Ill. Supreme Court finds Chicago’s vehicle lease tax unconstitutional

Rental tax within three miles of border exceeded city’s tax authority

Mar 08, 2017

On Jan. 20, 2017, the Illinois Supreme Court issued its decision in Hertz Corp. v. City of Chicago, finding that a ruling by the City of Chicago requiring vehicle rental companies located within three miles of city borders to collect tax on rentals was unconstitutional as a violation of the home rule article of the Illinois Constitution.

The tax at issue was the personal property lease tax (lease tax), which levies a tax on the lease or rental of personal property or the privilege of using personal property in Chicago. The obligation to pay the lease tax is imposed upon the lessee of the property and the lease or rental is deemed to take place at the location where the lessee takes possession of the property.

In May of 2011, the Chicago Department of Revenue promulgated Ruling 11 to assist enforcement of the property lease transaction tax ordinance as it applies to suburban short-term vehicle rental locations within three miles outside of the city’s borders. Ruling 11 applied to vehicle rental companies that were “doing business within the city.” The ruling defined “doing business in the city” as maintaining a vehicle rental location in the city or regularly renting vehicles that are used in the city, such that the rental company is subject to audit by the department.

According to Ruling 11, the department will assume that an individual who is a Chicago resident, based on the individual’s driver’s license, will use the vehicle in the city, and therefore will be subject to the tax. Conversely, the department will assume that an individual who is not a Chicago resident will use the vehicle primarily (greater than 50 percent) outside of the city and therefore will be exempt from the tax. Those presumptions were rebuttable by a lessee who affirmatively declares that the vehicle will be used primarily outside of the city. This affirmation must be part of the rental agreement. Rental companies may opt out of the record-keeping requirement but will be forced to pay tax on 25 percent of its rental charges from Chicago customers.

The Hertz Corporation and Enterprise Leasing Company of Chicago (collectively referred to as taxpayers) filed separate actions against Chicago seeking declaratory and injunctive relief, asserting that Ruling 11 is unconstitutional and that it has an unauthorized territorial effect. The circuit court sided with the taxpayers with respect to both arguments. The appellate court reversed, taking the position that the tax is constitutional as a use tax as opposed to a tax on the rental transaction itself.

On further appeal, the Illinois Supreme Court held that Ruling 11 violated the home rule article of the Illinois Constitution, which permits local governments within the state to exercise self-government unless explicitly limited by the General Assembly. Ruling 11 was an improper exercise of the city’s home rule article because it had an extraterritorial effect. According to the court, the lease tax was imposed on a stated intent as to future use or on a presumption of use based upon residency, not on actual use. Further, the conclusive presumption of taxability based upon residency has nothing to do with the use of the rental vehicles because there is no evidence of where the vehicle was actually driven. Accordingly, Ruling 11 impermissibly permitted the city to exercise power outside of city limits, which violated the home rule article of the Illinois Constitution.

The court warned that sanctioning the lease tax based upon nothing more than a lessee’s stated intention or a presumption of use based solely on residency would allow other home rule units to enact their own use taxes in similar circumstances, in essence opening the floodgates.


Chicago has enacted increasingly broad taxing ordinances with respect to sourcing income based upon the desired outcome. It’s unclear how the court’s decision may impact other portions of Chicago’s personal property lease transaction tax, but other rulings concerning cloud services have may be read to have similar “sourcing by intention” provisions. Personal Property Lease Transaction Tax Ruling 12 imposes a collection obligation on providers of nonpossessory computer leases even if the provider’s computer or software is located outside the city. Based on Hertz Corp., there may be a position that the city could not enforce the tax under Ruling 12 on businesses located outside of the city. Taxpayers renting or leasing property to Chicago customers should have an in-depth understanding of the various rulings and provisions of the city’s personal property lease transaction tax and should speak to their tax advisers with questions.