2013 Lane Reports

Time to Thwart the Sales Tax Gambit

The Lane Report, April 2013
Monday, April 1, 2013 10:00 am
by Marc J. Lane

Over the past three years, Illinois courts have heard one claim after another that cities and towns outside the Regional Transit Authority's six-county territory have illegally lured businesses whose headquarters are within the RTA's taxing authority to set up satellite offices merely to reduce the sales taxes they owe. Adding to the controversy, the exurban municipalities have sweetened their offers by splitting their newfound Illinois sales tax receipts with the companies whose sales are at issue.

The RTA has sued Chicago-based United Airlines, a unit of United Continental Holdings Inc., and the town of Sycamore, where United maintains an office but seems to do little or no business. In Sycamore, the company pays a sales tax of only 8 percent on fuel destined for O'Hare International Airport — not the 9.5 percent it arguably should pay, allegedly costing taxpayers funding the city of Chicago, Cook County and the RTA some $300 million over the past seven years. The RTA seeks to claw back the sales taxes it argues United and Sycamore unlawfully withheld at the expense of Chicago-area residents and businesses.

But United, Sycamore and all the earlier defendants tell a different story and, to some, make a compelling case.

The litigation turns on two questions: What is a sale? And where does it occur? These questions pit two competing legal principles against one another.

The RTA advances a form-over-substance argument. It contends that United maintains a phantom office with a single part-time employee for its “fuel subsidiary,” United Aviation Fuels, to “accept” jet-fuel purchases intended for O'Hare, in Chicago and the RTA sales area, only to avoid the 1.5 percent higher tax that would apply at O'Hare. The RTA insists that the courts should consider where contracts are negotiated and signed, where payments are made and where the product is used.

But, as some courts have already ruled, that's not what Illinois law actually says. Unlike most states, which require that sales taxes be collected where products are received, under Illinois law a sale occurs and tax is collected where a purchase is accepted. So United and Sycamore, vigorously denying the RTA's accusations, rely on an established rule of statutory construction that encourages a narrow interpretation of a law's language.

As things stand, Illinois' quirky law gives incentives to big and powerful companies to accept purchases in lower-tax venues, better still where sales tax rebates are available for the asking. The General Assembly should act now and amend the law so sales taxes are rationally tied to the locations where products are received. The taxpaying public and the broader business community should demand no less.

Marc J. Lane is a Chicago attorney and chairman of the Illinois Task Force on Social Innovation, Entrepreneurship, and Enterprise.

Reprinted from Marc Lane's March 7, 2013 editorial which appeared in Crain's Chicago Business.  Crain Communication Inc.'s permission is gratefully acknowledged. Copyright © 2013 by Crain's Communications Inc.

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