Chicago, Illinois RTA Sue Two Cities For Avoiding Sales Tax Collections

CHICAGO — Chicago and the Illinois Regional Transportation Authority filed lawsuits Tuesday against the cities of Kankakee and Channahon for their roles in tax-sharing agreements with retail companies that allow them to avoid collecting the Chicago area's higher sales tax rates.

Both lawsuits were filed in Cook County Circuit Court and seek to put a halt to the arrangements and recoup lost sales tax dollars. Under the arrangement, the two cities serve as the point of sale for processing purposes on purchases. Illinois imposes its sales tax at the location where the seller operates, not the buyer, as most other states do.

As part of tax-sharing agreements that entice the companies to their cities, the two municipalities in turn kick back much of their local share of the statewide sales tax to participating companies.

"Companies are gaming the system and cheating Chicago's taxpayers," Chicago Mayor Rahm Emanuel said in a statement. The lawsuit also names as defendants three so-called retail brokers.

The RTA lawsuit seeks to recoup $100 million in lost revenue due to what it characterizes as tax avoidance scams. "The RTA system relies on sales tax revenue for almost 50% of our funding," RTA executive director Joe Costello said in a statement. "It is this funding that keeps our trains and buses running and in good repair. We know that these illegal tax avoidance scams are costing our riders tens of millions in lost revenues every year."

The cities did not have an immediate response.

When state and local sales taxes are totaled, Chicago purchases carry a 9.75% rate, while suburban purchases carry rates between 8.25% and 9.5%. All are higher than local governments outside the region.

The RTA — which relies on about $900 million of sales tax revenue annually — is also pressing for state legislation that would clarify existing law to eliminate loopholes that allow for such schemes. Both the RTA and Chicago are struggling with budget woes and say they can't afford the diversion of the sales tax dollars.

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