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Court Rules Chicago OTP Tax is Invalid

Court Rules Chicago OTP Tax is Invalid

After nearly four years of costly legal challenges by the industry, the Illinois Supreme Court invalidates Chicago tax on cigars, pipe, and smokeless tobacco.

>BY THOMAS BRIANT

On December 19, 2019 the Illinois Supreme Court reversed a judgment of the Illinois Appellate Court and affirmed the initial Cook County circuit court ruling that the City of Chicago exceeded its legal authority in enacting a municipal “other tobacco products” (OTP) tax to apply to non-cigarette tobacco products including cigars, pipe tobacco, and smokeless tobacco products.

Former Chicago Mayor Rahm Emanuel led the push to enact an ordinance that included new taxes on non-cigarette, other tobacco products in March of 2016, that was scheduled to take effect in July of that year. As originally enacted by the Chicago City Council, the ordinance sought to impose local excise taxes of $0.20 per little and large cigar, $1.80 per ounce on smokeless tobacco, $0.60 per ounce on pipe tobacco and $1.80 per ounce on rollyour-own cigarette tobacco.

Shortly after the local law was passed, a broad cross-section of the industry challenged the legality of the tax, seeking to have it overturned by the court. The Plaintiffs that filed the lawsuit argued that state law prohibits local governments from creating a new tax on other tobacco products. The applicable law states that “a home rule municipality that has not imposed a tax based on the number of units of cigarettes or tobacco products before July 1, 1993, shall not impose such a tax after that date.”

The plaintiffs who ultimately prevailed in the litigation included the National Association of Tobacco Outlets (NATO), the Cigar Association of America, Iwan Ries & Co. (a Chicago tobacco and cigar store), the Illinois Association of Wholesale Distributors (IAWD), the Illinois Retail Merchants Association (IRMA), the International Premium Cigar and Pipe Retailers Association (IPCPR), and Arangold Corporation (dba Arango Cigar Company).

The group filed suit and sought injunctive relief, arguing that Chicago’s ordinance was preempted by state law that limited the authority of local units of government from imposing new taxes on cigarettes or other tobacco products. In the first decision related to the case, the Cook County Circuit Court agreed with the plaintiffs and granted their motion invalidating the local tax.

The city appealed that ruling to the Illinois Appellate Court and in December 2018, the appellate court sided with the city in this dispute and agreed they could implement and begin collecting the tax. In overturning that decision, the Illinois Supreme Court held that state law limited the ability of local governments to enact new cigarette or other tobacco products taxes unless they specifically and previously had a cigarette or an OTP tax in place prior to July 1, 1993. While the City of Chicago had adopted a local tax on cigarettes prior to that date, the city had not adopted a local excise tax on other tobacco products.

The city argued that having enacted a cigarette tax or an OTP tax prior to July 1, 1993 should allow them, under the state law, to pass and implement a new tax on other tobacco products. Both the Cook County Circuit Court and ultimately the Illinois Supreme Court rejected that argument as the statute distinguishes between the two different taxes. The ruling should make clear to municipal governments throughout Illinois that if they enacted a local cigarette tax or OTP tax prior to July 1, 1993, then that tax remains valid. However, if either of taxes were not enacted before the July, 1993 deadline, then state law prohibits local governments from enacting new cigarette or OTP taxes after that date.

Thomas Briant is executive director of the National Association of Tobacco Outlets (NATO), Toll-free: (866) 869-8888, Web: www.natocentral.org.