JUSTICE GARMAN delivered the judgment of the court, with
opinion. Chief Justice Karmeier and Justices Freeman, Thomas,
Kilbride, Burke, and Theis concurred in the judgment and
1 Defendant, the city of Chicago (City), imposes a tax on the
use of personal property within its borders. The tax applies
to the lease of personal property within the City and to the
use of property in the City that is rented or leased outside
the City. In 2011, the City's director of the department
of revenue (now the City comptroller) issued Ruling 11, which
provided guidance to suburban vehicle rental agencies located
within three miles of Chicago's borders, including
plaintiffs, as to the collection of the tax. Personal
Property Lease Transaction Tax Second Amended Ruling 11 (eff.
May 1, 2011) (Ruling 11). Ruling 11 stated that beginning
July 1, 2011, in the event of an audit, the City department
of revenue (Department) would hold the suburban rental
agencies responsible for paying the tax unless there was
written proof that the lessee was exempt from paying the tax
based upon the use of the leased vehicle outside the City. In
the absence of such proof, Ruling 11 provided, the Department
would assume that a customer who is a Chicago resident would
use the leased vehicle primarily in the City and that a
customer who is not a Chicago resident would use the vehicle
primarily outside the City.
2 Plaintiffs, the Hertz Corporation (Hertz) and Enterprise
Leasing Company of Chicago (Enterprise), separately filed
suit against the City and the City comptroller, seeking a
declaration that the tax violates the Illinois and United
States Constitutions and requesting an injunction to prevent
the City from enforcing the ordinance as to them. The circuit
court granted summary judgment to plaintiffs, declaring that
Ruling 11 was facially unconstitutional and permanently
enjoining the City from enforcing the ordinance against
plaintiffs with respect to short-term vehicle rental
transactions occurring outside the City's borders. The
appellate court reversed.
4 The Chicago personal property lease transaction tax
ordinance (Chicago Municipal Code § 3-32-030(A) (added
Dec. 15, 1992)) levies a tax on the lease or rental in the
City of personal property or the privilege of using in the
City personal property that is leased or rented outside the
City. The obligation to pay the tax is upon the lessee of the
personal property. The lease or rental of the property is
deemed to take place at the location where the lessee takes
possession or delivery of the personal property. Chicago
Municipal Code § 3-32-030(C) (added Dec. 15, 1992). The
use in the City of personal property leased or rented outside
the City is exempt from the tax if it is primarily used (more
than 50%) outside the City. Chicago Municipal Code §
3-32-050(A)(1) (added Dec. 15, 1992).
5 In May 2011, the then-director of the City's department
of revenue promulgated a second amended ruling, Ruling 11, to
explain the administration and enforcement of the ordinance
as applied to suburban short-term vehicle rental locations
within three miles of the City's borders. The ruling
applies to vehicle rental companies that are doing business
in the City, defined as having a rental location in the City
or regularly renting vehicles that are used in the City, such
that the company is subject to audit by the Department.
Id. § 3. Ruling 11 advises vehicle rental
companies doing business in the City, when renting from a
suburban location within three miles of the City's
borders to a customer who will use the vehicle in the City,
to maintain written records that support any claim of
exemption from the tax, for the company's use in the
event of an audit. In such an event, the ruling states,
absent written proof to the contrary, the Department will
assume that a customer who is a Chicago resident, based upon
the customer's driver's license, will use the vehicle
in the City and is thus subject to the tax. Conversely, the
ruling further states that the Department will assume that a
customer who is not a Chicago resident will use the vehicle
primarily outside the City and thus be exempt from the tax.
Ruling 11 suggested the following provisions for inclusion in
rental agreements, which, when selected by the customer,
would be deemed by the Department to be acceptable evidence
of taxable and exempt transactions:
"___By initialing this space you are notifying us that
you plan to use this vehicle 50% or more of the time
(including garaging) in the City of Chicago.
