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Paper Supply Co. v. City of Chicago





Appeal from the Circuit Court of Cook County; the Hon. F. Emmett Morrissey, Judge, presiding.


In four separate actions filed in the circuit court of Cook County the plaintiffs sought declaratory judgments holding invalid the Chicago Employers' Expense Tax Ordinance (Municipal Code of Chicago, ch. 200.3) and injunctive relief. Two suits were brought by multiple plaintiffs and in each of the other two the named plaintiff purports to sue in its own behalf and in behalf of a class of taxpayers similarly situated. The defendants in each action are the City of Chicago, its treasurer and the director of its department of revenue.

The circuit court ordered the four suits consolidated and allowed a petition to intervene filed on behalf of a number of parties alleged to be employers affected by the ordinance. Defendants moved to dismiss, and following consideration of memoranda and oral argument, the circuit court dismissed the complaints of the plaintiffs and the intervenors and entered judgment holding that with the exception of a portion of the definition of "full-time employee" the ordinance was valid. Plaintiffs appealed, defendants cross-appealed, and we allowed motions filed under Rule 302(b) and ordered that the appeal be taken directly to this court.

In pertinent part the ordinance provides:

"200.3-2. Employers' Expense Tax. A. A tax is hereby imposed upon every employer who, in connection with his business, engages, hires, employs, or contracts with, fifteen (15) or more individuals as commission merchants and full-time employees, or any combination thereof, to perform work or render services in whole or in part within the City of Chicago on and after January 1, 1974. The amount of such tax shall be Three Dollars ($3.00) per month * * *. The incidence of this tax shall be upon the employer alone as an employer's expense tax and shall not be transferred directly or indirectly to the commission merchant or full-time employee under any circumstances.

Arguing that the ordinance imposes a tax "upon occupations" plaintiffs contend that it was enacted in violation of section 6(e) of article VII of the 1970 Constitution, which provides:

"(e) A home rule unit shall have only the power that the General Assembly may provide by law * * * (2) to license for revenue or impose taxes upon or measured by income or earnings or upon occupations."

Defendants contend that under section 6(a) of article VII of the 1970 Constitution the defendant city is empowered to enact the ordinance, that the tax imposed is not a tax "upon occupations" within the contemplation of, and does not violate, section 6(e)(2) of article VII.

Much of the argument contained in plaintiffs' briefs is devoted to review and analysis of the debates of the constitutional convention (Record of Proceedings, Sixth Illinois Constitutional Convention (hereafter Proceedings)) concerning the limitation contained in section 6(e)(2) upon the power of a home-rule unit to impose taxes "upon occupations." In People ex rel. Keenan v. McGuane, 13 Ill.2d 520, 527, this court stated: "While in construing the constitution the true inquiry concerns the understanding of the meaning of its provisions by the voters who adopted it, still the practice of consulting the debates of the members of the convention which framed the constitution has long been indulged in by courts in determining the meaning of provisions which are thought to be doubtful." An examination of the Proceedings shows that section 6(e) of article VII was originally paragraph 4.4 of the Majority Proposal of the Committee on Local Government and provided:

"Units of local government shall not impose taxes based upon or measured by income, earnings, or occupation except as authorized by general law." 7 Proceedings 1579.

In its explanation of the proposed section, the Committee said:

"1. Explanation and Purpose.

This paragraph is intended to permit local governments to impose income and occupation taxes, but only if approved by the General Assembly and subject to control and supervision by the General Assembly." 7 Proceedings 1670.

In its discussion it said:

"The crux of this paragraph is its treatment of the income tax." 7 Proceedings 1670.

It then discussed the reasons for withholding authority from home-rule units of local governments to impose income taxes without legislative authority and in a concluding paragraph stated:

"It should be noted that paragraph 4.4 requires legislative authorization for taxes based upon an occupation as well as those based upon or measured by income or earnings. In part, the inclusion of occupational taxes in this paragraph is meant to prevent the evasion of its terms by calling a tax an occupation's tax instead of an income or earnings tax. In addition, the reference to occupation taxes will prevent the proliferation of various business and occupation taxes at the local level. Such taxes will be valid only if authorized by the General Assembly. This exception to home-rule taxing powers is justified on the ground that a large number of various and varying occupation taxes could impair the efficient operations of business within the state." 7 Proceedings 1673.

The most extensive debates on this proposed subsection (then 4.4) were held on July 24, 1970. Delegate Borek moved for the approval of the section and explained in substantially the same language as is found in the Committee report that the inclusion of the reference to occupation taxes was to prevent the imposition of a local income or earnings tax and would also prevent the proliferation of various business and occupation taxes at the local level. (4 Proceedings 3150-3151.) A discussion then ensued as to the differences between an occupation tax and licensing an occupation for revenue. (4 Proceedings 3151-3153.) Delegate Borek during this discussion stated:

"Now, in our research we found a number of legislatures through the country to try to avoid; the law said they could not file the earnings or income tax, so they — under the concept of calling it an occupational tax — this is one and the very same thing. But this is why the committee inserted this word to preclude any evasion of some municipality by trying to do otherwise." 4 Proceedings 3152.

The discussion then shifted to the effect on a local sales tax or retailers' occupation tax of the prohibition against taxing occupations. (4 Proceedings 3153-3154.) Delegate Borek during this discussion stated:

"Mr. Scott, I may repeat again, this word `occupation' was put in there to keep any municipality or whatnot — if we just had earnings and income tax, period, then you may come through and say an occupation tax which means actual earnings. It doesn't have anything to do with the occupational tax as we are charging people with the right to pass it on to them in our sales tax." 4 Proceedings 3154.

