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Illinois RTA Goes After Airlines for Sales Taxes

JAN 14, 2013 4:17pm ET
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CHICAGO – The Regional Transportation Authority of Illinois accused American Airlines and United Airlines of avoiding $300 million in sales taxes over the last seven years by conducting some business in “sham” offices set up outside of Cook County.

The RTA filed a lawsuit Monday in Cook County Circuit Court against United and plans to file litigation against American once it resolves its federal Chapter 11 bankruptcy case. The two operate offices in Sycamore, Ill., where they “accept” their jet fuel purchases made 50 miles away in Chicago, where both airlines have major hubs at O’Hare International Airport, the RTA said.

The offices are small and rarely occupied and one does not appear to have a computer, the RTA contends. United’s office – operated under the name United Aviation Fuels Corp. -- is located in a strip mall while American’s is located inside a windowless office in Sycamore’s town hall, the RTA said. The RTA claims the airlines are violating state law. The airlines pay a sales tax rate of 8% based on the Sycamore offices, not the 9.5% sales tax levied in Chicago. Under sales tax rebate agreements that help land the private companies, Sycamore returns a portion of the sales tax to the airlines.

“RTA is charged with ensuring the financial stability of mass transit in the region and with ensuring that CTA, Metra and Pace receive all revenue that they are entitled to,” RTA executive director Joseph Costello said in a statement. “We are calling on United, American and any other businesses engaged in these practices to do the right thing and cancel these agreements.”

The RTA provides fiscal oversight of Pace bus service, Metra commuter rail, and the Chicago Transit Authority. A CTA fare increase took effect Monday to help raise revenue to balance the agency’s 2013 budget without steeper service cuts.

Both airlines denied any wrongdoing and claim their operations are legal. “We have not reviewed the complaint, but we believe that any such suit would be without merit,” Chicago-headquartered United said in a statement. “In fact, the operation of our fuel subsidiary in Sycamore has been examined by tax authorities in the past and has been determined to comply with all applicable laws.”

An American spokeswoman said the airline typically does not comment on possible or pending litigation matters but asserted that its practices are permitted under Illinois law.

The RTA has attempted to highlight over the last two years what it calls tax-avoidance schemes by companies and has sued the cities of Kankakee and Channahon, far south of Chicago, over their roles in tax-sharing agreements with various retail companies. The RTA has pushed without success for legislation that would clarify current laws to close any loopholes companies claim make the practice legal.

Kankakee and Channahon serve as points 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.

Gov. Pat Quinn last year signed legislation that requires public disclosure of sales tax agreements between local governments and companies.

The RTA’s service boards are starved for both operating and capital funds. The RTA relies on about $1 billion in sales tax revenues annually. The transit agencies have an estimated $24.6 billion in spending needs just to keep the system in a state of good repair. The RTA’s $2 billion of general obligation debt carries low-to mid-double-A level ratings.

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