Cook County Use Tax Litigation Update -- April 24, 2013

by Reed Smith

Two significant developments have occurred with respect to the Cook County Non-Titled Personal Property Use Tax ("Use Tax") and Reed Smith’s challenge to the Use Tax.

First, on behalf of the Chicagoland Chamber of Commerce and its members (the "Chamber"), Reed Smith filed an additional challenge to the Use Tax.

Second, Cook County (the "County") amended the Use Tax Ordinance in response to Reed Smith’s initial lawsuit, decreasing the Use Tax rate to equal the corresponding sales tax rate.

Here is how these two developments may affect other taxpayers:

Chicagoland Chamber of Commerce Files Action Against Cook County

The Chamber’s action generally mirrors Reed Smith’s initial lawsuit filed against the County challenging the Use Tax. (See our prior Alerts for a detailed discussion about the Use Tax and the challenges thereto.) However, in this action, the Chamber asked the court to clarify that taxpayers can obtain refunds if the Use Tax is declared illegal.

In our prior Alerts, we urged taxpayers to carefully consider their options because the County refund provisions require the existence of a "mistake of fact" or an "error of law". It is unclear whether payments of the Use Tax made prior to a judicial finding that the tax is illegal will be deemed an "error of law" because at the time of payment, the Use Tax Ordinance would not have yet been determined to be illegal. In the Chamber’s action, the court is being asked to find that if determined to be invalid, the Use Tax "is a tax paid or remitted through a mistake of fact or error of law and as such must be refunded under the County’s Uniform Penalties and Interest Procedures Ordinance." If the court invalidates the tax, the court may then address the Chamber’s contention that the County’s claim for refund provisions require a refund of all monies paid to the County. This will provide taxpayers with specific guidance as to whether they can obtain a refund of monies paid if the Use Tax is declared invalid.

Cook County Amends Use Tax Rate to Equal Lower Sales Tax Rate

On July 19, 2013, the County amended the Use Tax Ordinance, "effective upon passage," by decreasing the Use Tax rate from 1.25 percent to 0.75 percent (equal to the lower sales tax rate), and further providing for a credit against the Use Tax for sales taxes paid at the vendor location outside of the County. These revisions are responsive to Reed Smith’s initial lawsuit and its pending motion for preliminary injunction against enforcement of the Use Tax in Reed Smith v. Zahra Ali.1 Reed Smith’s lawsuit, and the Chamber’s lawsuit discussed above, each include a challenge to the Use Tax under the Commerce Clause of the federal Constitution for periods preceding the amendment. The amendment addresses the federal Commerce Clause violation created by the County’s purposefully setting the Use Tax rate higher than the County sales tax rate, but it does so only with regard to purchases made on or after the effective date of the amendment, June 19, 2013. The amendment fails to rescind the higher rate applicable to purchases made prior to June 19.

1. For more information on Reed Smith’s lawsuit, see our earlier alert.

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