Is RTA's $1.6 million fight against tax havens a good bet?
It seemed a no-brainer back in 2011 when the RTA sued Channahon and Kankakee, claiming the towns were cheating the six-county region out of millions by operating tax havens for corporations and retailers.
A legal beatdown sounded like a win-win strategy, especially for a transit system in desperate need of cash.
So far, though, the agency has spent more than $1.6 million fighting the good fight, according to documents obtained through a recent Freedom of Information Act Request, on top of undisclosed costs for PR consultants and lobbyists.
If the RTA wins, leaders project millions of dollars can be recouped. But if the agency loses, has it waved goodbye to $1.6 million -- and counting -- in taxpayer dollars trying to chase taxpayer dollars?
RTA officials were confident the money wouldn't be wasted.
"With hundreds of millions of dollars at stake, the RTA will continue to vigorously pursue the sales tax revenue that rightfully belongs to our service region," Communications Director Susan Massel said, speaking for administrators in an email.
Legal experts warn the outcome could go either way.
"I don't think it's a slam dunk," said tax expert John Biek, an adjunct professor at IIT Chicago-Kent College of Law.
Meanwhile, in a similar dispute, everyone's waiting to hear what the Illinois Supreme Court rules in a lawsuit involving the Illinois Department of Revenue and Hartney Fuel Oil Co. The state contends Hartney based its sales center in Mark, a town in downstate Putnam County, although its headquarters are in Cook County. That means Mark, not the county, gets the sales taxes. Two lower courts found in favor of the oil firm.
The Illinois Supreme Court heard arguments in the Hartney case Sept. 11. Predictions on when justices will opine range from any moment now to January.
"At this point, everything's on hold pending the Hartney decision," Kankakee Mayor Nina Epstein said. "We feel it's the test case."
She added, "we have followed the laws. They're not sham offices -- they're legitimate."
The RTA went to court in August 2011 alleging Channahon and Kankakee were acting as tax shelters. Companies set up ersatz headquarters consisting of just a fax machine in remote, tax-friendly municipalities to avoid paying higher sales taxes in the six-county area where a portion goes to the RTA, officials contend. The participating municipalities benefit by a sales tax bonanza and refund a portion to the retailers.
And a number of suburbs -- including Elk Grove Village -- have joined the suit as well. Meanwhile, Chicago and Cook County also are engaged in lawsuits on the same issue.
"By avoiding paying their lawful share and attempting to enjoy a 'free lunch' at the expense of other taxpayers, they are starving the system of revenue it desperately needs to operate effectively, achieve a state of good repair and to replace outdated equipment when it reaches the end of its useful service life," Massel said.
The agency also sued United Airlines earlier this year, accusing it of operating a sham office in Sycamore.
United considers the suit without merit. "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," spokesman David Christen said.
RTA lawyers argue the agreements between the towns and businesses break a 2004 law prohibiting municipalities from making deals with retailers that deprive other local governments of sales tax that belongs to them.
Channahon and Kankakee counter that the majority of their agreements were signed in the early 2000s and are grandfathered in.
Kankakee has spent about $500,000 so far on litigation, Epstein said, adding that rulings from Cook County Judge Peter Flynn have been in the city's favor so far.
As to the $1.6 million in RTA costs, "if you add the amount of money spent on legal fees, the RTA will be hard-pressed to recover that in any lost sales taxes," Epstein said.
The RTA has one victory in its pocket. Back in fall 2011, one of the defendants, Plass Appliances, terminated its sales office in Channahon. (As an aside, Plass closed all its stores this April.)
Conventional wisdom holds that a ruling in favor of Hartney would hurt the RTA's case.
Former federal prosecutor and RTA board Director William Coulson acknowledged the lawsuit is "a high risk." But the effort to prevent "sham" tax havens is worth it, Coulson thinks. "The practice needs to be stopped."
However, Coulson's not so keen on paying PR firms to get involved with the case.
"A judge isn't going to be influenced by PR companies," he said.
RTA officials would not disclose how much has been paid for lobbying and a PR blitz from the following firms: Thomson Weir LLC; Leinenweber and Baroni LLC; Paul L. Williams & Associates P.C.; The Roosevelt Group; Compass Public Affairs LLC; Res Publica Group; and Serafin & Associates Inc.
"Each of these firms ... bill us a combined monthly sum for all projects performed during that month," the RTA's FOIA officer wrote. "Based on this form of billing, we are unable to provide specific billing related to our sales tax recovery efforts for those firms."
As we've reported previously, Compass Public Affairs counts a former aide to House Speaker Michael Madigan among its principles. RTA Chief of Staff Jordan Matyas, who has played a major role in the litigation, is Madigan's son-in-law. Thomas Weir also is led by former Madigan associates.
Asked about why the consultants were needed and if there were concerns about political connections, RTA officials said the defendants also hired PR help.
"Dozens of corporations have engaged law firms and PR firms to work to ensure their tax havens are allowed to continue siphoning away money that is rightfully meant for the benefit of the people of Chicago and Cook, DuPage, Kane, Lake, McHenry and Will counties," Massel said.
State regulations that enable remote offices with fax machines to be the point of sale are "bizarre," said economist Fred Giertz, a professor at the University of Illinois' Institute of Government and Public Affairs.
"It's terrible tax policy, but it may be legal," Giertz said, adding the courts would make that decision. But the ultimate fate lies with potential legislation, he thinks.
"It's not bad tax policy as a result of a mistake. Politicians know well what's happening, and they're allowing it to go on."
One more thing
Biek, whose law firm is not involved in the litigation, thinks the Supreme Court should uphold the lower courts' decisions in favor of Hartney.
For one reason, there's an established precedent, he said. "The regulation's been on the books for decades. The Illinois Department of Revenue has issued a series of written rulings saying, 'yes, the retailer can use a sales subsidiary,'" he explained.
Interestingly, Biek suggested that a win for Hartney could actually benefit the RTA. Let's say Hartney wins because the court finds that, yes, processing purchases in Mark means the transactions occurred in Mark. And if purchases happened in Mark, then, that helps the RTA's case that sales taxes were diverted from the six-county region.
Terry Witt's take-away from a recent transit conference was "there is not enough money to support the entire region's transportation needs.
"Competition for the too-small pot between the separate agencies (Metra, Pace and CTA) makes the situation no-win," the Bartlett cyclist wrote. "The argument to put these agencies into departments under one agency with regional goals and the authority to act is a strong one. I am tending to think that keeping this agency separate from the Chicago Metropolitan Agency for Planning is better. CMAP is not broken."
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