Tax Analysts Blog

Fighting the Fight Against a Local Use Tax in Illinois

Posted on Aug 7, 2013

In March 2013, Cook County, Illinois enacted a 1.25 percent use tax on the “value” of non-titled personal property purchased outside the county. The idea is to impose a tax on property that is not subject to Cook County’s .75 percent sales tax because it was purchased outside the county, but will be used within the county. Property will not be subject to tax at the time of sale, but rather when the property is first subject to use in the county. Purchasers located in Cook County are required to report and pay the tax.

The tax took effect on April 1 and was expected to raise about $13.8 million in revenue. The tax was designed to encourage county residents to purchase from local businesses. Many businesses in Cook County purchase goods outside the county to avoid the county’s already high sales tax rate.

But there are two problems with the tax: it treats Cook County-based businesses and individuals differently than those outside the county and the county doesn’t have the legal authority to impose the tax. Not surprisingly, a lawsuit quickly ensued. The law firm Reed Smith LLP was the first to file suit and has taken the lead in arguing against the use tax.

Unfortunately for the county, though not surprising given the questionable constitutionality of the tax, the court didn’t rule in the county’s favor. On July 24, Cook County Circuit Court Judge Robert Lopez Cepero granted Reed Smith’s motion for preliminary injunction. The judge ruled the use tax violated the Illinois Counties Code, which disallows a home-rule unit from imposing a use tax on the selling or purchase price; the Illinois Constitution’s prohibition against imposing an ad valorem tax on personal property; and the Commerce Clause of the U.S. Constitution.

The motion effectively enjoins the county from imposing the use tax and will force the county to defend arguments on each of Reed Smith’s points. The county is further required to provide the judge with an accounting of all receipts collected and is prohibited from cashing any checks received after July 20.

Despite the strong arguments made against the tax, on August 1, the county filed a motion to stay the injunction and intends to appeal. It’s really very surprising. Tax cases don’t typically result in preliminary injunctions. Yet Judge Cepero thought it was appropriate in this case. The likely reason is that the county has no hope of wining on the merits.

After the Reed Smith lawsuit (and others) were filed, the county has scrambled to make the tax work. The county commissioners reduced the use tax rate to .75 percent from 1.25 percent to make it equal to the county sales tax. Cook County Board President Toni Preckwinkle has defended the tax, saying the lowering of the rate should have eliminated at least one of the legal concerns. Preckwinkle said “Frankly, we took action at the last board meeting to remove one of those grounds, and we think we have a strong case. We’ll see what the courts decide.”

Still, there are additional legal issues that will inevitably be the death knell of the Cook County use tax. The sooner the county accepts that it is not permitted to impose a personal property use tax the sooner we can get to the issue of whether and how the county intends to issue refunds to those taxpayers that remitted use tax but did not pay under protest. Undoubtedly, the lawyers that have argued the case to this point will continue the fight.

Read Comments (1)

edmund dantesAug 8, 2013

I really hate it when legislators say "We'll see what the courts decide."
Legislators have the same responsibility to uphold and obey the constitution as
judges have. They treat legislating like a game, to see how much they can get
away with.

If I ran the world, if a law was found unconstitutional then every legislator
who voted for it and any governor or President who signed it would instantly
lose their office.

Your point about the inappropriateness of the use tax is, of course, correct.

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