Chicago and the Regional Transportation Authority on Tuesday filed the first of what are expected to be numerous lawsuits brought against other Illinois municipalities and businesses to halt a "tax avoidance kickback scheme'' that is allegedly diverting hundreds of millions of dollars in sales taxes away from the Chicago area.
The two lawsuits were filed in Cook County Circuit Court against Kankakee, Channahon and several business consultants. The legal action comes amid a looming budget shortfall in Chicago and a financial crisis with the mass transit system that is forcing the
The practice primarily involves companies setting up satellite sales offices and hiring brokers so that taxes are paid in jurisdictions that impose no local sales tax or lower tax rates than in the Chicago-area locations where the same companies have operated for years, according to the complaints. Under tax-sharing agreements with companies, the two municipalities kick back most of their local share of the sales tax to the companies, the lawsuits allege.
The RTA is seeking to get back more than $100 million in revenue that should have been collected in the six-county area, the lawsuit said.
The CTA conservatively estimated its losses at $50 million over the last eight years. Breakdowns were not available for Metra and Pace.
Chicago did not list a figure in its lawsuit, but it requested that all sales taxes collected by the two small towns be placed in a trust fund pending the outcome of the case.
"Companies are gaming the system and cheating Chicago's taxpayers," Mayor
The failure to collect all the tax revenue owed to Chicago and the RTA system has contributed to cuts in city programs as well as delays in improving bus and train service and improving the crumbling transit network, officials said.
But officials also disclosed that they have known for many years about the leakage of tax dollars, yet did nothing to stop it.
State Sen. Martin Sandoval, D-Chicago, said he supports the lawsuit, adding, "it's about time the RTA has taken this drastic action."
At least two dozen Illinois municipalities have had sales taxes totaling almost $74 million misallocated from their communities to
RTA Chairman John Gates Jr. said he expected other municipalities to file lawsuits. Gates said it's not known for how long tax revenue has been lost, although he suspected it has been going on since "the mid-2000s (and) only recently has ramped up to these very large numbers."
Officials from Kankakee and Channahon defended their practices as legal. They are simply allowing companies to sell goods that may be used elsewhere, officials said.
Channahon Mayor Joe Cook viewed the lawsuits as a David-and-Goliath scenario. "We're just being beat up here," he said. "We're just a small community of 13,000 residents."
But attorneys for Chicago said Kankakee and Channahon now lead the state in annual retail sales per capita, at $78,000 and $62,000, respectively. That's 10 times the per capita sales of Chicago, they said.
Tribune reporters Kathy Bergen and Robert Channick contributed.