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Commercial National Bank v. City of Chicago





Appeal from the Circuit Court of Cook County, the Hon. Richard L. Curry, Judge, presiding.


The Chicago service-tax ordinance was adopted on July 20, 1981. (Municipal Code of Chicago § 200.5-1, et seq. (1981).) These consolidated appeals involve several challenges to the constitutionality of the ordinance. Separate suits were originally filed in the circuit court of Cook County by (1) the Commercial National Bank of Chicago and various business entities; (2) the Illinois State Bar Association, representing attorneys throughout the State of Illinois; and (3) the Chicago Bar Association, its officials and certain members, and various other professional societies and members. Defendants in one or more of the suits are the city of Chicago and officials of the city. In addition, the Corporate Fiduciaries Association of Illinois, the Chicago Association of Commerce and Industry, and the Illinois Small Businessmen's Association subsequently filed amicus briefs.

Plaintiffs, prior to filing the circuit court actions, had sought leave to file similar complaints as original actions in this court pursuant to our Rule 381(a) (81 Ill.2d R. 381(a)). We denied leave, but directed that, in the event the suits were filed in the circuit court of Cook County, the court hear the cases expeditiously with a view toward their disposition prior to August 31, 1981. Plaintiffs thereafter proceeded in the circuit court, seeking a declaratory judgment holding the service-tax ordinance invalid, and injunctive relief. The cases were consolidated, and the circuit court granted plaintiffs' motion for a preliminary injunction enjoining defendants from enforcing the penalty provisions of the ordinance and requiring defendants to retain in escrow any amounts collected pending a final determination of the constitutionality of the tax. Defendants appealed to the appellate court from the preliminary injunction, and we allowed their motion to transfer that appeal directly here, taking the matter under advisement and denying the motion to vacate or stay the preliminary injunction. Defendants thereafter moved in the circuit court to dismiss the complaint for failure to state a cause of action. After consideration of extensive memoranda and oral arguments, the court, in a comprehensive opinion, granted the motion to dismiss, holding that the ordinance was not unconstitutional either in whole or in part for any of the reasons alleged in the complaints and dissolving its preliminary injunction.

The plaintiffs appealed to the appellate court and we again granted their motion to transfer the appeal to this court pursuant to our Rule 302(b) (73 Ill.2d R. 302(b)), and reinstated the injunction. To avoid unnecessarily complicating the city's fiscal planning, and to accommodate the city and the litigants, we departed from our customary procedure and on November 16, 1981, issued a brief decision declaring the Chicago service-tax ordinance to be unconstitutional, with a written opinion to follow. In this opinion we set forth the reasons for that decision. A majority of the court, as one basis for the decision, finds that the service-tax ordinance adopted by the city of Chicago is unconstitutional as an attempt to impose a tax upon occupations without authorization by the General Assembly, contrary to article VII, section 6(e), of the 1970 Illinois Constitution.

Under the 1870 Constitution, Illinois municipalities had only those powers which the State, through the General Assembly, conferred. (7 Record of Proceedings, Sixth Illinois Constitutional Convention 2727 (hereinafter cited as Proceedings).) After the adoption of the 1970 Constitution, which created home rule units of local government in this State, any county which has an elected chief executive officer, any municipality which has a population of more than 25,000, and any other municipality which elects to become a home rule unit by referendum may exercise home rule powers as provided in the Constitution. (Ill. Const. 1970, art. VII, § 6(a).) The Constitution defines the powers of home rule units as follows:

"Except as limited by this Section, a home rule unit may exercise any power and perform any function pertaining to its government and affairs including, but not limited to, the power to regulate for the protection of the public health, safety, morals and welfare; to license; to tax; and to incur debt." (Emphasis added.) (Ill. Const. 1970, art. VII, § 6(a).)

Thus, any limitation on the power of a home rule unit to tax must be found within section 6 of article VII of the Constitution. We find such a limitation in section 6(e) of that article, which provides:

"A home rule unit shall have only the power that the General Assembly may provide by law (1) to punish by imprisonment for more than six months or (2) to license for revenue or impose taxes upon or measured by income or earnings or upon occupations." (Emphasis added.) (Ill. Const. 1970, art. VII, § 6(e).)

The effect of this constitutional limitation is to place home rule units in the same position with respect to licensing for revenue and imposing taxes upon or measured by income or earnings or upon occupations that all units of local government were in prior to 1970. That is, home rule units have only the power in these methods of raising revenue conferred by the General Assembly. The power to raise revenue in the enumerated methods stems not from home rule powers but from legislative grant of authority. (7 Proceedings 1670.) For home rule units generally, the role of the General Assembly was significantly narrowed by the Constitution; however, the intent of this section of the Constitution is that the legislature exercise "maximum supervisory power" in these enumerated areas. 7 Proceedings 1672.

