This month, in Reed Smith LLP v. Ali, 2014 IL App (1st) 132646-U (2014), an Illinois Appellate Court affirmed a lower court ruling invalidating the Cook County Use of Non-Titled Personal Property Tax Ordinance (Cook County Tax). The court held that the ordinance was in violation of section 5-1009 of the Counties Code because the Cook County Tax imposed an improper use tax on the selling or purchase price of personal property.
The Cook County Tax
The Cook County Tax became effective April 1, 2013, after the Cook County Board of Commissioners enacted the Ordinance on November 9, 2012. The Ordinance stated that the purpose of the Cook County tax was to close a “widening tax loophole” by preventing taxpayers from avoiding sales tax by purchasing personal property in other counties. The Board recognized that taxpayers would frequently go to other counties to make expensive purchases of equipment or office supplies to save on sales tax, which in Cook County’s largest city, Chicago, is 9.25 percent. In addition to raising additional revenue, the Board sought to protect Cook County businesses.
The Cook County Tax imposes a tax on the value of non-titled personal property purchased outside Cook County when the property purchased is first used in Cook County. The Ordinance requires that every person who acquires such property in the course of business to register with the Tax Department. The Cook County Tax provided for an annual exemption of $3,500, but once a taxpayer exceeds the exemption amount, taxpayers were required to file monthly returns. Failure to register or file a return was considered a violation of the Ordinance and imposed harsh penalties and interest for failure to file or pay the tax, even granting Cook County the ability to impose liens and foreclose on property.
Challenging the tax
In May of 2013, two separate complaints, which were later consolidated, were filed seeking a preliminary injunction to block Cook County from imposing the Tax. The Plaintiff’s preliminary injunctions, previously discussed in the Aug. 1, 2013 update, were granted in July. Plaintiffs then sought permanent injunctive relief on grounds that the Cook County Tax violated Section 5-1009 of the Counties Code and the federal and state constitution.
As a threshold matter, Cook County argued that Plaintiff Reed Smith lacked standing to contest the ordinance. Reed Smith defiantly refused to register for the Cook County Tax or file a return. Reed Smith had purchased more than $3,500 worth of property outside Cook County and maintained a place of business located in Cook County, making it liable for the tax and subject to interest, penalties, and a lien on its personal and real property. Thus, the Illinois court found that Reed Smith had standing.
Striking down the Cook County Tax
Section 5-1009 of the Counties Code provides that “no home rule county has the authority to impose…a use tax based on…the selling or purchase price of said tangible personal property.” The court found that the Cook County Tax violated Section 5-1009 because it levied a use tax on the value of non-titled personal property. If property was delivered within the County or the purchaser resided or maintained their place of business within the County, then the property is "first subject to use" in the County on the delivered date. Since “mere residency” in Cook County or delivery of property within Cook County established the date of “first use”, the effective difference between the purchase date and the date of first use was eliminated. In the court’s view, the Cook County Tax “is in reality a sales tax.”
In Cook County’s defense, it argued that there are four acceptable methods of determining value. The court was unpersuaded because the methods provided would only result in a trivial differentiation from the purchase price or, in the case of obtaining an appraisal, was an impractical method. The court felt it unnecessary to address the federal and state constitutional arguments because the court only addresses constitutional issues as a matter of last resort.
Current tax situation in Cook County
Cook County is currently considering whether to appeal this decision to the Illinois Supreme Court. Because of the injunction, Cook County is not currently enforcing the Tax. Cook County Taxpayers should stay tuned to the county’s next move, and be aware of the Ordinance’s requirements in case the county decides to continue to pursue litigation to uphold the Tax. Interestingly, the court states that the tax is in reality a sales tax. Section 5-1009 does not prohibit a sales tax. Is it possible that if the tax really is a sales tax that Cook County could assess the difference between what taxpayers pay in other jurisdictions to eliminate the consideration of potential tax arbitrage in purchasing decisions? If Cook County decides not to pursue this matter further, Cook County may seek other avenues to meet budgetary constraints and close tax loopholes.