Marilyn A. Wethekam is a partner with Horwood Marcus & Berk Chtd. in Chicago, cochairing the firm's multistate state and local tax practice.
The focus of the SALT community's discussion generally has been on the states' search for revenue and the creation of new revenue sources. What has been overlooked in that discussion, however, is the revenue needs of cities, counties, and other local governmental bodies. The search at the local level has led some jurisdictions to push legal boundaries, expand existing tax schemes to areas such as the sharing economy, or develop new, creative tax schemes aimed at increasing revenue. Some of the creativity is driven by the fact that state statutes may limit or restrict the type of taxes that may be imposed by local governmental bodies.
Chicago is an example of a local jurisdiction that may have pushed the legal boundaries in search of additional revenue. Here are some examples:
- The city imposes a personal property lease tax on personal property used in Chicago, including rental cars. The city issued Ruling 11, which required suburban rental car agencies located within three miles of the city limits to collect the tax when renting to someone with a Chicago address. The theory was that the car would be used in Chicago. This year the Illinois Supreme Court struck down Ruling 11, holding that it violated the Illinois Constitution and was effectively extraterritorial taxation.33
- Illinois law prohibits home rule municipalities that had not imposed a tax on other tobacco products before July 1, 1993, from imposing such a tax.34 Once again, Chicago, a home rule jurisdiction, may have pushed the boundaries by the enactment of the Other Tobacco Products Tax in March 2016. The enactment is the subject of litigation in Iwan Ries & Co. v. City of Chicago, Cir. Ct. Cook County (Jan. 2017).35
- Chicago, like San Francisco and other municipalities, enacted a tax on checkout bags. Effective February 1, Chicago imposes a 7-cent tax on the retail sale or use of paper or plastic carryout bags. The tax is to be collected by the wholesaler of the bags. The retailer must separately state the bag tax if the bag is sold to the customer. However, the tax need not be separately stated if the retailer chooses to not pass the tax along to the customer. Thus, a business decision needs to be made as to how to handle the tax. Every retailer that remits or pays tax is entitled to retain 2 cents per checkout bag that is sold or used. The administrative issues, which are likely to be numerous, are still being worked out.
Not to be outdone by Chicago, Cook County also has shown creativity in enacting new tax schemes. The first attempt by the county was a use tax that was subsequently struck down by the Illinois Appellate Court. In November 2016 Cook County, like numerous other jurisdictions, enacted a tax on sweetened beverages. The tax imposes a 1-cent-per-ounce on the retail sale of a sweetened beverage. The definition of sweetened beverage is broad and would encompass beverages that one may not think of as sweetened. While the incidence of the tax is on the retailer and purchaser, the distributor of the products takes on the role of an indentured intermediary required to collect the tax from the retailer in advance of the retailer's collection from the purchaser of the beverage. The distributor, however, is not responsible for determining the taxability of the beverage when it is sold at retail. The way the tax is imposed and administered is going to lead to some interesting issues. For example, the use of a sweetened beverage as a mixer in an alcoholic drink is taxable. The alcoholic drink, however, is specifically exempt from the sweetened beverage tax. This gives rise to the possibility of a mismatch between the tax collected and remitted by the distributor and that collected by the retailer. Also, there is little guidance for the retailer who allows unlimited free refills of soda or other sweetened beverages. As a result, business models may need to be changed.
This lack of guidance brings up an additional point that may be lost on elected officials who enact the various taxes. Specifically, the enactment of the tax is easy, but there must be a second consideration - both the taxpayer and the agency must be capable of administering it.
33. Hertz Corp. v. City of Chicago, 2017 IL 119945 (2017).
34. 65 Ill. Comp. Stat. 5/8-11-6a(2).
35. Circuit Court of Cook County, No. 16 L 50556 (Jan. 20, 2017).
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(C) Tax Analysts 2017. Reprinted with permission.