The Chicago service-tax ordinance was adopted by the city council pursuant to its home rule powers conferred by the 1970 Constitution (Ill. Const. 1970, art. VII, § 6(a)). It imposes a tax on "each purchaser who purchases service in the City after July 31, 1981, at the rate of 1% of the purchase price of such service." (Municipal Code of Chicago, § 200.5-3 (1981).) The tax is expressly imposed on the purchaser, but collection and remittance duties are placed on the seller, who is also liable for uncollected taxes.

The service-tax ordinance is challenged, inter alia, on the ground that it is a tax "upon occupations" enacted without legislative authorization in contravention of the 1970 Constitution. Since the adoption of the 1970 Constitution, this court has had several occasions to rule on similar challenges to various taxing ordinances enacted by home rule units. In those cases, which will be discussed later, it was noted that section 6(m) of article VII of the Constitution requires that the powers and functions of home rule units shall be liberally construed. In those cases, in upholding taxing ordinances, this court "liberally construed" the powers of home rule units to enact taxing ordinances under the 1970 Constitution. We are urged to do so once again and to uphold the Chicago service-tax ordinance. We cannot uphold the ordinance without violating the clear limitation of article VII, section 6(e), of the Constitution, which requires authorization by the General Assembly before a home rule unit can impose a tax upon occupations.

In the instant case, the tax which the city of Chicago seeks to impose falls within the area of taxation the delegates to the sixth constitutional convention intended to limit by denying home rule units the power to "license for revenue or impose taxes upon or measured by income or earnings or upon occupations," unless authorized by the General Assembly (Ill. Const. 1970, art. VII, § 6(e)). This restriction now found in section 6(e) was presented to the convention in paragraph 4.4 of the proposal of the majority of the Committee on Local Government of the constitutional convention. The explanation of this restriction on the authority of a home rule unit to impose taxes upon occupations is contained in the report of that committee, which states:

"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. * * * [T]he inclusion of occupational taxes in this paragraph is meant to prevent the evasion of its terms by calling a tax an occupation 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." (Emphasis added.) (7 Proceedings 1673.)

Thus, the majority of the committee felt that the limitation on a home rule unit's authority to tax occupations was necessary to (1) prevent an evasion of the limitation on home rule units' authority to impose a tax measured by income or earnings, and (2) to prevent a proliferation of taxes on various businesses and occupations at local levels which could impair the efficient operation of business within the State, believing that, by vesting the authority to authorize such taxes in the General Assembly, these consequences should be controlled on a State-wide basis.

Although it is true that the remarks of an individual delegate may or may not reflect the general sentiment of the constitutional convention, it is, nevertheless, quite clear from the debates that it was the consensus of the convention that taxes upon occupations should not be imposed by home rule units unless legislatively authorized and that this limitation was specifically considered in relation to the imposition of taxes on services. It is also apparent that the delegates were aware of various means that had been used in other jurisdictions to evade particular restrictions on the taxing power by imposing a similar tax under the guise of a different name. The debates reflect that the delegates were intent on preventing a similar evasion of the restrictions of paragraph 4.4 of the report.

The delegates considered this particular constitutional provision at length, and there was strong feeling expressed in the convention against permitting home rule units to impose an income tax without legislative authorization. It was pointed out that paragraph 4.4 of the report would not simply prohibit home rule units from imposing an income tax. The language of that paragraph was much broader and prohibited taxes "upon or measured by income [or] earnings" so as to prevent circumventing the restriction on income taxes. (4 Proceedings 3159; 7 Proceedings 1669-70.) As noted in the majority report quoted above, one of the reasons for the restriction on occupation taxes was to prevent the use of that type of a tax to circumvent the income tax restriction. Several delegates expressed the opinion that a tax on occupations measured by earnings, in their opinion, constituted an income tax or a tax measured by earnings. 4 Proceedings 3165-69.

On three separate occasions during the consideration of paragraph 4.4 of the report, an amendment was proposed that would have eliminated the occupation-tax restriction, and on each occasion the amendment was defeated. (4 Proceedings 3157-71, 3369-71; 5 Proceedings 4167-69.) Delegate Meek initially proposed to amend paragraph 4.4 by deleting the words "or" and "occupation." (4 Proceedings 3157.) He spoke at length concerning this amendment and stated that he wanted cities to be able to tax occupations without the necessity of having legislative approval. (4 Proceedings 3159.) He further stated:

"As far as I am concerned, what I did envision in all honesty was a tax on the occupation measured exactly on the tax that the retailer pays at the present time.

Mr. Elward: Well that is gross receipts, is it, which —

Mr. Meek: Yes, it is." 4 Proceedings 3163.

