SALT Report 1973 – The Circuit Court of Cook County determined that a Chicago ordinance which required rental companies to impose and collect the lease transaction tax on car rentals that occur outside the city of Chicago was both an improper and unconstitutional.
The Chicago ordinance in question, Ruling 11, requires that a lease transaction tax be imposed on the privilege of using in Chicago property that was leased outside Chicago. Ruling 11 also requires vehicle rental companies that are located within three miles of Chicago to ask their customers whether they planned to use the vehicle more than 50% of the time in Chicago and, if so, to collect and remit use tax on those transactions. In addition, the rental locations outside Chicago are required to keep the same rental records as rental locations located in the city limits.
In their decision, the Circuit Court found that Ruling 11 was improperly imposed by Chicago’s taxing authority. As a home-rule city, Chicago is limited to taxing transactions that occur within its borders. Therefore, the Court ruled that rental transactions made outside of the city’s limits occur outside of the jurisdiction of Chicago and its taxing power because the rental transactions do not result in delivery within the city. The court further noted that Chicago does not have the jurisdiction to tax transactions outside its borders simply because it has jurisdiction over Chicago residents or because it has jurisdiction over the company that has business locations within Chicago.
Additionally, Ruling 11 was found to exceed the scope of Chicago’s taxing ordinance. The Ruling extends the reach of the leasing tax beyond Chicago by creating the presumption that non-Chicago leasing transactions are taxable if the lessee is a Chicago resident.
Finally, the Court ruled that the language and imposition of Ruling 11 violates both the Due Process Clause and the Commerce Clause. The Due Process Clause requires that there be a definite link or minimum connection between a jurisdiction and the person, property or transaction it seeks to tax. Therefore, because Chicago has nothing to do with the rental transactions that occur beyond the boundaries of Chicago’s jurisdictional authority they have no basis to impose the tax. Further, the court determined that Ruling 11 fails to prove that substantial nexus is established between the transaction being taxed and the taxing body, as required by the Commerce Clause.
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