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Circuit Court of Cook County Upholds City of Chicago’s Imposition of Amusement Tax on Internet-Based Streaming Services

On May 24, 2018, the Circuit Court of Cook County granted the City of Chicago’s Motion for Summary Judgment in the case captioned Labell v. City of Chicago, No. 15 CH 13399 (Ruling), affirming the City’s imposition of its amusement tax on internet-based streaming services.

City’s Amusement Tax and Amusement Tax Ruling #5

The City imposes a 9 percent tax on “admission fees or other charges paid for the privilege to enter, to witness, to view or to participate in such amusement. …” Mun. Code of Chi., tit. 4, ch. 4-156 (Code), § 4-156-020(A); see also id. § 4-156-010 (defining “amusement” in part as a performance or show for entertainment purposes, an entertainment or recreational activity offered for public participation and paid television programming). On June 9, 2015, the City Department of Finance (Department) issued Amusement Tax Ruling #5, taking the position that the amusement tax is imposed “not only [on] charges paid for the privilege to witness, view or participate in amusements in person but also [on] charges paid for the privilege to witness, view or participate in amusements that are delivered electronically [emphasis in original].” Amusement Tax Ruling #5, ¶ 8.

The Ruling sought to impose an amusement tax on subscription fees or per-event fees for the privilege of: (1) watching electronically delivered television, shows, movies or videos; (2) listening to electronically delivered music; and (3) participating in online games, provided the streamed content (i.e., movies, music, etc.) was delivered to a customer in the City. See id. ¶¶ 8, 10. The Ruling stated that “this means that the amusement tax will apply to customers whose residential street address or primary business street address is in Chicago, as reflected by their credit card billing address, zip code or other reliable information.” Id. ¶ 13. A copy of the City’s Amusement Tax Ruling #5 is linked here. (more…)

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Illinois Supreme Court Holds City of Chicago Went Too Far in Taxing Cars Rented Outside Its Borders

The Illinois Supreme Court, in Hertz Corp v. City of Chicago, 2017 IL 119945 (Jan. 20, 2017) , held that the City of Chicago’s ruling requiring rental car companies located within three miles of the City to collect tax on vehicle rentals is unconstitutional under the home rule article of the Illinois Constitution. Hopefully, the court’s ruling will stymie the City’s expansive interpretation of its taxing powers.

The tax at issue is the City’s Personal Property Lease Transaction Tax (Lease Tax), which is imposed upon “(1) the lease or rental in the city of personal property or (2) the privilege of using in the city personal property that is leased or rented outside of the city.” Mun. Code of Chi. § 3-32-030(A). While the Lease Tax is imposed upon and must be paid by the lessee, the lessor is obligated to collect it at the time the lessee makes a lease payment and remit it to the City. Mun. Code of Chi. §§ 3-32-030(A), 3-32-070(A).

The subject of this litigation is the City’s application of the Tax in its Personal Property Lease Transaction Tax Second Amended Ruling No. 11 (eff. May 1, 2011) (Ruling 11). The plaintiffs argued that Ruling 11 extends the reach of the tax ordinance beyond Chicago’s borders in violation of the home rule provision of the Illinois Constitution and violates the federal due process and commerce clauses. The Ruling “concerns [short-term] vehicle rentals to Chicago residents, on or after July 1, 2011, from suburban locations within 3 miles of Chicago’s border … [excluding locations within O’Hare International Airport] by motor vehicle rental companies doing business in the City.” Ruling 11 § 1.  The Ruling explains that “‘doing business’ in the City includes, for example, having a location in the City or regularly renting vehicles that are used in the City, such that the company is subject to audit by the [City of Chicago Department of Finance] under state and federal law.” Ruling 11 § 3. As for taxability of leased property, the Ruling cites the primary use exemption, exempting from Tax “[t]he use in the city of personal property leased or rented outside the city if the property is primarily used (more than 50 percent) outside the city” and stating the taxpayer or tax collector has the burden of proving where the use occurs.  Ruling 11 § 2(c) (quoting Mun. Code of Chi. § 3-32-050(A)(1)).

Ruling 11 contains a rebuttable presumption that motor vehicles rented to customers who are Chicago residents from the suburban locations of rental companies that are otherwise doing business in Chicago are subject to the Lease Tax. The Ruling applies to companies with suburban addresses located within three miles of the City. The presumption may be rebutted by any writing disputing the conclusion that the vehicle is used more than 50 percent of the time in the City. The opposite is assumed for non-Chicago residents. Ruling 11 § 3. The Ruling provides that such a writing can be as simple as a customer’s [...]

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Illinois Regional Transportation Authority Suffers A Setback In Its Sales Tax Sourcing Litigation

Illinois’ order acceptance rule for sourcing local sales taxes has spurred litigation and endless confusion. The wide differential between local tax rates has encouraged shoppers and retailers to transact business in lower rate jurisdictions – everything from drivers heading across the county line to fill their gas tanks to huge retailers establishing order acceptance facilities in low tax rate jurisdictions. The Illinois Regional Transportation Authority (RTA) has aggressively pursued claims against municipalities and retailers it asserts have violated local sourcing rules.  Recently, the RTA suffered a serious setback in its widely publicized effort to retroactively change the rules on order acceptance.

For decades, the Illinois Department of Revenue (IDOR) administered local sales taxes so that the sole factor governing the applicable tax rate was the point at which a retailer accepted a purchase order. This “order acceptance” rule was clear and understandable, and supported by IDOR letter rulings.  Some retailers obtained IDOR approval to source their sales to a low rate local jurisdiction where a single employee physically received the buyer’s executed counterpart of the retailer’s offer to sell. In addition, a number of retailers entered into contracts with municipalities in which the municipalities agreed to rebate part of their share of the resulting local tax back to the retailers.

About 10 years ago, the IDOR began backing away from its strict order acceptance rule. Its backtracking eventually led to the Illinois Supreme Court’s recent decision in Hartney Fuel Oil.  In Hartney, the Supreme Court rejected the IDOR’s single factor order acceptance test as inconsistent with the underlying statute.  The court also held, however, that taxpayers who had relied on the old rule were not liable for transactions occurring before the court’s November 2014 ruling. The court also found that retailers had a legitimate purpose to establish offices to accept orders in low rate jurisdictions solely for the purpose of controlling the tax rate.

While the Hartney case progressed through the court system, the RTA and other local governments began both a public relations campaign and litigation challenging a number of tax sourcing arrangements. One of the leading cases is the RTA’s challenge to United Airlines’ contract to have its purchase orders for aviation fuel accepted in Sycamore, a city outside the RTA’s taxing jurisdiction. The contract called for Sycamore to rebate a portion of the local tax it received back to United.  The RTA sued both the City of Sycamore and United under the theory that the fuel sales should be relocated so that they would be subject to the RTA’s taxing power. It claimed that the Sycamore office was a “sham” and sought millions in additional tax.

On April 25, 2014, the Circuit Court of Cook County found that the Hartney ruling meant that United and its affiliates were “legally entitled to… structure their sales so that acceptance of purchase orders occurred in Sycamore and they would owe no RTA retail occupation taxes.” The court rejected the RTA’s theory that [...]

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