Hertz Corp. v. City of Chi.

• Decision Date: 22 September 2015
• Docket Number: Nos. 1–12–3210,1–12–3211.,s. 1–12–3210
• Citation: 41 N.E.3d 574
• Parties: The HERTZ CORPORATION, Plaintiff–Appellee, v. CITY OF CHICAGO and Dan Widawsky, Not Individually, But as City Comptroller, Department of Finance, Defendants–Appellants. Enterprise Leasing Company of Chicago, LLC, d/b/a Enterprise Rent–a–Car, Alamo Rent–a–Car and National Car Rental, a Delaware Limited Liability Company, Plaintiff–Appellee, v. City of Chicago and Dan Widawsky, Not Individually, But as City Comptroller, Department of Finance, Defendants–Appellants.
• Court: United States Appellate Court of Illinois

41 N.E.3d 574

The HERTZ CORPORATION, Plaintiff–Appellee

v.CITY OF CHICAGO and Dan Widawsky, Not Individually, But as City Comptroller, Department of Finance, Defendants–Appellants.

Enterprise Leasing Company of Chicago, LLC, d/b/a Enterprise Rent–a–Car, Alamo Rent–a–Car and National Car Rental, a Delaware Limited Liability Company, Plaintiff–Appellee

v.City of Chicago and Dan Widawsky, Not Individually, But as City Comptroller, Department of Finance, Defendants–Appellants.

Nos. 1–12–3210

1–12–3211.

Appellate Court of Illinois, First District, Second Division.

Sept. 22, 2015.

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

Duane Morris LLP (Stanley R. Kaminski, Amy E. McCracken, and Elinor L. Hart, of counsel), and Jenner & Block LLP (Ross B. Bricker and John F. Ward, Jr., of counsel), Chicago, and Jenner & Block LLP, Washington, DC (Jessica Ring Amunson, of counsel), for appellees.

OPINION

Presiding Justice PIERCE

delivered the judgment of the court, with opinion.

¶ 1 Since early 1990, the City of Chicago (City) has imposed a tax on the use of all leased personal property within city limits. Chicago Municipal Code § 3–32–030(A) (added Dec. 15, 1992). In 2011, the City's department of revenue adopted a ruling intended to serve as a guide for the application of the tax on the use of vehicles leased by City residents from rental agencies located within three miles of the city's border. Personal Property Lease Transaction Tax Second Amended Ruling No. 11 (eff. May 1, 2011). Plaintiffs, Enterprise Leasing Company of Chicago (Enterprise) and the Hertz Corporation (Hertz), filed separate actions against defendants, the City of Chicago and the City Comptroller, seeking declaratory and injunctive relief against the City's imposition of a tax on “car-rental transactions” that occur within three miles of the city's border. The cases proceeded in tandem before the circuit court. On cross-motions for summary judgment, the circuit court granted summary judgment in favor of Enterprise.¹ The circuit court declared Ruling 11 facially unconstitutional and permanently enjoined the City from enforcing the ordinance and the ruling “against plaintiff[s] with respect to * * * short-term vehicle rental transactions occurring outside the City of Chicago.” For the reasons that follow, we reverse the judgment of the circuit court, vacate the permanent injunction and enter summary judgment in favor of defendants.

¶ 2 BACKGROUND

¶ 3 The relevant facts are not in dispute. The authority for the City's tax on the use of short-term car rentals in the city by Chicago residents, where the lease occurs within three miles of its border, is derived from a general use tax for leased personal property found in section 3–22–030(A) of the Chicago Municipal Code. Section 3–22–030(A) imposes an 8% tax (1) on the rental of personal property within the city, and (2) on the use of personal property in the city that is leased or rented outside the city. Chicago Municipal Code § 3–32–030(A) (added Dec. 15, 1992). This tax on leased personal property is levied in addition to all other taxes imposed. Chicago Municipal Code § 3–32–010 (added Dec. 15, 1992). The ordinance applies to lessors that maintain an office or principal place of business in the city or to lessors that are otherwise required to collect the tax imposed by the ordinance. Chicago Municipal Code § 3–32–090 (added Dec. 15, 1992). The tax is imposed on the lessee and is due at the time of payment to the lessor. In the event the lessee does not remit the tax, the lessor is required to remit the tax to the city. Chicago Municipal Code §§ 3–32–030(B), 3–32–070(A) (added Dec. 15, 1992). If the lessor fails to collect or remit the use tax, the lessor is liable for the amount of tax plus interest and penalties. Chicago Municipal Code § 3–32–070(A) (added Dec. 15, 1992).

