Sales Tax Slice: Will Taxpayers Be Entitled to Refunds if Cook County Use Tax is Invalidated?

Taxpayers seemingly scored a victory on July 24, when the Cook County Circuit Court granted a preliminary injunction enjoining the enforcement of the county’s non-titled personal property use tax. So far, the court has agreed with the taxpayers’ contention that the levy violates the U.S. Commerce Clause.

But even if the tax is ultimately found to be constitutionally infirm, it is far from certain if those who paid the tax will ever receive refunds.   

In the coming weeks, there could be a few angry taxpayers in Cook County, Illinois. 

When the court issued its injunction order, it did not address the issue surrounding claims for refunds. While the court’s silence is not altogether surprising given the fact that the injunction is temporary, the issue looms while taxpayers await word over whether the injunction will be extended permanently. 

The tax, which, to date, has lasted a shade under 5 months, was implemented not only to raise money for the county government, but also to stimulate economic activity by incentivizing in-county purchasing,

It has also been marred with controversy since its enactment.  As originally drafted and imposed, the tax subjected non-titled personal property (e.g., computer hardware, furniture, office equipment, etc.) purchased outside the county to a use tax of 1.25 percent of the property’s value, making it 0.50 percent higher than the county’s sales tax rate. However, perhaps recognizing a potential violation of the Commerce Clause of the U.S. Constitution, the county dropped the rate to 0.75 percent on June 19, bringing it in line with the local sales tax rate.

The county’s tax reduction, however, did not solve the U.S. Constitutional issue, according to Jordan Goodman, partner at Horwood, Marcus & Berk in Chicago, whose law firm was one of two firms that brought suit against the county. According to Goodman, the tax also violates the Commerce Clause because it is based on the property’s value and it is therefore a new tax that only subjects out-of-county sellers to collect it and in-county buyers to pay it. Furthermore, there is “no equivalent for purely intra county transactions because no other tax in the county was based on value,” Goodman said.

Accordingly, shortly after the tax’s April 1 effective date, suit was brought against the county on three grounds. First, that the Illinois Counties Code forbids the imposition of use tax on the “selling price” or “purchase price” of tangible personal property. Second, the plaintiffs argued that the Illinois Constitution prohibits the imposition of an ad valorem tax. Last, the plaintiffs presented the aforementioned Commerce Clause arguments. 

In granting the injunction, the court sided with the plaintiffs on all three grounds and it also agreed with the disparate treatment under the Commerce Clause argument.

In response, on August 15, the court heard arguments from the Cook County Department of Revenue for a stay of the preliminary injunction on the basis that the injunction causes irreparable harm to the county. While a decision on the stay has not yet been handed down, the court indicated it will have one by Friday, August 23, according to Goodman, who also stated that Horwood, Marcus & Berk has filed a Motion for Summary Judgment and has been asked by the court to “hold off” pending its decision on the stay. 

Should the court ultimately make the injunction permanent, however, there is no guarantee that it will address the refund issue.

In Illinois, refunds are granted when there has been a “mistake of fact” or an “error of law.” It remains unclear, however, whether the court will determine that payments made prior to any tax invalidation will be an “error of law” because, at the time of those payments, the tax had not been determined to be illegal. 

While the plaintiffs have requested clarification on the issue, the issue of whether refunds will be doled out is far from certain. Accordingly, taxpayers that dutifully made their payments, while unaware of the legal issues surrounding the tax, may find themselves out of luck.

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