Personal Property Lease Transaction Tax
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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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Taxpayers Stand to Lose Under Chicago’s Lease Tax VDA Offer

Yesterday, the City of Chicago (City) Department of Finance (Department) published an Information Bulletin that provides additional guidance on the Personal Property Lease Transaction Tax (Lease Tax) and extends a new Voluntary Disclosure Agreement (VDA) offer to providers and customers. The updated guidance includes an overview of the Lease Tax, a description of the amendments included in the FY 2016 Revenue Ordinance that passed on October 28, 2015, and answers to 15 FAQs. The details on the Department’s controversial interpretation of the Lease Tax in Ruling #12 and the recent amendments to the Lease Tax have been covered by the authors in prior blog posts, available here and here. The new VDA offer is a significant development that may be enticing to certain providers and customers. However, before providers and customers rush to sign up to pay the Lease Tax for the foreseeable future, they should carefully evaluate whether any Lease Tax obligation is in fact due and whether they qualify under the loose terms outlined in the Bulletin (discussed in detail below). It should be noted at the outset that the guidance (and accompanying VDA offer) do not relate to the City’s amusement tax, which has also been of concern after a ruling was issued this summer interpreting the tax to apply to streamed digital content.

VDA Offer Terms

The most significant component of yesterday’s guidance is the VDA offer beginning on page 6 of the Bulletin. While the VDA may seem enticing, we encourage providers and customers alike to proceed with caution as the practical application of the ambiguous (and discretionary) terms are tainted with uncertainty.

As a threshold to qualifying, the provider or customers must qualify (i.e., be a qualified discloser) for the City standard voluntary disclosure program. Under the standard program, a taxpayer must not be under audit or investigation (i.e., has not received a written notice relating to an audit or investigation for the tax at issue) and must “waive their right to an administrative hearing or claim for refund or credit, and agree not to initiate or join any lawsuits for the payments made under the program.” This is significant because we believe a challenge to the Lease Tax is imminent and those that participate in the VDA program will not benefit if any such challenge is successful.

Even if a taxpayer is considered a qualified discloser under the standard program, to qualify for the more favorable Lease Tax offer providers and customers must file an application by January 1, 2016, and come into compliance with the Lease Tax Ordinance by the same date (or such later date that the Department may agree to). If all of these requirements are met, they will receive the following terms:

  1. As to charges for nonpossessory computer leases that qualified for Exemption 11 under the Department’s interpretation of the exemption before the issuance of Ruling #12, no liability for tax, interest or penalties based on those charges for [...]

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Chicago Mayor’s Tax-Heavy Budget Passes: Lease and Amusement Tax Implications

Last week the Chicago City Council approved Mayor Rahm Emanuel’s 2016 revenue ordinance as part of his tax-laden budget proposal. The revenue ordinance included noteworthy changes to the personal property lease transaction tax (lease tax) and amusement tax, both of which we have covered in-depth since the Department of Finance (Department) issued two rulings over the summer officially extending a nine percent tax to most services provided online. The portions of the revenue ordinance related to the lease tax were drafted in response to the concerns raised by the startup community. As discussed in more detail below, the lease tax amendments provide little relief for the vast majority of businesses dreading the January 1st effective date of the ruling. The amendments to the amusement tax provide no relief whatsoever.

Chicago Lease Tax Amendment

The changes to the Lease Tax Ordinance include: (1) a narrowly defined exemption for small businesses; (2) a reduction of the rate for cloud-based services where the customer accesses its own data; and (3) codification of the applicability of the Illinois mobile telecom sourcing rules. The amendments were touted by the mayor as addressing many of the concerns expressed by small businesses after the Department administratively interpreted the nine percent lease transaction tax to apply to most cloud-based services in June. In response to an outcry from the startup community, the Department subsequently delayed the effective date of the ruling to January 1, 2016. Unfortunately the mayor’s solution falls short of providing any significant relief and will not alleviate the concerns of the vast majority of customers and providers affected by the ruling.

Effective immediately upon publication, the lease transaction amendments approved yesterday will:

  1. Exempt “small new businesses” that are lessors or lessees of non-possessory computer leases from their respective lease transaction tax collection and payment obligations. For this purpose, “small new business” is a business that (1) holds a valid and current business license issued by the city or another jurisdiction; (2) during the most recent full calendar year prior to the annual tax year for which the exemption provided by this subsection is sought had under $25 million in gross receipts or sales, as the term “gross receipts or sales” is defined for federal income tax purposes; and (3) has been in operation for fewer than 60 months. For the purpose of calculating the $25 million limit, gross receipts or sales will be combined if they are received by members of a single unitary business group. This will exclude most subsidiaries from taking advantage of the “small new business” exemption.
  2. Reduce the rate from nine percent to 5.25 percent of the lease or rental price in the case of the non-possessory lease of a computer primarily for the purpose of allowing the customer to use the provider’s computer and software to input, modify or retrieve data or information that is supplied by the customer.
  3. Codify the use of the sourcing rules set forth in the Illinois [...]

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Illinois Appellate Court Holds City of Chicago Tax on Cars Rented Outside of but Used Within the City Valid

An Illinois Appellate Court, in Hertz Corp. v. City of Chicago, 2015 IL App (1st) 123210 (Sept. 22, 2015), gave the City of Chicago (City) permission to require rental car companies to collect tax on vehicle rentals from locations within three miles of the City, overturning a lower court ruling that found such taxation was an extraterritorial exercise of the City’s authority.  The appellate court granted summary judgment to the City and lifted the permanent injunction enjoining the City from enforcing the tax.

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 is an extraterritorial exercise of the City’s authority because the City lacks nexus with the rental transactions.  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 is used more than 50 percent of the time in the City.  The opposite is assumed for non-Chicago residents.  Ruling 11 § 3.  The [...]

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In Chicago, Taxing the Cloud Will Wait (Mostly) Until 2016

The City of Chicago has announced that it will be delaying the effective date for its recent ruling under the Personal Property Lease Transaction Tax until January 1, 2016. Personal Property Lease Transaction Tax Ruling #12 takes a broad view of how the 9 percent tax applies to cloud-based services. It was scheduled to come into effect on September 1, 2015, but after an outcry from the startup community, Chicago has pushed back the date on which it expects cloud-based providers to begin collecting and remitting tax. The additional time will allow the city to further consider potential exemptions for small businesses. Providers of information services, software as a service (SaaS), platform as a service (PaaS), and some forms of infrastructure as a service (IaaS) that have nexus with the city will now have until January 1, 2016, to begin collecting the tax. (See a detailed discussion of Ruling #12 and its implications in a previous post.) The delay could backfire for the city because taxpayers will now have more time to launch challenges to the tax.

Ruling #12 is only part of Chicago’s two-pronged approach to taxing the cloud. The city had at the same time issued Amusement Tax Ruling #5, which provides that charges for video streaming, audio streaming, computer game subscriptions and other forms of online entertainment, as well as temporary download rentals, are subject to the 9 percent Amusement Tax—not the Lease Transaction Tax. That ruling also was issued with a September 1, 2015, effective date.  This effective date for the Amusement Tax Ruling has not been changed, and the city has indicated that no such extension is currently under consideration.




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