___By initialing this space you are notifying us that you
plan to use this vehicle more than 50% of the time (including
garaging) outside the City of Chicago." Id.
6 Section 4 of Ruling 11 states that, as a policy matter, the
Department has decided that it will not audit or assess any
motor vehicle rental companies for rentals from locations
more than three miles outside the City's border. Ruling
11 further states that in the event of a change in policy,
the Department will provide at least 120 days' notice of
the change, which would be prospective only. Id.
§ 4. Ruling 11 contains a "safe harbor"
provision, which states that in lieu of maintaining written
records, a suburban motor vehicle rental company subject to
the ruling may assume that 25% of its rental charges to
customers who are Chicago residents are for vehicles that
will be used primarily in Chicago and the company may then
pay the tax on that amount. Id. § 5.
7 Subsequent to the issuance of Ruling 11, Enterprise sought
guidance from the Department on whether its current lease
agreement was sufficient to provide an exemption from the
tax. That agreement informed the lessee of the vehicle that a
city tax may apply if the leased vehicle is used primarily in
the City. The agreement further advised the lessee to request
a tax form for remittance of the tax directly to the City
should the lessee intend to use the vehicle primarily in
Chicago. The City found the agreement insufficient to support
an exemption from the tax, reasoning that silence by a
Chicago resident as to the intended use of the vehicle did
not constitute a claimed exemption by the lessee and that a
Chicago lessee should be required to expressly inform
Enterprise whether the intended use of the car would
primarily be in Chicago.
8 Plaintiffs filed separate actions against the City, seeking
declaratory and injunctive relief. Those actions were later
consolidated. Plaintiffs alleged that Ruling 11 (1) violates
the due process clause of the fourteenth amendment to the
United States Constitution (U.S. Const., amend. XIV, §
1) based upon the alleged extraterritorial nature of the tax;
(2) has an unauthorized extraterritorial effect in violation
of article VII, section 6, of the Illinois Constitution (Ill.
Const. 1970, art. VII, § 6); (3) is unauthorized because
it exceeds the scope of and is prohibited by the ordinance
imposing the tax; and (4) violates the commerce clause of the
United States Constitution (U.S. Const., art. I, § 8,
cl. 3). Plaintiffs further alleged that the tax ordinance
itself is unconstitutional with respect to extraterritorial
transactions. Hertz separately alleged that the retroactive
application of Ruling 11 is illegal.
9 Enterprise filed a motion for preliminary injunction, and
the City filed separate motions to dismiss the complaints.
The circuit court denied the City's motions and granted
Enterprise's motion for preliminary injunction.
Enterprise filed a motion for summary judgment, which Hertz
joined. The circuit court granted plaintiffs summary
judgment. The court found that Ruling 11 is an exercise of
improper extraterritorial taxing authority because the
taxable event, i.e., the lease transaction, takes
place outside the City's boundaries. The court also found
that Ruling 11 exceeds the scope of the tax ordinance by
improperly extending the reach of the ordinance to
transactions that take place outside Chicago's borders.
Finally, the circuit court found that Ruling 11 violates the
due process and commerce clauses of the United States
10 The appellate court reversed. It first rejected
plaintiffs' characterization of the tax as a transaction
tax. Based upon the plain language of the tax ordinance, the
court found that the tax is in fact a use tax on the
privilege of using leased tangible personal property inside
the City. 2015 IL App (1st) 123210, ¶ 22. The court held
that because plaintiffs had rental locations in the City and,
therefore, did business in the City, they could be required
to collect the use tax at their suburban locations.
Id. ¶¶ 26-27. The court found a sufficient
nexus between plaintiffs and the taxable activity,
i.e., use of the vehicles in Chicago, to permit the
tax to be imposed and collection duties placed on plaintiffs.
Id. ¶ 31. The appellate court also rejected
plaintiffs' other arguments. We granted plaintiffs'
petitions for leave to appeal (Ill. S.Ct. R. 315 (eff. Mar.