Chicago Calls Two Cities Tax Cheaters

CHICAGO (CN) - Chicago and its public transit agency claim two distant cities have cost it millions of dollars by offering Chicago-based businesses kickbacks to set up empty shells out of town, to dodge local taxes with help from financial consultants, or brokers, whom the city also sued.

The two lawsuits in Cook County Chancery Court were filed as Chicago Mayor Rahm Emanuel made the accusations public.

Chicago sued Kankakee, the Village of Channahon and three consultants: MTS Consulting, Inspired Development, and Minority Development, all of them LLCs.

In a separate complaint in the same court, the Regional Transportation Authority, which runs Chicago's Metra commuter rail system and Pace suburban buses, sued Kankakee, Channahon, the same three consultants, plus Corporate Funding Solutions and XYZ Sales, Inc.

Channahon is southwest of Joliet, in Will County; Kankakee even farther from Chicago, in Kankakee County.

Chicago and the RTA claim the two distant southwest suburbs have cost it millions of dollars for more than a decade through a tax incentive scam that allowed Chicago-based vendors to dodge Cook County sales tax.

"Kankakee and Channahon have attracted a large number of corporations - and an enormous amount of revenue - by offering Illinois retailers kickbacks of sales tax revenue if they purport to process their retail sales through small offices set up in those municipalities," Chicago says in its complaint.

"So successful has this scheme been that Kankakee and Channahon now lead the state in annual retail sales per capita at $78,000 and $62,000 respectively, which is tenfold the per capita sales of Chicago and roughly double the per capita sales of municipalities that are home to major retail shopping malls.

"Almost every sale made in Kankakee or Channahon pursuant to a sales tax kickback arrangement means one less sale in another Illinois municipality - often the municipality where the retailer is located and which provides police and fire protection and other municipal services to its corporate citizens at great expense."

The state passed a law in 2004 to bar such sales tax kickbacks, Chicago says. It claims the defendant cities tried to duck the law by hiring brokers to act as a liaison between retailers and Kankakee and Channahon.

Chicago and the RTA say the brokers set up small, sometimes unstaffed, sales offices in Kankakee or Channahon, where sales in Chicago are processed as though they were made in the exurbs.

Kankakee and Channahon kick back 85 percent of sales tax revenue to the brokers, who pass it along, minus a fee, to store owners, according to the complaint.

Chicago claims annual sales brokered on behalf of vendors in Kankakee rose from $1 billion to $1.9 billion from 2004 and 2009.

In Channahon, reported sales shot up from $100 million to $852 million.

"In contrast, retail sales statewide remained flat from 2004 to 2009," the city says. The RTA claims that both Kankakee and Channahon have refused to allow it to see their financial records. It claims the towns have diverted $20 million of tax money from it each year - at least $100 million since 2004.

Chicago makes similar allegations: "Certain of the allegations made in this complaint are made on information and belief because the particular facts are exclusively in defendants' possession and defendants have refused legitimate requests for such information."

Chicago and the RTA seek damages for lost taxes, violations of state law, (65 ILCS 5/8-11-21), unjust enrichment, conversion, conspiracy, and aiding and abetting conspiracy and conversion. The city is represented by house counsel Stephen R. Patton, the RTA by lead attorney Timothy Bertschy with Heyl, Royster, Voelker & Allen.

Channahon, population 14,049, grew by 91 percent from 2000-2009, during which time its median income grew from $71,991 to $87,535, far above the 2009 state median of $53,966, according to city-data.com. Its population is 95 percent white.

Kankakee, population 26,840, had a stagnant economy in the past decade, its median household income rising from $30,469 in 2000 to $31,705 in 2009, according to city-data.

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