Dozens of companies doing business in the Chicago area are routing their sales through small outlying municipalities with low sales tax rates, siphoning tens of millions of dollars from city and suburban taxing districts.
These companies, ranging from catalog houses and appliance retailers to oil companies and computer purveyors, shift the official point of purchase from the Chicago area to such locations as Kankakee and Channahon in order to escape the high sales-tax rates in Cook and some collar counties. One significant advantage for the companies is that they can sell products to customers at a lower tax cost, effectively reducing the purchase price and gaining an advantage over competitors.
It's a tax-reduction strategy that has gained momentum in the past decade, fostered by consultants who help companies set up and operate satellite offices, some of which are not much more than scantily equipped storefronts. To woo and retain the remote offices, towns often rebate a portion of their sales taxes to the businesses.
Officials of towns such as Channahon say they are adhering to rules set forth in Illinois tax code, and that the remote offices provide a few jobs and extra sales tax revenue to bolster their budgets.
"It built our village hall, which is not the Taj Mahal but is very functional, and we've had some updates to our waste treatment plant and facilities," Channahon Mayor Joe Cook said. "I don't begrudge any community that's going out to grab any dollar they can. When it all comes down to it, local government tends to be very parochial."
The tactics escaped attention until fairly recently, when the economic downturn put intense pressures on Chicago-area government budgets and leaders began to feel they were being aced out of crucial revenue.
Now, several government entities are attempting to grab back the tax dollars.
Chicago Mayor Rahm Emanuel's office said late Friday that the city plans to file a lawsuit early next week against Kankakee and Channahon. "There is money that should be going to Chicago that is going to other cities," said Chris Mather, a spokeswoman for Emanuel.
The Regional Transportation Authority, which relies on sales tax for half its budget, is working with Illinois House Majority Leader Barbara Flynn Currie, D-Chicago, on legislation aimed at blocking the tax maneuver and is hoping for a resolution during the October veto session.
"This practice has to stop; every month we lose money," said Jordan Matyas, RTA's deputy executive director.
Just how much money is at stake is hard to track. Kankakee, which observers think has the largest program, reported paying companies about $125 million in sales-tax rebates between 2002 and 2010, but if those sales had taken place in higher tax venues, they easily could have generated double or triple that amount.
Meanwhile, the state's Department of Revenue is conducting audits in 26 municipalities, most in metro Chicago, that are believed to have lost tax dollars, RTA officials said. The revenue department does not comment on whether it has audits pending, a spokeswoman said.
Cook County government is researching potential lost income as well, a spokesman said.
Within the next week, as many as eight suburbs that are home to Plass Appliance & Furniture showrooms are expected to jointly send a letter to the Revenue Department, asking for a ruling on the company's routing of sales through Channahon, said Martin Bourke, village administrator for Bloomingdale, a DuPage County suburb.
The retailer stopped paying taxes to Bloomingdale in January 2008, and the village estimates it has lost nearly $100,000 in that time. Plass executives did not respond to requests for comment.
"Plass is considered a minor player in our sales tax portfolio," Bourke said, "but the problem we have is we don't know if this is happening with other vendors."
The Bloomingdale tax rate is 8.75 percent in its business districts, compared with 7.25 percent in the portion of Channahon used by many remote offices.
Municipal administrators such as Bourke have been frustrated in their attempts to size up losses to their towns because they have been unable to obtain full lists of involved companies from the cities that offer the sales-tax incentive deals, despite requests under the Freedom of Information Act.
"You can't pierce the veil to see what's going on behind the curtain," said Brad Bettenhausen, treasurer for Tinley Park, which never received sales tax from the Plass outlet that opened there in 2007.
Often, cities strike sales-tax incentive deals with consultants who act as middlemen, and those contracts generally have been made available. But those consultants in turn strike confidential deals with individual companies seeking lower taxes. Municipalities seeking the identity of those firms through FOIA requests have been thwarted so far.
"I'm under a confidentiality agreement that says I can't give up the information," said Cook, Channahon's mayor. Kankakee Mayor Nina Epstein did not respond to requests for an interview on Friday.