Those who spoke in favor of the Meek Amendment to permit taxes on occupations spoke in terms of occupation taxes primarily on those in occupations which provided services. (4 Proceedings 3159, 3160-61.) Delegate Mullen, speaking in favor of the Meek Amendment, stated:

"* * * I look on the word `occupation' as a corollary to the sales tax, and some of the people in some of the tax studies have suggested that a logical extension of the sales tax could be to [tax] professional or commercial services. * * *.

These are, I think, * * * an extension — a logical extension — of the sales tax, not only to the sale of tangible personal property, but to the component of service as well * * *.

* * * [I]f we give our home rule entities free power on the sales tax, it seems to me a logical extension to carry it to these kinds of services, which I, as I said before, look on as a corollary.

* * * [F]rankly I would prefer an extension of the income tax over these other occupation taxes or whatever you wish to call them — service taxes." (4 Proceedings 3160-61.)

Thus, Delegate Mullen saw the occupation tax as a "corollary" to the sales tax which would extend that tax to services, and in the last paragraph quoted above, equated the occupation tax with a tax on services.

The opponents of the amendment, who favored the restriction on the occupation tax, noted that paragraph 4.4 of the report did not affect a home rule unit's authority to levy a sales tax, that is, a tax on the sale of tangible personal property. The delegates held the view that the sales tax was an excise tax, the accepted definition of which at the convention was "an indirect tax on production, sale, or distribution," and that tax was not limited by the restriction of paragraph 4.4 of the report. (4 Proceedings 3166.) Although, as Delegate Mullen acknowledged in the above quotation, some authors advocated the extension of the sales tax to cover services, the sales tax, as an excise tax, which a home rule unit could impose, was not considered by the delegates to encompass a tax on services. Therefore, Delegate Mullen considered that a home rule unit must also have the authority to tax occupations as a "corollary" to the sales tax.

This conclusion finds further support in an exchange between Delegate Mullen and Delegate Parkhurst, who was chairman of the Committee on Local Government. Delegate Mullen asked Chairman Parkhurst:

"I am talking about the extension of the sales tax — the state sales tax, for instance — to services — repair services, professional services, commercial services * * * [Y]ou are prohibiting here the occupation tax. Does this mean the kind of professional and commercial services that might be an extension of the sales tax? * * *." (4 Proceedings 3153-54.)

Chairman Parkhurst answered:

"* * * I think that extension of a sales tax in a municipality to occupations which provide services — not those which sell tangible personal property at retail —

Mrs. Mullen: Right.

Mr. Parkhurst: — but which sell services would be precluded under the provisions of section 4.4 unless authorized by the General Assembly, because I don't see how you could possibly interpret a tax on those services as anything else than a tax on an occupation. (Emphasis added.) (4 Proceedings 3153-54.)

Again distinguishing between the sales tax on the retail sale of tangible personal property and the occupation tax, Delegate Parkhurst observed:

"I think that either a sales or use tax could be imposed by a municipality with home rule clearly, and I think that under 4.4 a tax on an occupation based upon its sales would not be possible unless authorized by the General Assembly. (Emphasis added.) (4 Proceedings 3154.)

Different versions of the Meek Amendment attempting to delete the restriction on occupation taxes were, as earlier stated, offered and defeated three times. Thus, the delegates' determination to allow taxes upon occupations only with legislative authorization was clear.

In addition to the three proposals to delete the restriction on occupation taxes from paragraph 4.4, the delegates also considered proposals for a variety of other modifications of the restriction, all of which were defeated. 4 Proceedings 3172-73, 3175, 3179, 3185-87.

One of the three amendments to paragraph 4.4 suggested by Delegate Meek would have specifically authorized units of local government to levy taxes upon occupations and service taxes and use taxes unless preempted by the State. (4 Proceedings 3365.) The proponents of this amendment urged its adoption so that those who provided services would be taxed the same as retailers; that is, services should be taxed to the same extent as sales. (4 Proceedings 3365-68.) The amendment was soundly defeated. (4 Proceedings 3371.) The convention's action on this Meek Amendment fairly well summarizes the lengthy controversy in the convention concerning a home rule unit's authority to levy taxes on occupations. The convention firmly rejected the idea of permitting home rule units to impose taxes on occupations without legislative authority, and it firmly rejected the idea that a home rule unit should be able to impose occupation taxes as a means of taxing services complementing the sales tax on tangible personal property.

The trial court, in upholding the Chicago service tax in this case, noted that historically in Illinois, there have been several unsuccessful attempts to expand the tax on retail sales of tangible personal property to include services. Report of the Commission on Revenue 26-27 (1963); 2 Journal of the Senate, 75th Gen. ...

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