Delegate Friedrich then asked if there were not ways local government could evade the purpose of the proposed section. (4 Proceedings 3154.) During this discussion Delegate Kelleghan asked Delegate Borek or Delegate Parkhurst, the chairman of the Local Government Committee, to explain how the language of the proposed section would prevent a court from saying an occupation tax is not an income tax as was done in Colorado. (4 Proceedings 3156.) This comment made reference to the case of City and County of Denver v. Duffy Storage and Moving Co., 168 Colo. 91, 450 P.2d 339. Duffy involved the validity of three revenue ordinances (Nos. 232, 233 and 234) enacted by the city of Denver under its broad home-rule powers. Ordinance No. 234 imposed an "Earnings Tax" which the city conceded was an income tax and invalid under the Colorado court's holding in City and County of Denver v. Sweet, 138 Colo. 41, 329 P.2d 441, that Denver did not have constitutional authority to impose an income tax. The city urged the court to overrule the Sweet case. Applying the doctrine of stare decisis the court refused to overrule Sweet and declared Ordinance No. 234 unconstitutional.

Denver Ordinance No. 232 imposed a "Business Occupational Privilege Tax." The tax applied to persons "engaged in any business, trade, occupation, profession or calling of any kind having a fixed or transitory situs within Denver, for any period of time in a calendar month within Denver." The rate of tax imposed was $2 per month measured by the number of owners, partners and employees performing services for such businesses who received compensation in excess of $250 per month. It was contended that this was also an income tax but the court found that the essential details of the ordinance were almost identical in one manner or another with occupation-tax ordinances which it had held valid in Post v. City of Grand Junction, 118 Colo. 434, 195 P.2d 958, 6 A.L.R.2d 737; Jackson v. City of Glenwood Springs, 122 Colo. 323, 221 P.2d 1083; Ping v. City of Cortez, 139 Colo. 575, 342 P.2d 657; and City of Englewood v. Wright, 147 Colo. 537, 364 P.2d 569. Without labeling the tax ("The terminology aside," 168 Colo. 91, 100, 450 P.2d 339, 343) the court held "that the four cited cases have settled the law and set at rest constitutional questions raised herein." 168 Colo. 91, 100, 450 P.2d 339, 343.

Ordinance No. 233, designated "Employee Occupational Privilege Tax," imposed a tax of $2 per month upon an employee for the privilege of performing service within Denver for an employer for wages of more than $250 per month. This ordinance was also attacked as being an income tax. Again without labeling the tax, four justices held that the four occupation-tax cases cited in upholding Ordinance No. 232 were controlling as to Ordinance No. 233. Three dissenting justices felt that Ordinance No. 233 imposed an income tax prohibited by the court's Sweet decision.

Delegate Parkhurst, mentioning the Duffy case by name, stated that the Denver occupation tax was a tax measured by income. He said this would be avoided in Illinois, because unlike Colorado, the General Assembly will be able to preempt, without exercising the power, and

"Secondly, we have the limitations contained in the section before you now, which is section 4.4 which says that no unit of local government — home rule or not — no unit of local government can impose a tax measured by income or earnings — which is what they did in Colorado the second time around — or on an occupation except as authorized by general law." 4 Proceedings 3157.

He concluded by stating:

"So we were aware of the sequence of cases in Colorado, Delegate Kelleghan, when we devised this, and we attempted to in our constitution avoid the end run that was successfully used in Colorado." 4 Proceedings 3157.

Delegate Meek then introduced an amendment to strike the words "or" and "occupations." (4 Proceedings 3157.) Delegate McCracken thereafter stated:

"Let me just say this: that at the present stature of the provisions on income taxes — that is, that they are prohibited unless authorized by general law — is perfectly fine with me. I do not wish to direct my remarks to that point at all.

However, I do wish to clear up some murky waters in 4.4, which have been created by the remarks of some of the delegates and some of the committee members. I would be the last to deny that the occupation tax has, from time to time, been bastardized. It has. As a matter of fact, because of the classic case of bastardization of the occupation tax, your counsel has very prudently used the language, `taxes based upon or measured by income,' because the first time the occupation tax was used as a device to pose an income tax was when a state, in response to the federal income tax statute, defined a prohibition as prohibiting an income tax.

Note the difference in phraseology: `income tax' as opposed to `a tax based upon or measured by income.' This terminology is excellent, and in my opinion, makes impossible the bastardization of the occupation tax in the guise that is the guise of an occupation tax to have the effect of an income tax. So, the point I am making is this: If you want to deny occupation taxes to the cities, okay, but don't put a phony mantle on it. You don't have to do it in order to prohibit income tax." 4 Proceedings 3159.

Delegate Carey thereafter discussed the Duffy case and explained that the Denver business occupation tax which was upheld in that case was not based on earnings. (4 Proceedings 3163.) The feeling that an occupation tax was the equivalent of an income tax continued to prevail, however. For example, Delegate Elward:

"I shall vote against the Meek amendment, because in my judgment it permits a backdoor city income tax." 4 Proceedings 3164.

Delegate Durr:

"As we've heard, read, and stated here, in effect allowing an occupation tax turns out to be an income tax, so if I may shorthand it just a little bit and refer to it as an income tax, you will know that I am using that because of the admitted effect of permitting an occupation tax." 4 Proceedings 3166.

Delegate Nudelman:

"Mr. President, I would change my vote from pass to no, and I would explain the vote by saying that it's my interpretation that no matter how you slice it, if you tax occupation, it can only result in an ...

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