Photo via Wikimedia/mindfrieze

Photo via Wikimedia/mindfrieze

The Illinois Supreme Court told Chicago to stop collecting taxes on suburban car rental companies that may rent cars for use within city limits, according to a report by Law360.

The court ruled that the way Chicago imposes the tax violates the home rule article of the Illinois constitution. All seven judges of the Illinois Supreme Court agreed that a rule setting how the city collects taxes on rental companies outside its jurisdiction is unconstitutional, says the report.

That rule, circulated by Chicago’s Department of Revenue in 2011, tells how a city property use tax is to apply to cars leased from businesses within three miles of the city’s boundaries.

Under the guidelines, the city required those renting the vehicles to check a box declaring whether they plan to use the car within city limits for at least 50% of the time that they are in possession of the vehicle. If the box is not checked, the city automatically imposes the tax if the customer’s driver’s license lists a Chicago address, according to the report.

But intent is not actual use, according to the Illinois Supreme Court. The end result could be that Chicago is taxing property being used outside city bounds in violation of the Illinois Constitution’s clause on home rule authority.

“There is no delivery of the leased vehicles into Chicago, and the lease transactions take place wholly outside Chicago,” the court wrote. “At most, there is only a tenuous connection between the city and the taxed transaction.”

A representative for Enterprise Holdings, one of the two rental companies challenging the rule, said the company was pleased with the ruling and that it will continue to pay taxes for leases of vehicles within city limits, which totaled more than $21 million last year.

“The court’s decision only holds that the city cannot require out-of-city businesses to collect city taxes when they do not sell their product in the city,” Laura Bryant told Law360 in an emailed statement.

Karen Drake, a representative for Hertz Corp., told Law360 that the company was also pleased with the ruling.

Enterprise and Hertz both sued the city after the guidelines were handed down in 2011. The circuit court granted summary judgment to both but the appellate court reversed, ruling that it was in the city’s authority to tax leased property being used within its boundaries, according to the report.

Chicago urged the high court to uphold that ruling, arguing in part that the vehicles and their drivers are using city streets and receive the protection of city-funded services like the fire department and police force. But because the current rule doesn’t actually ensure that the leased vehicles are being driven on city streets, the Illinois Supreme Court marked it as unconstitutional, according to the report.

Click here for the full Law360 report.