Businesses costing burbs with sales tax loophole

Chicago and its immediate suburbs are losing millions of dollars in revenue because companies doing business there are routing purchases through outlying cities that have lower sales taxes, according to a published report.

The Chicago Tribune reported in Sunday’s editions that the retailers can charge customers a lower price, gaining a competitive advantage and offering a windfall to the host cities.

The companies, including catalog houses, appliance retailers, and even oil companies, set up offices in places such as Kankakee and Channahon with lower sales taxes. It’s a strategy that has emerged in the past decade and has been aided by consultants who help the companies set up offices that are sometimes not much more than storefronts, the newspaper reported.

The host cities say they’re following the state tax code in competing for the few tax dollars available. Some even offer rebates to incoming businesses. The newspaper said Kankakee reported paying companies $125 million in sales tax rebates from 2002 to 2010.

That amount could be double or triple in a city with a higher sales tax. Kankakee charges the state minimum, 6.25 percent, of which the state shares 1 percent with municipalities.

Chicago’s rate is 9.75 percent, meaning millions of dollars in lost revenue at a crucial economic time.

“There is money that should be going to Chicago that is going to other cities,” said Chris Mather, a spokesman for Chicago Mayor Rahm Emanuel, whose office said it would sue Channahon and Kankakee this coming week.

The strategy makes no difference for a retailer such as a grocer, where customers leave the store with the product. But Illinois is among a few states that apply sales tax where an offer is accepted rather than where a product is delivered to a customer. A sale based on an order that is delivered later can be accepted away from the store.

The Department of Revenue suggested new interpretations of the law but the ideas stalled in the General Assembly. Rep. Barbara Flynn Currie, D-Chicago, said she is working with various parties to provide revenue-law clarity and stop abuses.