The RTA found 33 companies that had contracts with Kankakee and eight that had contracts with Channahon. The actual total is likely higher because some contracts are with consultants who bring in multiple companies. The rosters include some big corporate names, among them Target Corp., Forsythe Technology Inc. and SPS Inc., a procurement subsidiary of Sears Holdings Corp. Target and Forsythe, an information technology company based in Skokie, exited the arrangements last year.
"Like all responsible corporate citizens, we operate fully under the law and make business decisions to meet our customers' best interests and ensure our viability as a company," said Kyra Auslander, a spokeswoman for Forsythe. Sears Holdings said the company pays all required taxes on all transactions in Illinois.
Those companies did not discuss exactly how they put the agreements to use, but experts say companies often use these arrangements to reduce costs in their own purchasing programs. The arrangements also are popular with companies that buy and sell high volumes of commodities because it represents a significant price reduction for customers.
The state's sales tax rate is 6.25 percent, and 1 percent of that is shared with municipalities. To encourage businesses to open sales offices, municipalities such as Kankakee and Channahon frequently pledge 70 to 85 percent of their local share to the firms for a period of years.
In Kankakee, for instance, there is no additional sales tax above the 6.25 percent, so companies, even after sharing the rebate with a consultant, can pay a rate under 6 percent, compared with rates as high as 9.75 percent in Chicago.
Illinois is among a handful of states where sales tax is applied where an offer is accepted, rather than where a product is delivered to the customer.
For most cash-and-carry retailers, like a supermarket or big-box electronics store, the acceptance would occur at purchase. But for products that are ordered and delivered later, the sale can be accepted elsewhere, and that's where the remote offices come in.
The key legal question is whether the remote offices are true sales processing operations or token setups for tax purposes. In 2008, for instance, the Illinois Department of Revenue challenged a claim by Hartney Fuel Oil Co., a major petroleum marketer, that its sales office was in tiny Mark, Ill., with a population of 500. The Revenue Department lost a two-year court fight but is appealing.
A case involving another oil company is pending as well.
A visit to some remote offices in Kankakee and Channahon demonstrate the difficulty in making such assessments.
Late Friday morning, there was no answer at the locked door of MTS Consulting LLC, which has a sales-tax incentive agreement with Kankakee. A peek inside the mail slot revealed a single desk and two chairs, a fax/copy machine and a bathroom. A large pile of unopened mail was inside the door.
Scott Browdy, an attorney representing MTS, declined to comment. He also represents Inspired Development LLC and Minority Development LLC, two companies that have sales-tax rebate agreements with Kankakee and recruit companies to locate offices there.
Several other offices in Channahon and Kankakee, including one above a hair-braiding salon, appeared to be staffed by just one person. In one case, the office had no sign.
Channahon's Cook says all the offices in his town are legitimate sales operations.
But the RTA is skeptical, Matyas said.
"With all due respect to Kankakee and Channahon, just as no one would mistake them for offshore tax havens, no one should believe that their misinterpretation of Illinois tax law is correct or that their schemes to siphon sales-tax money to their cities is in the best interests of our state," he said.
Still, a coalition of Illinois businesses and tax consultants likes the status quo and earlier this year supported legislation sponsored by Sen. Toi Hutchinson, D-Olympia Fields, that would have spelled out that sales taxes should be attributed to the unit of local government where the purchase orders are accepted, solidifying current practice.
But the Department of Revenue, some local governments and the Regional Transportation Authority opposed the bill because it would have given businesses too much leeway to set up remote sales offices in lower-tax jurisdictions.
The Revenue Department proposed a multifactor test to determine the proper place for tax collection when the point of sale isn't as clear-cut as a cash-and-carry transaction. The criteria would have included the location of the product inventory and the location of sales negotiations. The proposal was part of an amendment offered by Currie.
Both proposals stalled in the legislature. Currie's proposal was rejected by business groups, such as the Illinois Retail Merchants Association and the Taxpayers' Federation of Illinois, which said the multifactor test would have caused more confusion because it involved subjective criteria.
"Some of the language we've seen is pretty murky," said Tom Johnson, president of the Taxpayers' Federation. "It would have been difficult for retailers to determine their tax rate."
Currie said she is working with all parties to come up with legislation that would provide clarity for the Revenue Department and taxpayers, and eliminate abuses.Copyright © 2014, Los Angeles Times