The court further disregarded the fact that through the presumption, the city was extending its regulatory and tax jurisdiction to non-Chicago rentals even when delivery and use of the vehicle does not occur in Chicago.

In the recent case of Hertz and Enterprise Leasing v. City of Chicago, the Illinois Appellate Court has sanctioned the City of Chicago's administrative expansion of its tax and regulatory jurisdiction to vehicle rentals outside of Chicago (limited to three miles of the city) wherever a Chicago resident is involved. In reversing the decision of the Circuit Court that found the city's action unconstitutional, the appellate court held that since a Chicago resident was involved who could possibly use the vehicle in the city, this was sufficient contact with the city to impose an administrative presumption that taxable use will occur in the city, thus essentially requiring national lessors of vehicles to modify their non-Chicago contracts, interview their customers and get affirmations of use from their customers on their non-Chicago rentals in order to prove no taxable use would occur. Ignoring that the city has no direct jurisdiction over the rental unless use actually occurred in Chicago, the appellate court basically found that to be meaningless since the presumption allowed the lessor to dispute the tax due. The court further disregarded the fact that through the presumption, the city was extending its regulatory and tax jurisdiction to non-Chicago rentals even when delivery and use of the vehicle does not occur in Chicago. It also rejected the extraterritorial impact arguments of the plaintiffs by making the argument that if use of the vehicle ultimately occurs in Chicago, then no extraterritorial effect would occur. In doing so, the court failed to address the argument that there was an absence of due process nexus as a result of the rental taking place outside of Chicago and that no use of the rented vehicle may ever occur in Chicago. It merely said due process is met if use occurs in Chicago.

The Hertz decision is a landmark case since it is the first time in Illinois or nationally that a court has allowed a taxing body to extend its tax collection and regulatory powers to extraterritorial activities and transactions based solely on an administrative presumption that a taxable use would be presumed to occur in the future in the taxing jurisdiction, unless the lessor proves otherwise. In doing so, the appellate court appears to not take into account a number of Illinois court, U.S. Supreme Court and other state court decisions directly opposite to its reasoning.

[Note: Duane Morris represented Enterprise Leasing in the case discussed in this Alert.]

For Further Information

If you would like more information on how this may affect your company, please contact Stanley R. Kaminski, any other member of the State and Local Tax Practice Group or the lawyer in the firm with whom you are regularly in contact.

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