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12/07/88 Arthur Katz Et Al., v. the City of Chicago Et Al.

December 7, 1988





532 N.E.2d 322, 177 Ill. App. 3d 305, 126 Ill. Dec. 637 1988.IL.1770

Appeal from the Circuit Court of Cook County; the Hon. Irwin Cohen, Judge, presiding.


PRESIDING JUSTICE WHITE delivered the opinion of the court. McNAMARA and RIZZI, JJ., concur.


Plaintiffs, owners of laundromats located in the City of Chicago, filed suit in the circuit court of Cook County seeking a declaration that the Chicago Transaction Tax Ordinance (Chicago Municipal Code § 200.1 et seq. (1974)) was unconstitutional as applied to them. The court granted a motion to dismiss filed by the defendants and plaintiffs appeal.

In 1974, the City of Chicago enacted the Chicago Transaction Tax Ordinance. Section 200.1 -- 2 of the ordinance imposed a tax on all leases and lease or rental agreements and memoranda "involving the lease or rental of any personal property . . . by an individual person, domestic or foreign association, company, or corporation . . . made after the 1st day of January, 1974, whether made upon or shown by the books of the person, association, company, corporation, or trustee, or by any paper or agreement or memorandum or other evidence of such lease or rental when delivery or use also takes place in the City of Chicago." (Chicago Municipal Code § 200.1 (1974).) As originally enacted, the ordinance contained an exemption for transactions involving $10 or less. It further provided in section 200.1 -- 2.A.5(a) that personal property included washers and dryers. Section 200.1 -- 2.A.5(b) provided that personal property also included leased time on equipment not otherwise itself rented, such as leased time for use of calculators, computers, data processing equipment, tabulating equipment, accounting equipment, copying machines, duplicating machines, and addressing machines.

In 1981, an amendment to the ordinance removed the $10 limit and imposed a flat 6% tax on all lease transactions. In March 1984, the ordinance was amended once again and the language of section 200.1 -- 2.A.5(a), listing washers and dryers as examples of personal property subject to the tax, was deleted. Section 200.1 -- 2.A.5(b) remained substantially the same.

In January 1987, the department of revenue published "Lease Transaction Ruling No. 8." This ruling, which was to take effect on February 1, 1987, provided that the "use of a clothes washing or car washing machine, where the possession of the machine does not transfer but where a charge is made for the period of use of the machine by the user," was taxable under section 200.1 -- 2.A.5(b).

In June 1987, plaintiffs filed a complaint for declaratory and injunctive relief in which they alleged that the manner in which their businesses were conducted made it virtually impossible for them to comply with the provisions of the ordinance. Plaintiffs also alleged that the ordinance, as applied to their businesses, constituted an unconstitutional tax on the occupation of providing laundry services and that any attempt to enforce ruling No. 8 as of its February 1 effective date would constitute a retroactive gross receipts tax. Plaintiffs requested that ruling No. 8 be declared void and that defendants be enjoined from enforcing the ordinance against them.

Defendants filed a motion to strike and dismiss plaintiffs' complaint on the ground that it failed to state a cause of action. The circuit court granted this motion, stating that under the ordinance, the time lease of coin-operated washers and dryers was a taxable lease transaction, that the tax did not constitute an occupation tax, and that the tax was not being applied retroactively.

In their appeal, plaintiffs argue that as applied to them, the tax constitutes an unconstitutional service tax. Noting that when a court seeks to determine the nature of a tax, it must look to the totality of the transaction (see Caterpillar Tractor Co. v. Department of Revenue (1965), 32 Ill. 2d 377, 205 N.E.2d 447), plaintiffs contend that when the totality of their transactions with their customers is considered it is clear that they are providing a laundry service. In support of this argument, plaintiffs cite Chicago Health Clubs, Inc. v. Picur (1988), 124 Ill. 2d 1, in which the Illinois Supreme Court held that an amendment to the Chicago Amusement Tax Ordinance (Chicago Municipal Code §§ 104 -- 1 through 104 -- 8 (1985)), which extended application of the ordinance to racquetball and health clubs, constituted an unconstitutional occupation tax on services. One of the concerns expressed by the supreme court in Picur was that it would be impossible to segregate health club memberships into amusement and non-amusement components.

In the present case, plaintiffs point out that in addition to using their machines, customers use plaintiffs' real property, furnishings, and auxiliary facilities such as plumbing, fixtures, electricity, and areas for waiting and parking. Plaintiffs contend that the use of their machines is so integrated with these items that the primary function of their laundromats is the provision of services.

A similar argument was rejected in Springfield Hotel-Motel Association v. City of Springfield (1983), 119 Ill. App. 3d 753, 457 N.E.2d 1017. There, the plaintiff argued that a tax on the rental of hotel and motel rooms was an unconstitutional occupation tax on services. In upholding the tax, the appellate court noted that where a tangible product is provided as a part of a service and the product is only incidental to the service, a tax on the transaction constitutes a service tax. (See also Velten & Pulver, Inc. v. Department of Revenue (1963), 29 Ill. 2d 524, 194 N.E.2d 253.) The court found that the rental of a hotel room could be distinguished from the purchase of services. The court held that although ...

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