Cook County Use Tax Update – Reed Smith Wins Appeal – Ordinance Invalid

On August 4, 2014, the First District Illinois Appellate Court affirmed a lower court decision invalidating Cook County’s Non-Titled Personal Property Use Tax (the “Use Tax”). The Appellate Court dismissed as moot the County’s interlocutory appeal of the lower court’s preliminary injunction against enforcement of the Use Tax Ordinance, which was extinguished upon entry of the permanent injunctions in favor of Reed Smith and its client, the Chicagoland Chamber of Commerce, as discussed in our previous alert. Of procedural note, the Appellate Court rejected the County’s argument that Reed Smith lacked standing to challenge the Use Tax Ordinance because it failed to register for or pay the Use Tax. The court found that Reed Smith would have suffered a direct injury from enforcement of the Use Tax and therefore had standing to challenge the Use Tax Ordinance.

Reed Smith tailored its appeal to leave before the trial court its claim on behalf of the Chicagoland Chamber of Commerce that the County must accept the invalidity of the Ordinance as a “mistake of law” which, under its refund ordinance, is a prerequisite for the County to approve a refund claim. That remaining claim is now ripe for decision upon return to the trial court.

Standing The court addressed Cook County’s contention that Reed Smith lacked standing to challenge the Use Tax because it failed to register or pay any tax due. The court found that (i) the Use Tax Ordinance provides that the mere failure to register is a violation, (ii) Reed Smith would have been subject to penalties and interest for failing to register and pay the Use Tax, had the tax been valid, and (iii) these assessments would constitute a lien on Reed Smith’s real and personal property, all of which would make the injury “hardly theoretical.” The court distinguished Reed Smith’s case from the case upon which the County based its claim, Wexler v. Wirtz,1 noting that the plaintiff in Wexler lacked standing primarily because it was not legally obligated to collect and remit tax. The court also shot down the County’s argument that the voluntary payment doctrine would bar Reed Smith’s claim, stating that it was indisputable that Reed Smith didn’t pay the Use Tax; making the voluntary payment doctrine inapplicable.

Imposition of A Prohibited Sales Tax The Appellate Court affirmed the trial court’s decision to grant Reed Smith’s motions for summary judgment, based on the Use Tax violating Section 5-1009 of the Illinois Counties Code by imposing a use tax on the sales price of nontitled personal property. Section 5-1009 provides that “no home rule county has the authority to impose, pursuant to its home rule authority a . . . use tax based on . . . the selling or purchase price of said tangible personal property.”2 The court found that mere residency in the County established the date of “first use” of property under the Use Tax Ordinance, which effectively eliminated any meaningful difference between the purchase date and the first use of the property. In addition, the court found that although the Use Tax Ordinance provided four acceptable methods of determining the value of property subject to the Use Tax, it still constituted an improper use tax on the selling or purchase price of personal property because the methods provided in the Ordinance did not allow for anything more than a trivial deviation from the purchase price or would require either an unjust and inconvenient necessity of an appraisal or a blind estimate of the “fair market value” of the property. Based on the foregoing, the Appellate Court held that the trial court did not err in granting Reed Smith’s motions for summary judgment and denying Cook County’s motion.

Constitutional Claims Reed Smith had also argued, and the lower court agreed, that the Use Tax Ordinance imposed an ad valorem tax on personal property prohibited by Section 5 of Article IX of the Illinois Constitution of 1970, and that the Ordinance facially discriminated against interstate commerce in violation of the Commerce Clause of the United States Constitution, because it did not impose the use tax on in-county purchases between private parties while targeting such purchases from private parties outside the County and State. The Appellate Court declined to rule on these constitutional issues, stating that the court addresses constitutional issues only as a last resort.

Further Proceedings Had the Ordinance been declared unconstitutional on either ground, a direct appeal to the Supreme Court would be a matter of right for the County. However, as these constitutional issues were not the basis for the invalidity of the Ordinance, Cook County does not have a right to appeal directly to the Supreme Court.3

The lower court may now be asked to determine whether the invalidity of the Use Tax Ordinance constitutes a “mistake of law,” thus satisfying the prerequisite for the County to honor claims for refund under its refund ordinance.

  1. Wexler v. Wirtz, 211 Ill. 2d 18 (2004).
  2. 55 ILCS 5/5-1009
  3. Ill. S. Ct. R. 317 (eff. July 1, 2006)

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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