Both sides in a tax haven lawsuit between the Regional Transportation Authority and Kankakee call a Thursday ruling by the Illinois Supreme Court on a related case a win.
Justices said Illinois tax law allows counties and towns to collect sales tax from retailers doing business in their communities to help pay for government services, which is the heart of a dispute between the state and Hartney Fuel Oil Co.
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However, the court found that Hartney Oil had not broken the law when it set up what critics call a "sham" sales center in downstate Mark, thereby avoiding paying taxes to Cook County. The blame goes to Illinois Department of Revenue regulations defining where sales occur that are so "erroneous" and "flawed," justices invalidated them.
The RTA has called arrangements where local businesses set up long-distance offices in tax-friendly counties a scam and is seeking to recover millions in a separate lawsuit filed against Kankakee, Channahon, Sycamore and companies including United Airlines. The Hartney litigation has been viewed as the test case for others.
"Hartney wins because it relied on the flawed DOR regulation; but the regulation is invalid," said attorney and RTA Director William Coulson, adding the state law allows "taxing businesses where they are located and enjoy the public services."
"Businesses are now on notice that sham 'order offices' violate the sales tax statute, even without a new regulation. In my view this significantly strengthens the RTA lawsuits," Coulson said via email.
Meanwhile, Kankakee Mayor Nina Epstein was delighted with the justices' decision. "It's basically saying we are correct in what we did because we followed Department of Revenue regulations," Epstein said. "You can't say we were wrong or these were sham offices."
What's not clear is if the RTA will recover the millions of tax dollars officials predicted they would when filing the lawsuit. The agency has spent more than $1.8 million on the case so far.
The ruling "should end the practice going forward; past practices which relied on the invalid DOR regulation may be protected," said Coulson, a former federal prosecutor.
Epstein said the decision doesn't affect taxes previously distributed. "All that's gone on to this point can't be touched," she said.
Department of Revenue officials said justices clarified that sales taxes must be paid in the community where the bulk of the business activities occur and noted they would propose revisions to rules about the allocation of local sales taxes.
Epstein hoped all sides could get together with the DOR to rewrite regulations but thought the court's opinion doesn't give a lot of direction and "opens another Pandora's box." RTA Chief of Staff Jordan Matyas seemed to anticipate that lawmakers will get in on the action. "We ... will fight any legislative efforts that seek to permit these tax schemes," he said. The RTA has oversight of Metra, Pace and the CTA.
A United spokeswoman said the airline needed to review the suit before commenting.