Cook County Use Tax Litigation Update

On May 7, 2013, a complaint was filed against Cook County to enjoin the county from enforcing its newly enacted Cook County Personal Property Use Tax (“Tax”). The Cook County Circuit Court has now set a briefing schedule on Reed Smith’s Motion to Preliminarily Enjoin Ali Zahra and the Cook County Department of Revenue from enforcing the Tax, and to enjoin the imposition of the Tax.1 To read our initial assessment of the Cook County Tax, click here.

In the motion, Reed Smith asked the court to declare that the Tax violates the Illinois Counties Code, the Illinois Constitution, and the Dormant Commerce Clause of the United States Constitution.

The argument is that the county may not impose a tax in violation of the Counties Code. The Code prohibits home rule units (which includes Cook County) from imposing use taxes on the selling price of tangible personal property. Although the county measures the Tax based on the “value” of the tangible personal property purchased, that “value” is ultimately the equivalent of the “selling price.” Thus, because the Tax is a use tax on the selling price, the county is prohibited from imposing the Tax.

The county is also prohibited by the Illinois Constitution from imposing any tax on value as the state’s constitution abolished ad valorem (value-based) personal property taxes as of January 1, 1979. Thus, if the Tax is not on the “selling price,” then it must be on the value, which is prohibited by the Illinois Constitution.

The motion also argues that the United States Supreme Court has interpreted the Dormant Commerce Clause to provide for a per se violation of the Commerce Clause where a state or local law is motivated by simple economic protectionism and discriminates against interstate commerce to achieve its local purpose. Cook County’s Tax is a per se violation of the Commerce Clause because, by its own statements, Cook County designed and imposed the tax to increase purchases made within Cook County by setting the tax rate higher than the Cook County sales tax rate, thus making the cost of the same purchase that could be made outside the county more prohibitive.

Procedural Status

The following briefing schedule was entered: (i) Plaintiff, Reed Smith LLP is standing on its Motion to Preliminarily Enjoin the County Defendants as its opening brief, which was previously filed with the court May 21, 2013; (ii) the County Defendants have until June 26, 2013 to file their response to Reed Smith’s opening brief; (iii) Reed Smith will have until July 10, 2013 to reply to the County Defendants’ brief; and (iv) a hearing has been set for July 24, 2013 for oral argument. The court could issue its decision as early as July 24, 2013.

What to do now?

Some taxpayers may be planning to pay the Cook County tax and seek refunds at a later date, in order to avoid any potential interest and penalties. These taxpayers should consider that there may not be a remedy in the County Ordinances to file a refund claim if the court ultimately holds, as expected, that the Tax is illegal. The County Ordinance provides that claims for refund may be filed only if there is a mistake of fact or error in law. It is not clear whether a law held to be illegal will be deemed an error in law.

Therefore, taxpayers have at least five options that should be carefully considered: (1) file the Tax return and pay the Tax, but risk not being able to recover the payments made if the Tax is held to be illegal (paying the tax “under protest” may increase the likelihood of obtaining refunds); (2) do not pay the Tax, and risk an audit and penalty/interest assessment during the time the complaint is being litigated; (3) file a mirror complaint against Cook County to protect against imposition of the Tax, which may be consolidated with or stayed until resolution of the pending appeal; (4) file a return and report no taxable purchases claiming the exemption in the County Ordinance against an illegal imposition of the Tax; or (5) pay the Tax “under protest” and file a refund claim with the county. Taxpayers will need to carefully evaluate their specific facts and circumstances to decide how to proceed.

The filing of complaints against the county is the clearest option taxpayers have to protect the ability to recover any tax payments that are made to Cook County.

For more information on the Cook County Tax and taxpayer challenges to the Tax, contact the authors of this Alert or another member of the Reed Smith State Tax Group. For more information on Reed Smith’s Illinois tax practice, visit www.reedsmith.com/iltax.

About Reed Smith

State Tax Reed Smith’s state and local tax practice is comprised of lawyers across seven offices nationwide. The practice focuses on state and local audit defense and refund appeals (from the administrative level through the appellate courts), as well as planning and transactional matters involving income, franchise, unclaimed property, sales and use, and property tax issues. Click here to view our State Tax team.