¶ 4 The ordinance authorizes the department of revenue (Department) (now the City Comptroller) to issue rules and regulations for the administration and enforcement of the ordinance. Chicago Municipal Code § 3–32–120 (added Dec. 15, 1992). In that regard and relevant to this case, in 2011 the Department issued a second amended ruling to explain the administration and enforcement of the general city use tax as applied to “suburban [short-term car rental] locations within 3 miles of Chicago's border.” Personal Property Lease Transaction Tax Second Amended Ruling No. 11 (Ruling 11) (eff. May 1, 2011). By its terms, Ruling 11 applies to car rentals “to Chicago residents, on or after July 1, 2011, from suburban locations within 3 miles of Chicago's border * * * by motor vehicle rental companies doing business in the City.” Id. Under Ruling 11, a motor vehicle company is “ ‘doing business' in the City” when it has a rental location in the city or “regularly rent[s] vehicles that are used in the City, such that the company is subject to audit by the Department.” Id. § 3. Ruling 11 applies only to car rental agencies that do business in Chicago and also have agencies in the suburbs located “within 3 miles of Chicago's borders.” Id. § 1. Ruling 11 cites the ordinance and states that the ordinance allows certain exemptions, including an exemption for leased property that is used outside of the city more than 50% of the time. Id. § 2(c). Ruling 11 also reflects that the ordinance puts the burden of proving an exemption on the tax payer or tax collector. Id. Lastly, Ruling 11 cites the ordinance in stating that the ordinance requires the lessor to maintain books and records of every taxable transaction for a period of at least five years. Id. § 2(e).

¶ 5 Section 3 of the Ruling provides guidance to car rental companies doing business in the city and that have rental facilities within three miles of the city's border that, when leasing to Chicago residents intending to use the car primarily in the city, the lessor should maintain records in the event of an audit. Id. § 3. Ruling 11 contains a policy statement that the Department will not audit rental locations beyond three miles of the city border, excluding O'Hare field, and it will provide prior notice of a change in policy. Id. § 4. Ruling 11 also contains a safe harbor provision: rather than maintaining records of the city residents' intended use of the vehicle, rental car companies subject to the tax can remit a tax “equal to the tax rate multiplied by 25% of its rental charges at such locations, to customers who are Chicago residents.” Id. § 5.

¶ 6 If audited, absent any written proof to the contrary, where a suburban location leases to a Chicago resident, the Department will “assume” that the lessee used the vehicle in the city. Id. The address shown on the lessee's driver's license determines whether the lessee is a Chicago resident. Conversely, where a suburban location leases to a driver whose license does not show a Chicago address, the Department will “assume” that the rental is to a non-Chicago resident and the vehicle was not used in the city. Id. Ruling 11 provides that where the lessor, as part of its rental agreement or as part of its records, obtains a response to the following statement from the lessee, the Department will accept this statement as sufficient proof of use:

“____ 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. § 3.

¶ 7 Plaintiffs, national car rental companies, operate rental car facilities in Chicago and the surrounding suburbs. Enterprise operates several different vehicle rental companies² and estimates it has 26 rental car locations in the three-mile tax zone. Plaintiffs are subject to the collection and remittance requirements of this tax.

¶ 8 Enterprise's current rental agreement, iterated in fine print, informs the lessee that a city tax may apply if the vehicle is used primarily in the city and that the tax will not apply if the vehicle is not primarily used in the city. The rental agreement advises the lessee to request a tax form for remittance of the tax directly to the City should the primary use be in the city. In 2011, Enterprise sought guidance from the Department to ascertain whether this information contained in its current agreement was sufficient to support an exemption for car rentals leased from outside of Chicago. Enterprise argued that given this provision in its lease agreement, where the lessee remains silent and does not request a tax form to indicate primary use in the city, it should be inferred that the tax was not incurred. Enterprise contended that the information contained in the agreement, and the response (or lack of response) from the lessee, is a sufficient basis to determine actual usage and whether a tax was due. The City disagreed reasoning that silence by a Chicago resident lessee relating to the intended use of the vehicle does not constitute a claimed exemption by the lessee and that a Chicago resident lessee should be required to expressly inform Enterprise whether the intended use of the car will be primarily in Chicago for the exemption to apply.

¶ 9 Unable to resolve the dispute, Enterprise and Hertz filed these actions against the City seeking declaratory and injunctive relief to stop enforcement of the ordinance as authorized by Ruling 11. Plaintiffs argued that Ruling 11 is an extraterritorial exercise of Chicago's home rule authority; Ruling 11 violates the scope of the ordinance; and Ruling 11 violates the due process clause and commerce clause of the United States Constitution. Plaintiffs argue that Ruling 11 improperly imposes the tax on all short-term car rentals outside of Chicago where the lessee's driver's license shows a Chicago...