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Illinois Supreme Court rules to close sales tax loopholes

Updated: December 23, 2013 3:04PM

The Illinois Supreme Court on Thursday issued a ruling that sales taxes must be paid by companies in communities where the bulk of their business activities occur, targeting big firms that set up shop in far flung towns to allegedly avoid sales taxes. The Regional Transportation Authority called it a “tremendous victory for transit riders and taxpayers in Northeastern Illinois.”

The RTA sales tax is the primary source of revenue for the system, the equivalent of 1 percent on sales in Cook County and 0.25 percent on sales in the collar counties of DuPage, Kane, Lake, McHenry and Will.

In an unanimous opinion, the court found the practice of shifting the point of purchase from the Chicago area to downstate counties with lower sales taxes to be inconsistent with state law.

“Businesses, along with Channahon, Kankakee, Sycamore and other municipalities, have been put on notice that going forward sales tax avoidance schemes that cheat the mass transit system and local governments out of sales tax revenue will not be tolerated,” RTA Chief of Staff Jordan Matyas said in a statement. “The Court’s opinion is a significant blow to businesses that are improperly diverting sales tax revenue from the RTA region.”

Local governments that were getting money from the companies had argued the rules weren’t clear enough.

The Illinois Department of Revenue said Thursday based on the court’s decision, it will propose revisions to its regulations about allocation and distribution of local sales tax, according to spokeswoman Susan Hofer.

She said there was no state revenue at issue. The department’s only interest has been to make sure the correct amount of local sales tax is collected and properly distributed.

The court’s action came in the Hartney Fuel Oil Co. case, in which the Forest View-based company had a sales office in downstate Monk and avoided paying higher sales taxes in RTA’s region. But Hartney wasn’t the only company to do so.

The RTA in 2011 filed suit against some 70 companies said to have been occupying offices in Kankakee or Channahon, possibly to avoid paying higher sales taxes. The agency in January released a draft of company names, listing Target, Aldi, Lands’ End and Gateway as defendants. The RTA has contended companies have been claiming their sales are sourced through “sham” offices set up in Kankakee and Channahon so they can be taxed at a lower rate than if they used their actual offices in the six-county RTA region. RTA officials say the scheme has resulted in the loss of more than $100 million in tax revenue.

Hartney had to pay back taxes totaling $23 million, which they company paid and then filed suit. Thursday’s court opinion, however, ruled that the company acted consistently with the Department of Revenue’s regulation, published at the time they were conducting the business. That means, Hartney is entitled to that $23 million.

The RTA’s suit, which seeks $100 million in back payments, is pending.

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