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Thursday, April 28, 2011 03:21 pm

Bill to protect sales tax havens backfires


Some big Chicago-area retailers have found a way to avoid paying high local sales taxes on their wholesale purchases. They’ve essentially set up their own “tax havens” in downstate counties which have no local sales taxes. The havens are mostly just one-person offices with a fax machine.

The retailers contract to purchase mass quantities of fuel, or construction equipment, or lumber or whatever, and then those contracts are faxed to their little Downstate offices, stamped as received and then faxed back to headquarters and – voilà – no high local sales taxes are owed.

Back in January, the Illinois Department of Revenue lost a court case filed by Hartney Fuel Oil Co., Putnam County and the little town of Mark, Ill., (population 500). Hartney is based in Cook County, but had a “sales office” in no-tax Mark. The Department of Revenue claimed Hartney owed sales taxes in Cook, but a Putnam County judge disagreed.

Nobody really noticed. But then some folks got the bright idea of introducing a bill at the Statehouse to codify the Downstate court case to make certain that all Chicago-area companies had the same option.

Bad move.

Introducing that legislation shined a light on this tax avoidance scheme and now all heck is breaking loose.

Proponents say this tax haven thing has been standard practice for 50 years and they’re just hoping to codify the judge’s ruling after the Department of Revenue changed its practices. They also claim that if their bill fails, companies will move their headquarters out of the Chicago area to avoid high sales tax rates. A lobbyist who worked for the bill claimed that after five state audits ruled against his clients, four moved out of Cook, with one going to Indiana. The bill passed the Senate earlier this month, partly because opponents reacted too late to kill it.

The legislation has received scant media coverage so far, but it is considered a major threat by the Regional Transportation Authority, Cook County, the City of Chicago and several suburban taxing bodies which worry that the legislation would lead to a vast out-migration of tax revenues. Some suburban counties thought they could get some of those tax havens until they realized their inclusion in the RTA’s regional sales tax zone meant they had no chance. So they are no longer supporting the bill.

The Chicagoland Chamber of Commerce’s support was crucial to the bill’s Senate passage, but it reportedly received serious heat from Chicago Mayor Rich Daley and Mayor-elect Rahm Emanuel. So, it’s backing away as well.

And the main lobbying firm which pushed the legislation through the Senate has withdrawn from the fight. The firm also represents the DuPage County Board, the chairman of which is now opposing the bill after initially backing it. That position change meant the lobbying firm had a conflict, so it’s out.

Meanwhile, House Speaker Michael Madigan’s spokesman said last week that while opinion is divided in the House over the bill’s future, with some downstaters pushing hard for its passage, Madigan has put the legislation “under very serious review” because the “alarm bells have been sounded.”  That may look like a hedge to you, but Madigan’s people don’t usually tip their hand so clearly. The wheels have come off this bill.

The RTA’s chief lobbyist is Speaker Madigan’s son-in-law, which doesn’t help the Senate bill, of course, but the strong opposition from pretty much the entire Chicago region’s governmental units is hugely important. Also, Madigan’s own state senator, Steve Landek, forcefully opposed the tax bill in committee, claiming that much of the construction of the Chicago Fire’s soccer stadium in his district avoided local sales taxes by using those downstate tax havens.

And now, the Senate bill’s opponents are gearing up to introduce legislation of their own in the House which would officially kill off these tax havens. The measure will likely be tacked onto a broader bill which deals with taxation. Doing it that way would make it far tougher to vote against the provision.

The bottom line here is that the backers of the original Senate legislation might have set the stage for exactly the opposite of what they originally intended. Instead of just letting the judicial branch handle the issue completely under everybody’s radar screen, they decided to move the fight into the General Assembly, but then everybody discovered what was going on. 


Rich Miller publishes Capitol Fax, a daily political newsletter, and thecapitolfaxblog.com.

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