.Id.§ 5.

¶ 7 Subsequent to the issuance of Ruling 11, Enterprise sought guidance from the Department on whether its current lease agreement was sufficient to provide an exemption from the tax.That agreement informed the lessee of the vehicle that a city tax may apply if the leased vehicle is used primarily in the City.The agreement further advised the lessee to request a tax form for remittance of the tax directly to the City should the lessee intend to use the vehicle primarily in Chicago.The City found the agreement insufficient to support an exemption from the tax, reasoning that silence by a Chicago resident as to the intended use of the vehicle did not constitute a claimed exemption by the lessee and that a Chicago lessee should be required to expressly inform Enterprise whether the intended use of the car would primarily be in Chicago.

¶ 8Plaintiffs filed separate actions against the City, seeking declaratory and injunctive relief.Those actions were later consolidated.Plaintiffs alleged that Ruling 11 (1) violates the due process clause of the fourteenth amendment to the United States Constitution(U.S. Const., amend. XIV, § 1 ) based upon the alleged extraterritorial nature of the tax; (2) has an unauthorized extraterritorial effect in violation of article VII, section 6, of the Illinois Constitution(Ill. Const. 1970, art. VII, § 6 );(3) is unauthorized because it exceeds the scope of and is prohibited by the ordinance imposing the tax; and (4) violates the commerce clause of the United States Constitution(U.S. Const., art. I, § 8, cl. 3 ).Plaintiffs further alleged that the tax ordinance itself is unconstitutional with respect to extraterritorial transactions.Hertz separately alleged that the retroactive application of Ruling 11 is illegal.

¶ 9 Enterprise filed a motion for preliminary injunction, and the City filed separate motions to dismiss the complaints.The circuit court denied the City's motions and granted Enterprise's motion for preliminary injunction.Enterprise filed a motion for summary judgment, which Hertz joined.The circuit court granted plaintiffs summary judgment.The court found that Ruling 11 is an exercise of improper extraterritorial taxing authority because the taxable event, i.e. , the lease transaction, takes place outside the City's boundaries.The court also found that Ruling 11 exceeds the scope of the tax ordinance by improperly extending the reach of the ordinance to transactions that take place outside Chicago's borders.Finally, the circuit court found that Ruling 11 violates the due process and commerce clauses of the United States Constitution.

¶ 10The appellate court reversed.It first rejected plaintiffs' characterization of the tax as a transaction tax.Based upon the plain language of the tax ordinance, the court found that the tax is in fact a use tax on the privilege of using leased tangible personal property inside the City. 2015 IL App (1st) 123210, ¶ 22, 397 Ill.Dec. 163, 41 N.E.3d 574.The court held that because plaintiffs had rental locations in the City and, therefore, did business in the City, they could be required to collect the use tax at their suburban locations.Id.¶¶ 26–27.The court found a sufficient nexus between plaintiffs and the taxable activity, i.e. , use of the vehicles in Chicago, to permit the tax to be imposed and collection duties placed on plaintiffs.Id.¶ 31.The appellate court also rejected plaintiffs' other arguments.We granted plaintiffs' petitions for leave to appeal(Ill.S. Ct. R. 315(eff. Mar. 15, 2016)), and ...